The Threat of Parallel Investigations: When Civil Isn’t Civil

To hone these tools, the IRS has taken procedural steps to enhance its tactics in enforcing the federal tax laws.⁴ One particularly intriguing development has been so-called parallel investigations. The IRS first devised this strategy to expedite the processing of civil and criminal investigations of the same taxpayer by allowing them to be conducted simultaneously. Traditionally, when a civil agent deems a taxpayer worthy of criminal investigation, the civil exam is frozen and the criminal matter proceeds to its conclusion. The gradual evolution of parallel investigations, however, has generated extensive interaction between criminal and civil enforcement personnel, with consequences that range from trivial inconveniences to much more serious landmines such as a tax adviser's unwittingly waiving a client's constitutional rights.⁵ Such prospects, which represent truly worrisome potential pitfalls to the unwary practitioner, highlight the shifting landscape of tax practice and procedure in which tax advisers must exercise greater care in protecting their clients' interests.

This article examines recent developments in parallel investigations as they have been reinvented over the past decade.⁶ This article also describes the leverage parallel investigations give IRS agents in their investigatory work and discusses practical situations where the agents may blur the lines between their rights and obligations in both civil audits and criminal investigations. It further offers advice for tax advisers as they shift their strategies in audits and other interactions with the government from trust-based communications designed to foster fair resolution of tax issues to those of police-type investigations, requiring appropriate protection of client rights.

Who's Who Within the IRS

To navigate the roads in parallel investigations,it helps to understand the role of some of the key IRS players:

Revenue officer: A revenue officer is assigned to collecting taxes that have already been assessed. A revenue officer may, among other things, file notices of federal tax lien and levy wages or bank accounts. The revenue officer's responsibilities are civil.

Revenue agent: A revenue agent audits tax returns. The revenue agent is trained to find unreported income and to examine the propriety of deductions and credits claimed on tax returns. Similar to the revenue officer, the revenue agent's responsibilities are civil.

Special agent: A special agent conducts criminal investigations of issues such as willful attempts to evade taxes or otherwise defraud the U.S. Treasury. When necessary, a special agent recommends prosecution of such violations to the U.S. Attorney's Office, which is part of the Department of Justice (DOJ). The IRS itself does not have the authority to prosecute tax crimes; its role in the courtroom is strictly civil.⁷

Revenue agents and revenue officers are tasked with determining or collecting the true and correct amount of tax owed. They work as an advocate for the IRS toward the correct disposition of tax cases under the law. These agents can close cases as "unagreed," which means those cases will move on to the IRS Appeals Division for settlement discussions or to IRS or DOJ lawyers for litigation on the merits. However, revenue agents and revenue officers work hard to resolve cases at their level. Knowing this, experienced tax practitioners traditionally do their best to work cooperatively with the revenue agents and revenue officers and comply with informal or formal requests for information.

Working with a special agent, however, is a radically different prospect. The special agent's presence means that the client is being investigated for a crime, and any information the special agent can generate may form the basis of future criminal charges. In this realm, a practitioner must be careful to protect the client's Fourth Amendment right against unlawful searches and seizures and Fifth Amendment right against self-incrimination, because any evidence provided voluntarily can be used against the client. The Internal Revenue Manual (IRM) instructs special agents to inform a taxpayer of his or her rights before conducting questioning, so as to avoid violating the taxpayer's constitutional rights.⁸ Significantly, revenue officers and revenue agents are not required to take this step⁹ because the information they gather is intended for civil use only. This distinction, when overlaid upon parallel investigations, exposes the troubling constitutional issues raised by using IRS civil agents for criminal prosecution.

Tweel and Parallel Investigations

The IRS may conduct its civil investigation before, during, or after any criminal investigation of the same taxpayer. If the investigation is conducted simultaneously with the criminal investigation, the process is referred to in the IRM as a parallel investigation.¹⁰ The words "simultaneous" and "parallel" imply the two investigations are conducted at the same time but are unconnected—as with parallel lines. However, this is not how the IRS conducts its parallel investigations.¹¹ While the IRM stresses that parallel investigations are not "joint investigations," it does require "significant coordination" throughout the civil investigation and litigation processes.¹² In practice, this means the criminal and civil agents communicate, confer, strategize, and share information throughout their investigation.

