February 28, 2023
Defense Strategies for IRS CI Investigations Targeting Tax Evasion
While IRS Criminal Investigation (IRS CI) targets taxpayers for a broad range of federal offenses, many of its investigations are centered on allegations of tax evasion. These allegations can stem from IRS audits, whistleblower complaints, referrals from other federal agencies, and a variety of other sources, and, regardless of their source, they can present risks for substantial penalties.
For taxpayers targeted in these investigations, executing a strategic defense is paramount. With hundreds of thousands of dollars (if not millions of dollars) in financial penalties and years of federal imprisonment potentially on the line, taxpayers cannot afford to take chances. If you are under investigation for tax evasion, protecting yourself starts with understanding the options you have available.
7 Strategies for Defending Against Federal Tax Evasion Investigations
How can high-income and high-net-worth taxpayers successfully defend themselves in federal tax evasion investigations? Here are seven examples of defense strategies we use to protect our clients:
1. Conducting a Risk Assessment Under the Attorney-Client Privilege
When facing an IRS CI investigation, you need to know what (if anything) agents are going to find. This means conducting a comprehensive risk assessment before the investigation progresses beyond the point at which you (and your defense counsel) are able to intervene effectively.
Conducting a comprehensive risk assessment involves reviewing your tax filings, substantiating documentation and any other records that may potentially be relevant to IRS CI’s inquiry. The goal at this stage is not to try to skew the facts in your favor, but rather to gain a clear understanding of the facts and the risks they present. By working closely with your defense counsel during this process, not only can you ensure that you are uncovering and giving due consideration to all relevant information, but you can also ensure that the assessment is protected under the attorney-client privilege.
2. Identifying the Specific Allegations At Issue
Another key preliminary step when facing an IRS CI investigation is to identify the specific allegations at issue. Tax evasion can take many forms, and IRS CI targets a variety of types of tax evasion schemes. In order to mount an effective defense, you need to know what you are defending against.
Until you know exactly what IRS CI is investigating, taking any action can be risky. For example, if you assume that you know why you are facing scrutiny, you could end up trying to defend mistakes (and potentially exposing mistakes) that aren’t actually at issue. Similarly, if you mistakenly take the position that you don’t have anything to hide, you could end up giving IRS CI the information it needs to pursue charges against you.
3. Carefully Balancing Cooperation with Preservation of Your Rights
Sometimes, a little cooperation can go a long way. Cooperating with IRS CI can be an effective defense strategy in many cases—and this is true whether you truly have nothing to hide or you are at risk of facing prosecution.
But, cooperating during a federal tax evasion investigation can be risky as well. When facing a federal investigation, you have clear legal rights, and it is important that you preserve these rights to the extent that it makes sense to do so. While voluntarily providing information to IRS CI can be helpful, it can also potentially prevent you from asserting a successful defense that minimizes the consequences of the investigation.
4. Challenging IRS CI’s Evidence of Willfulness
Under the federal tax evasion statute (26 U.S.C. Section 7201), the government needs evidence of willfulness to secure a conviction. If you inadvertently underpaid your federal income taxes, you may be liable for back taxes, interest and civil penalties, but you are not a criminal. So, while successfully challenging IRS CI’s evidence of willfulness won’t necessarily protect you entirely, it will protect you against facing criminal fines and up to five years behind bars.
5. Challenging IRS CI’s Evidence of an Attempt to Evade or Defeat Tax
Under 26 U.S.C. Section 7201, the federal crime of tax evasion involves “willfully attempt[ing] in any manner to evade or defeat any tax” imposed by the Internal Revenue Code. As a result, in addition to challenging the government’s evidence of willfulness, another potential defense strategy involves challenging the government’s evidence of an attempt to evade or defeat tax. If you had every intention to pay what you owed (or if IRS CI cannot prove that you lacked this intention), this can also serve as a complete defense to criminal culpability for federal tax evasion.
6. Demonstrating Good-Faith Reliance
If you are like most high-income and high-net-worth taxpayers, you rely on advisors to help you decide how much to pay the IRS. In fact, your personal involvement in preparing your federal income taxes may be minimal—if any. If this is the case, you may also be able to avoid criminal culpability for federal tax evasion by demonstrating your good-faith reliance on the professional advice you received.
While working with professional advisors does not shield taxpayers who provide their advisors with inaccurate or incomplete information, it does provide a defense to federal tax evasion charges in many cases. If you (or your defense lawyer) can show that you did your part to comply with the Internal Revenue Code and reasonably relied on your professional advisors’ advice, you do not deserve to face a criminal trial.
7. Steering the Investigation Toward a Specific Outcome
Finally, regardless of the facts at hand and the substantive defenses you have available, it is important to approach an IRS CI investigation with a specific outcome in mind. Whether this means working to resolve the investigation without liability or negotiating a settlement that avoids criminal charges, by taking control of the process, you (and your defense lawyer) can mitigate your risk substantially.
Arrange a Confidential Consultation with Tax Lawyer Lawrence Brown in Fort Worth, TX
If you are a high-income or high-net-worth taxpayer and you are facing scrutiny from IRS CI, we encourage you to contact us promptly. To arrange a confidential consultation with tax lawyer and firm founder Lawrence Brown, please call 888-870-0025 or tell us how we can reach you online today.