DOJ Criminal Tax Manual Review (Part Two)
In part one of this series, we reviewed the general structure of the Department of Justice’s (DOJ) tax enforcement apparatus. This included establishing the statutory grounds for DOJ jurisdiction in all criminal tax cases, reviewing the investigative tactics by the IRS’s Criminal Investigation Division (CID), and the factors that DOJ uses to make charging decisions. The hope is that the contents of DOJ’s criminal tax manual, alongside our insights, can provide important information to other criminal tax attorneys and taxpayers that find themselves under criminal investigation.
In this second part, we will build on part one by reviewing the specific procedures used in administrative investigations (CID startups) and grand jury investigations (DOJ startups). At each stage, we will include personal thoughts based on our experience in handling criminal tax cases for the last forty years.
Criminal Tax Procedures During an Administrative Investigation
DOJ Tax uses the term “administrative investigation” to discuss criminal tax investigations that are spearheaded by CID. Normally, these investigations involve the service of administrative summonses to the taxpayer and third parties to develop evidence. Many criminal tax investigations begin with a special agent with CID showing up at a taxpayer’s home to serve a summons and hopefully, collect an oral statement.
The CID summons is used to gather both documents and testimony. Under normal circumstances, a criminal tax attorney will instruct the taxpayer (target) to avoid making any statements to CID during an administrative investigation. From the taxpayer’s perspective, the CID summons only serves as a vehicle to force the taxpayer to produce non-privileged documents.
Summonses served on third parties (witnesses) will allow CID to collect relevant documents and oral statements for use in a later prosecution. In most circumstances, CID will advise an attorney whether they view their client as a witness or target. If the client is a witness, meeting with CID agents is often in the client’s best interest.
Once documents and statements have been obtained, the CID agent will build an investigative file and decide whether to recommend charges to the Department of Justice. The agent will draft a Special Agent’s Report (SAR) laying out their findings and stating which charges should be filed based on the statute of limitations.
Once the SAR is complete, a criminal tax attorney within the IRS will review the SAR, provide feedback to the agent, and edit the SAR if any mistakes or strategic errors were made. The SAR then goes to DOJ Tax in Washington, D.C. for review and potential authorization.
When the case gets to DOJ Tax, the manual provides procedures for review and authorization. For simple cases (as designated by the IRS), a criminal enforcement chief can conduct the standard review for authorization. This review includes determining whether the charges can be proven beyond a reasonable doubt and whether the case deserves the government resources necessary to prosecute the case. If the section chief believes the answer to both questions is yes, they will often authorize charges.
For complex cases, the review process is more involved. The enforcement chief must assign the case to a DOJ trial attorney. The trial attorney must prepare an authorization memorandum discussing the merits of moving forward with the prosecution, including the proposed charges and policy considerations.
Once the prosecution memorandum is complete, the case is assigned to an assistant division chief. This party is tasked with reviewing the memorandum and preparing a note with additional thoughts and considerations. Once this last leg is complete, the criminal enforcement division chief can make the authorization decision.
As you can tell, the DOJ Tax procedures for authorization can be lengthy; involving multiple attorneys and reviews. During this process, the taxpayer and criminal tax attorney should receive a letter inviting the parties to request a conference with DOJ. This conference is the defense’s only opportunity to influence DOJ prior to authorization. While the DOJ conference is an opportunity to punch holes in the government’s case or present compelling information, it is not an opportunity for discovery. While DOJ will normally provide some very basic information prior to the conference, they will do very little talking during it. It is not an opportunity for the defense to gain insight into the government’s case. It is an opportunity for the defense to speak and deliver information that may impact their decisions.
An administrative investigation can take over a year to complete. Taxpayers often have notice of the pending investigation for many months before the case is sent to DOJ. This allows time for plenty of defense work prior to authorization. During this time, the defense team needs to be running their own tax loss, meeting with witnesses, and preparing a defense narrative. If genuine issues in the government’s case exist, they need to be exposed at the DOJ conference. Once authorization has occurred, it is more difficult to stop the criminal train. If valid reasons for avoiding criminal litigation exist, they must be explored and developed early to ensure the client can effectively navigate the criminal tax enforcement process.
While DOJ does grant conferences in nearly all cases, there is nothing in statutes or within the manual that requires them to do so. If a case is simple, liability is clear, and the government does not believe anything valuable will come from a conference, they are well within their power to bypass this step. Having said that, a conference should still be requested in nearly all cases.