Parallel investigations were first devised by the IRS as a way to speed up the process of civil and criminal investigations by allowing them to be conducted simultaneously, with information passing freely between both. This allowed civil agents to make criminal referrals of cases as necessary, without always having to suspend audits or seek extensions of statutes of limitation on their civil examinations. It also facilitated a more thorough development of cases. However, abuse of the parallel investigation format generated serious constitutional questions¹³ that the Fifth Circuit examined almost 40 years ago in the landmark case Tweel.¹⁴

Tweel involved a criminal tax conviction stemming from a civil audit conducted by a revenue agent. At the beginning of the audit, the accountant for the defendant-appellant, Nicholas Tweel, suspicious of the revenue agent's motives, asked the agent whether a special agent was also investigating. The revenue agent truthfully replied that no special agent was involved but did not mention that the audit was being conducted at the specific request of the Organized Crime and Racketeering Section of the DOJ. Assuming the investigation was strictly civil, Tweel's accountant voluntarily gave the revenue agent certain records in an attempt to resolve the amount of tax owed. The revenue agent copied the records for use in a criminal prosecution. In the later criminal case, Tweel's attorneys moved to suppress the records, arguing that the government conducted an illegal search in violation of the Fourth Amendment because the accountant's consent to produce the records was obtained through deception.¹⁵

A taxpayer who consents to a search cannot later argue the search was unreasonable under the terms of the Fourth Amendment.¹⁶ However, the Tweel court noted that "a consent search is unreasonable under the Fourth Amendment if the consent was induced by the deceit, trickery or misrepresentation of the Internal Revenue agent."¹⁷ The court found that the revenue agent's failure to apprise Tweel's accountant of the criminal nature of the investigation constituted a deliberate deception. "Because the IRS requires only special agents to warn taxpayers of their rights, by assigning a revenue agent the IRS still succeeded in masking the undeniable criminal nature of this investigation and materially deceived this appellant,"¹⁸ the court said, adding, "We cannot condone this shocking conduct by the IRS. Our revenue system is based upon the good faith of the taxpayers and the taxpayers should be able to expect the same from the government in its enforcement and collection activities."¹⁹ The court recognized the consequences of IRS audit tactics that prevent tax advisers from effectively and efficiently resolving tax matters while protecting client rights.

Tweel precludes the IRS from pursuing a criminal investigation under the guise of a civil examination, as such conduct deceives a taxpayer into unknowingly waiving constitutional protections. Often cited,²⁰ likely due to its stern language, the opinion is actually one of several during the 1970s dismissing indictments or vacating convictions where individuals were deceived or misled by the government or where the government made false promises or assurances to the detriment of the criminal defendants.²¹ These opinions compelled the IRS, SEC, and other agencies to adopt policies requiring revenue officers, revenue agents, and other civil investigators to suspend civil investigations if a "firm indication of fraud" is uncovered²² that would compel referral of the matter for criminal investigation.²³ Once the criminal investigation begins, any pending civil audit is suspended, and the taxpayer is entitled to all the protections afforded a criminal target.²⁴ Later developments, however, have undermined the clarity and applicability ofTweel.

The Erosion of Tweel

In 1999, the Sixth Circuit addressed a case in which a revenue agent audited a taxpayer for using corporate assets to pay personal expenses.²⁵ Over a period of nine months, the revenue agent met with the taxpayer several times, requested documents, and interviewed the taxpayer's employees.²⁶ The revenue agent ultimately referred the case for criminal investigation. Based on the information the revenue agent procured during the civil audit, the government charged the taxpayer with willfully filing a materially false tax return, a violation of Sec. 7206(1). On appeal, the taxpayer argued that the revenue agent had violated the provisions of the IRM, and thereby Tweel, by not referring the case for criminal investigation sooner.²⁷ The court disagreed, holding that the information leading the revenue agent to her document requests might have been initial indications of fraud, but that they were not firm indications of fraud.²⁸ The court stressed that the purpose of the civil audit is to allow a taxpayer to explain discrepancies before a revenue agent takes action on the case. The court deferred to the revenue agent's discretion in the timing of her fraud referral. In so holding, however, the court did express ambivalence, noting that "almost all of the government's evidence against the [taxpayer] was practically handed to the [Criminal Investigation Division] on a silver platter as a result of the civil investigation."²⁹

The effect of the Sixth Circuit's narrow definition of the word "firm" was to introduce more subjectivity and more revenue agent discretion into what had been a clear standard. Notwithstanding the appellate court opinion, a district court in a different circuit later recognized the danger. In Scrushy,³⁰ involving an SEC action arising out of HealthSouth Corp.'s illicit dealings, the court dismissed perjury counts against the defendant, finding that the government's civil and criminal actions had impermissibly merged. The court noted that "[t]o be parallel, by definition, the separate investigations should be like the side-by-side train tracks that never intersect."³¹ The court quoted at length from an earlier HealthSouth case:

Because this is a case where the government has undoubtedly manipulated simultaneous criminal and civil proceedings, both of which it controls, "there is a special danger that the government can effectively undermine rights that would exist in a criminal investigation by conducting a de facto criminal investigation using nominally civil means. In that special situation the risk to individuals' constitutional rights is arguably magnified."³²

A later SEC case presented a more troubling precedent from the taxpayer's perspective. In Stringer, the SEC in the course of its civil investigation actively sought to aid the criminal investigation of the defendants and prevent the defendants from becoming aware of the criminal investigation by instructing court reporters at a deposition not to mention the involvement of the U.S. Attorney's Office and giving evasive answers about other agency involvement.The trial court angrily dismissed the criminal indictment, finding a clear abuse of the investigative process.³³ On appeal, the Ninth Circuit reversed, holding sufficient disclosure was provided in a standard form sent to the defendants, which stated that information received in a civil investigation could be used criminally. The court stated:

There was no deceit; rather, at most, there was a government decision not to conduct the criminal investigation openly, a decision we hold the government was free to make. There is nothing improper about the government undertaking simultaneous criminal and civil investigations, and nothing in the government's actual conduct of those investigations amounted to deceit or an affirmative misrepresentation justifying the rare sanction of dismissal of criminal charges or suppression of evidence received in the course of the investigations.³⁴

Shortly after Stringer was decided, the IRS introduced new investigative standards that closely embody the same conduct Tweel condemned. In 2009 and 2010, the IRS amended the IRM, instructing its examiners (1) not to disclose to a taxpayer or the taxpayer's representative that the investigation has been referred to the IRS's Criminal Investigation Division,³⁵ and (2) to continue the civil examination while concurrently working closely with the IRS criminal agents.³⁶ The revisions reestablished the IRS's commitment to the use of parallel investigations. Indeed, the Service encourages use of the technique in a not-so-parallel manner.

Bruce Meneely, deputy area counsel, IRS Small Business/Self-Employed Division, spoke about parallel investigations at a Court Practice and Procedure session of the American Bar Association Section of Taxation.³⁷ He stated that a prior IRS policy statement was effectively a "thou shalt not" rule, requiring civil prosecution to stop as soon as a criminal investigation began. He explained that the new policy statement resulted from a coordinated effort between the DOJ and the IRS to strike a balance between civil and criminal actions, especially in the context of tax shelters and return preparation fraud.³⁸ This important policy change increases the likelihood of parallel investigations and therefore increases the dangers these investigations pose. It is particularly troubling in light of the IRS's Federal Intergovernmental Program (FIP), under which the Service has launched various initiatives with federal agencies that include information sharing. The IRS describes FIP as a program to increase collaboration by, among other things, "[a]ssisting other federal agencies in achieving their goals."³⁹ It is not clear whether this means IRS policy now requires a taxpayer involved in an audit to consider the risk of prosecution for any federal crime, not just those having to do with tax reporting and payment.⁴⁰