If the defense is unsuccessful in halting authorization, DOJ can either 1) authorize prosecution or 2) authorize continued investigation at the grand jury level. DOJ will notify the taxpayer and their attorney if charges are authorized or the case has been closed.
A few practice notes. Taxpayer’s are allowed to attend the DOJ conference. Absent some extraordinary circumstances, defense counsel should avoid allowing their client to attend. Everything the taxpayer states will be used against him in the prosecution. At that stage, the defense will not understand every theory of prosecution. A criminal tax attorney is setting their client up for disaster by allowing them to talk about issues no one on the defense team completely understands.
An example may help highlight this point. Let’s assume a criminal tax investigation is focused on filing false returns for five years. The defense team has rebuilt the returns with a Kovel accountant and has a good argument for why DOJ should not waste their resources on a small case. At the conference, the taxpayer brings up a transaction involving a bank account the government did not uncover in the investigation. Now, the taxpayer has given the government a path to more evidence. If that bank account is not U.S. based, they may have given the government a new charge for Bank Secrecy Violations. Criminal tax and other financial crimes are too complicated for a lay person to know which statements are dangerous. With enough coaching, maybe a taxpayer can be prepared for the presentation. In our opinion, any added juice an attorney gets from having the taxpayer present is dwarfed by the dangers of allowing off the cuff statements to federal prosecutors.
Criminal Tax Procedures for Grand Jury Investigation
Criminal tax cases can begin as a grand jury investigation or be thrown into one following an administrative investigation by CID. The points below apply to the grandy jury process under either track.
A grand jury serves multiple functions in the federal system. The most obvious role consists of indicting criminal defendants charged with felony offenses. In both federal and state jurisdictions, the prosecution is required to obtain an indictment before moving forward with felony charges. This process aims to ensure that local prosecutors cannot charge enemies with no actual evidence. While the purpose is well founded, the reality is that grand juries always do what the prosecutors ask. If a federal prosecutor takes a case to the grand jury, it is going to get indicted. Even cases with minimal evidence or glaring defense issues will pass this low bar for prosecution.
A secondary, and likely more important, role for grand juries involves investigations. In federal court, prosecutors use the grand jury to develop their case. Grand juries have the power to subpoena documents and testimony from witnesses. Through these powers, the prosecutor can obtain all relevant documents for the case as well as sworn testimony on key facts. In white-collar criminal defense, the grand jury is often the main investigative tool.
Under this investigative track, DOJ normally takes a seat and allows the local Assistant United States Attorney (AUSA) to handle the heavy lifting. This makes sense as the grand jury will be seated in the home district and the local prosecutor will be more familiar with the local rules and procedures. When the AUSA has completed the grand jury process, the AUSA will provide a full analysis to DOJ Tax. DOJ will decide whether to authorize charges under similar rules involved in the administrative investigation outlined above.
When a grand jury is used to investigate, the AUSA will obtain more control over the criminal case. And in turn, become a key cog in the decision making. While an administrative investigation is largely a show with DOJ and CID serving as the main actors, the grand jury track infuses the AUSA into the middle of the case.
This is important because it gives criminal tax attorneys another route to sway authorization or charging decisions. DOJ Tax will lean heavily on the AUSA following a grand jury investigation. And while the authorization decision is DOJ’s to make, the AUSA’s input will be given weight during the decision making process.
Criminal tax attorneys that represent clients under grand jury investigation should understand that communications with the local AUSA can greatly benefit the client later down the road. If there are defensive theories or other mistakes in the government’s case, it is wise to voice those to the AUSA during the grand jury investigation instead of waiting for the DOJ conference.
Further, it should be noted that the defense is less likely to obtain a tax conference with DOJ when the case is not derived from the administrative investigation process. Though a tax conference is still technically possible, our experience has been that DOJ often avoids this process following a grand jury investigation. The potential issues that may be present following an investigation spearheaded by CID often do not exist in a grand jury investigation spearheaded by an AUSA with DOJ oversight. Having said that, if DOJ believes there is a potential weakness, or trusts the criminal tax attorney asking for the conference, the conference is still available.
In the next post in this series, we will begin review of common immunity issues, the tax investigation referral structure, the layout of the criminal enforcement division, and unique rules relating to search warrants in criminal tax cases.