The policy revisions take on greater significance in light of changes made by Congress in 2006 to Rule 408 of the Federal Rules of Evidence to allow statements made during compromise negotiations regarding a civil dispute by a government agency to be introduced in a criminal case.⁴¹ Advisory Committee Notes on this revision state that "[w]here an individual makes a statement in the presence of government agents, its subsequent admission in a criminal case should not be unexpected."⁴² This means that any statement a taxpayer or his or her representative makes to a civil agent, even if made in an attempt to cooperate and negotiate a settlement, can be used against the taxpayer in a subsequent criminal prosecution.⁴³

Judicial erosion of Tweel, IRM amendments, and the amendment to Rule 408 have caused practitioners to pause and carefully reevaluate once-established methods in representing clients before the IRS. Accordingly, one of the hottest topics in tax seminars across the country is the IRS's increased use of parallel investigations and specifically whether Tweel is still good law. The practical answer to that question may be found in a pre-Tweel case on the inner workings of parallel investigations. Kordel was a landmark Supreme Court decision that endorsed parallel civil and criminal investigations on grounds of public interest in the context of consumer protection, specifically, an investigation of the sale of misbranded drugs.⁴⁴ Even when dealing with an issue of this magnitude, however, the court recognized limitations. The Kordel holding noted the case did not involve a civil action the sole purpose of which was to obtain evidence for a criminal prosecution, a failure by the government to advise a defendant in a civil proceeding that it was contemplating a criminal action, or "any other special circumstances that might suggest the unconstitutionality or even impropriety of . . . criminal prosecution."⁴⁵ The court implicitly recognized that parallel investigations could raise fairness issues that could constitute a violation of due process, but ruled the facts in the case did not support such a finding.⁴⁶

The potential for unconstitutional government action in parallel investigations, recognized in Kordel, is exposed by Tweel. While not ending the practice, the latter case established that evidence obtained through trickery or deceptive tactics should be kept out of the courtroom. As a result of the case, focus shifted to exactly what sort of misconduct was sufficient to mandate the exclusion of government evidence, and on this point, existing case law gave the IRS cover. For example, in Robson,⁴⁷ the Ninth Circuit had previously eliminated any affirmative disclosure requirement and stated merely that the government could not affirmatively mislead the taxpayer that the investigation is exclusively civil and will not lead to criminal charges.⁴⁸ In Prudden,⁴⁹ the taxpayer was under civil audit and attended a meeting with an IRS agent and a special agent who did not read the taxpayer his rights or explain that he was conducting a criminal investigation. The taxpayer's later efforts to exclude evidence collected by the special agent were unsuccessful. The court explained that "[s]ilence can only be equated with fraud where there is a legal or moral duty to speak or where an inquiry left unanswered would be intentionally misleading."⁵⁰ Using this standard, the court ruled that the special agent properly introduced himself when giving his credentials and that he had no affirmative duty to reveal the criminal nature of the meeting.⁵¹ Accordingly, the court found that the failure to reveal the facts was not misleading.

Although the Tweel ruling seemed clear, other cases, such as Prudden, Robson, McKee, and Peters,⁵² may limit the protection the case offers. IRM provisions such as those prohibiting civil examiners from disclosing criminal investigations and requiring them to work closely with IRS criminal agents evidence the Service's commitment to aggressive use of parallel investigative techniques. The IRM specifically instructs agents who are asked whether a parallel criminal investigation is being conducted to state only that any information obtained can be shared with criminal investigators.⁵³ There is no obligation to go further, even where the agent knows the case has already been referred for criminal investigation. The risks these policies pose are significant, but the danger to constitutional protections is especially heightened in the area of tax shelters, where the IRS is especially dogged in its investigation tactics, and in trust fund recovery penalty cases, because the elements of the relevant civil and criminal statutes are virtually identical.

Parallel Investigations of Abusive Tax Shelters

Parallel investigations are used most aggressively and are least "parallel" when it comes to tax shelters. The IRS authorizes simultaneous criminal and civil investigations with respect to "ongoing, abusive tax schemes that result in significant losses to the US Treasury⁵⁴ and, in such circumstances, actually encourages civil examiners and special agents to meet and coordinate the gathering of evidence.⁵⁵ The IRS requires a "six-way conference" for parallel investigations. This conference among the civil examiner, his or her manager, the special agent, his or her manager, and IRS civil and criminal counsel "provides an opportunity to discuss how the parallel civil and criminal investigations will be conducted."⁵⁶ The IRM even encourages DOJ lawyers, who would handle any later criminal prosecution, to attend and participate in the joint conference and, if they cannot participate, to be apprised of the nature of the discussions and any decisions made.⁵⁷

The IRM provides "discussion topics" for the six-way conference to ensure that "the IRS effectively balances civil and criminal actions to achieve maximum compliance and stop the promotion of the abusive tax scheme."⁵⁸ Items to be discussed include:

• Identification of the subjects of the investigations;
• Types and sources of evidence available;
• Information known with respect to participants; and
• Tax theories or positions of each respective investigation.⁵⁹

The six-way conference also discusses any limitations on sharing information between divisions such as rules regarding grand jury secrecy and the potential impact of possible civil defense discovery motions during the criminal investigation. Also discussed is the effect of the disclosure requirements of Brady and Giglio, which apply to civil examiners involved with the injunction process. Brady v. Maryland⁶⁰ requires prosecutors to disclose exculpatory information to defendants. Giglio⁶¹ expanded the scope of Brady and required disclosure of promises made by the government not to prosecute a witness.

Note that IRS policy here raises additional issues by encouraging sharing of information among taxpayer audits. This is problematic under Sec. 6103, which prohibits unauthorized disclosure of taxpayer information. To illustrate, if civil and criminal agents are investigating a variety of taxpayers and sharing the information they procure in each audit, that information now becomes "taxpayer information" of each taxpayer under Sec. 6103. If one or more of the taxpayers request their information, they should necessarily receive information of all of the other targeted taxpayers.

In determining whether to proceed with parallel investigations of an abusive tax scheme, the IRM requires consideration of various factors, including the scope and size of the promotion in terms of potential tax revenue loss, geographic location, and the number of promoters, participants, or returns involved; the rate of growth and extent of marketing; the deterrence value of civil versus criminal action; and the potential impact on a criminal investigation.⁶² Interestingly, none of the IRM factors address protection of individuals' rights by the IRS agents. Indeed, notwithstanding the constitutional issues, the IRS prefers parallel investigations over any delays in the civil audits. The IRM states that delay of a civil audit should occur only if the civil audit would seriously harm or impair the criminal investigation.⁶³

In view of the above, parallel investigations of tax shelters and their participants are hardly "parallel"; they are meticulously synchronized. The IRM actually mandates that "[c]ivil examiners, special agents and their respective Area Counsels must continually coordinate their efforts. Investigation status meetings are required to be held, at a minimum, every quarter until the civil proceedings are complete or the civil investigation is placed in fraud suspense."⁶⁴ On this point the IRM is clear: "The purpose of the quarterly coordination meetings is to communicate investigation developments and facilitate information sharing between the civil and criminal divisions. . . . It is critical that the DOJ attorney assigned to the criminal investigation be fully aware of all civil actions, developments and evidence throughout the investigative process."⁶⁵ Remarkably, the coordination extends even to development of the theory of the case.⁶⁶

Instructions for Civil Agents

The IRM also lays out the guidelines a revenue agent or revenue officer must follow in conducting a parallel investigation. For example, the IRM requires the civil agent to work directly with a special agent and criminal tax attorney⁶⁷ and to coordinate meetings among the members of the parallel investigations. If the DOJ or a U.S. attorney's office is involved, their lawyers should be included. Contrary to the notion of parallelism, the IRM states that "[s]haring information between revenue officers and government attorneys assigned to the case is a key ingredient in developing civil and criminal cases simultaneously and efficiently."⁶⁸ Moreover, as discussed above, the 2009 IRM amendments provide that "[u]nder no circumstances should the revenue officer inform the taxpayer that the case has been referred to CI [Criminal Investigation Division]."⁶⁹ Presumably, this rule holds even if the taxpayer or his representative asks, "Have you referred the case to CI?" or "Am I under criminal investigation?"

In this manner, parallel investigations place tax advisers in a perilous position. The IRS has structured its protocol so as to keep taxpayers and their representatives from knowing of the criminal investigation, while at the same time facilitating information gathering from taxpayers through its civil arm. The dangers are heightened for CPAs, who are often on the front line of any interaction between a taxpayer and the IRS. The dilemma is whether to comply with requests made by a civil agent, in the hopes of working toward resolution of the case, or instead to cease communication and invoke constitutional privileges to prevent the possibility that information supplied voluntarily might ultimately incriminate the client in a criminal prosecution.

Unfortunately, it is clear that the IRS and DOJ intend to continue using parallel investigations, and doing so effectively requires the government to conceal the nature of the inquiry from taxpayers and their representatives. Indeed, once a taxpayer learns of the criminal investigation, civil cooperation likely will cease. Essentially, then, the IRS and DOJ are placing taxpayers and their representatives on notice that any civil examination, collection action, or trust fund tax investigation could also be a criminal investigation. The civil agent will not reveal this fact to taxpayers and will not give Miranda warnings explaining the taxpayer's constitutional rights and disclosing the possible use in a criminal prosecution of information a taxpayer provides.⁷⁰ It is up to the taxpayer and his or her representative to assume the investigation is criminal and determine how to respond or to face the consequences of unexpected criminal action.

Where Do We Go From Here?

How might all of this play out in practice? Assume a CPA's client under audit is a small family restaurant. In the hopes of resolving the audit satisfactorily, the CPA might allow the revenue agent to speak with the client, sift through the client's documents, and inspect the place of business. Then, at the end of the audit, the CPA could find that a special agent has also been assigned to the case and that the client faces indictment based on the evidence the CPA provided. The client is understandably upset, particularly when the accountant reveals that she was aware this could occur but decided to take the risk that the audit was only civil. The practitioner may have malpractice exposure, which means that, in this situation, the audit strategy clearly must be reconsidered.

But suppose instead the client's CPA, aware of the possibility of a parallel investigation, refuses to provide information to the revenue agent and instead adopts a defensive posture to protect his client's rights. Unfortunately, this strategy also entails risks. If a taxpayer fails to produce information in an audit, the revenue agent will close the audit, making adjustments the taxpayer and his CPA may know to be incorrect, based on a "lack of substantiation." In this situation, and under the IRS's new Appeals Judicial Approach and Culture (AJAC) Project,⁷¹ the usual strategy of contesting unfavorable audit adjustments before IRS Appeals will be unsuccessful.

The new AJAC protocol, initiated Sept. 2, 2014, provides that IRS Appeals may not consider evidence that has not already been provided to the Examination Division.⁷² The result of the tax adviser's cautious approach is that the case is far more likely to go to litigation, putting the client at risk of losing adjustments that could have been avoided or settled and creating greater caseloads for government trial attorneys and federal courts. Also, in a civil case, it is permissible to draw an adverse inference when a person refuses to answer questions.⁷³In addition, a shift in the burden of proof under Sec. 7491 will only occur if the taxpayer complies with IRS agents and produces credible evidence with respect to factual issues relevant to ascertaining the taxpayer's liability.

In light of the dangers presented by parallel investigations, CPAs and other tax practitioners representing clients before the IRS should consider adding to their audit checklist protocol a standard preliminary question to the civil agent of whether a parallel investigation is being conducted, or whether any other government agencies are involved. This question and answer should be memorialized in the adviser's files. Korn stresses the importance of this inquiry.⁷⁴ Korn involved an interview by a revenue officer who failed to inform the defendant of his Miranda rights or an ongoing criminal investigation. The district court held that the failure to inform the defendant of the criminal investigation did not amount to affirmative deceit by the government unless the defendant had asked about the nature of the investigation and if, in failing to respond, the agents intended to mislead.

If the civil agent states that there is not any other involvement, then CPAs may cooperate as they normally would because, if criminal investigators are lurking in the background, any evidence obtained through the civil agent's deliberate deception would be inadmissible in court. However, if the civil agent follows the IRM and responds ambiguously,⁷⁵ then the CPA should proceed as if the audit is a criminal investigation. For tax accountants, this may require considering retaining a tax attorney with criminal trial experience. It also means CPAs should remember that they have only a limited tax adviser-client privilege under the Code that does not extend to criminal matters.⁷⁶ The risk is that any additional information the accountant develops could be summonsed by the IRS as the special agent builds the criminal case.⁷⁷

So if a client does hire an attorney, what happens next? Some lawyers will advise taxpayers to assert the Fifth Amendment privilege against self-incrimination.⁷⁸ However, this strategy can lead to difficulties if there is a later civil trial.⁷⁹ There is an alternative approach, but it too presents pitfalls. Rather than plead the Fifth Amendment, some tax lawyers instead move for a stay in the Tax Court proceeding until the criminal investigation is concluded, so that the taxpayer may better cooperate with the civil agent.⁸⁰ While it is not clear the motion will be granted,⁸¹ the goal is to slow down the civil proceeding to see how the criminal proceeding turns out. The problem with this approach is that to win the stay, a practitioner must assert that the possibility of criminal prosecution is not remote or unlikely.⁸² In effect, an attorney is in the untenable position of arguing that his client might be criminally culpable. Such arguments are unlikely to escape IRS notice.

Conclusion

The fact that practitioners, tax reporting services, and others are weighing in on the dilemmas created by parallel investigations suggests that practitioners are not the only ones deeply troubled by the IRS's use of this investigative technique. However unwelcome the position may be, practitioners nonetheless find themselves on the front lines of this battle. While lawyers may differ on strategies to implement if a revenue officer or revenue agent will not affirmatively state that no parallel investigation is in place and no other government agencies are involved in the investigation, tax advisers clearly should ask the question. If the civil agent will not answer, the client should consider engaging counsel. The real danger of parallel investigations lies not so much in their use by the IRS but in the unknowing cooperation of advisers who, in the hope of resolving a civil dispute, are providing evidence to be used against their clients in a criminal prosecution.  

Footnotes

¹See, e.g., IRS News Releases IR-2005-83 and IR-2009-75.

²Criminal prosecutions also encourage taxpayers to participate in amnesty-type programs that give taxpayers using abusive tax shelters or undisclosed foreign bank accounts a "last chance" to disclose their transactions or holdings.

³The Code contains criminal penalties for willful misconduct including in Secs. 7201, 7202, and 7206.The IRS and Department of Justice also use several Title 18 and Title 31 violations as bases for tax indictments and asserting severe civil penalties.

⁴One example is the IRS's creation of "issue specialists" who consult with examiners when listed transactions surface during an examination, and "issue teams." See Internal Revenue Manual (IRM) §4.32.1.3.3.

⁵See Persaud, "Parallel Investigations Between Administrative and Law Enforcement Agencies: A Question of Civil Liberties," 39 U. Dayton L. Rev. 77 (Fall 2013), available at www.udayton.edu.

⁶In the late 1980s and early 1990s, to facilitate its policy of voluntary compliance, the IRS treated taxpayers as "customers." See "IRS Becoming More User-Friendly," CNN.com (Feb. 15, 1999), available at www.cnn.com. That policy has rotated 180 degrees, and in many realms, the IRS treats its former "customers" as "targets." See Herman, "How to Fight the IRS," The Wall Street Journal (April 12, 2010), available at www.wsj.com.

⁷See IRS webpage "How Criminal Investigations Are Initiated," available at www.irs.gov.

⁸IRM §9.4.5.11.3.1.

⁹Peters, 153 F.3d 445, 447 (7th Cir. 1998), cert. denied, 525 U.S. 1070 (1999). See also IRM §4.10.2.8.4.

¹⁰IRM §5.1.5.1.

¹¹IRM §§5.1.5 and 9.5.1.

¹²IRM §5.1.5.1(4).

¹³Persaud, "Parallel Investigations Between Administrative and Law Enforcement Agencies," 39 U. Dayton L. Rev.77.

¹⁴Tweel, 550 F.2d 297 (5th Cir. 1977).

¹⁵Id. at 298.

¹⁶Florida v. Jimeno, 500 U.S. 248 (1991).

¹⁷Tweel, 550 F.2d at 299, citing Rothstein, 530 F.2d 1275 (5th Cir. 1976).

¹⁸Tweel, 550 F.2d at 299–300.

¹⁹Id. at 300. In a footnote, the court commented on the government's characterization of such procedures as "routine" and urged the "routine" be corrected immediately (id. at fn. 9).

²⁰See, e.g., Grunewald, 987 F.2d 531, 534 (8th Cir. 1993); Tenzer, 127 F.3d 222 (2d Cir. 1997); Groder, 816 F.2d 139 (4th Cir. 1987); and Powell, 835 F.2d 1095, 1098 (5th Cir. 1998).

²¹See, e.g., Rodman, 519 F.2d 1058, 1059 (1st Cir. 1975) (dismissing an indictment where the subject of an SEC investigation was induced to cooperate based on a representation that the agent would recommend against criminal prosecution and no such recommendation was made); Carter,454 F.2d 426 (4th Cir. 1972) (vacating a conviction and remanding the case for further inquiry into whether the government promised not to prosecute in exchange for the defendant's cooperation).

²²See IRM §25.1.1.3 for what constitutes firm indications of fraud.

²³Webster, Review of the Internal Revenue Service's Criminal Investigation Division (April 1999) (the "Webster Report"), at fn. 33, citing IRM §§104.2.4.3 and 4.4565.21(1). The Webster Report is available at permanent.access.gpo.gov.

²⁴See Toscher et al., BNA Tax Management U.S. Income Portfolios 636-3d: Tax Crimes, Detailed Analysis V (2012), for a general discussion of rights applicable when a taxpayer is being investigated.

²⁵McKee, 192 F.3d 535 (6th Cir. 1999).

²⁶Id. at 539.

²⁷Id. at 540.

²⁸Id. at 543.

²⁹Id. at 544.

³⁰Scrushy, 366 F. Supp. 2d 1134 (N.D. Ala. 2005).

³¹Id. at 1139.

³²Id. at 1140 (citations omitted), quoting SEC v. HealthSouthCorp., 261 F. Supp. 2d 1298 (N.D. Ala. 2003).

³³Stringer, 408 F. Supp. 2d 1083 (D. Or. 2006).

³⁴Stringer, 521 F.3d 1189, 1191 (9th Cir. 2008), amended by 535 F.3d 929 (9th Cir. 2008).

³⁵IRM §5.1.5.6.

³⁶IRM §5.1.5.

³⁷See Trivedi, "Parallel Criminal and Civil Investigations Require Caution, Practitioners Say," 134 Tax Notes 1091 (Feb. 27, 2012).

³⁸IRS Policy Statement 4-26, at IRM §1.2.13.1.11 (10/5/05).

³⁹"Federal Information Sharing," available at www.irs.gov.

⁴⁰See LaSalle Nat'l Bank, 437 U.S. 298 (1978) (IRS summonses are enforceable only if used in a good-faith pursuit of the taxpayer's civil liability), and Sec. 6103, which expressly precludes the IRS from transmitting taxpayer information to other agencies absent special circumstances.

⁴¹Fed. R. Evid. 408.

⁴²Rule 408, Notes of Advisory Committee on Rules (2006 Amendment).

⁴³Note the amendment does provide for the exclusion of certain evidence, including evidence of an offer or acceptance of a compromise of a civil claim when the government seeks to use this proof as an admission of fault (id. at 10).

⁴⁴Kordel, 397 U.S. 1 (1970).

⁴⁵Id. at 12. The opinion also notes the case did not involve other troubling circumstances, including where a defendant is without counsel or reasonably fears prejudice from adverse pretrial publicity.

⁴⁶Id. at 11.

⁴⁷Robson, 477 F.2d 13 (9th Cir. 1973).

⁴⁸Id. at 17—18.

⁴⁹Prudden, 424 F.2d 1021 (5th Cir. 1970).

⁵⁰Id. at 1032.

⁵¹Id. at 1033.

⁵²Peters, 153 F.3d 445 (7th Cir. 1998).

⁵³IRM §5.1.5.6 (8/3/09) ("If a taxpayer under investigation inquires about criminal implications or whether the taxpayer is the subject of a criminal investigation before CI [Criminal Investigation Division] has contacted the taxpayer, the revenue officer must be careful to provide accurate information and not mislead the taxpayer. The revenue officer should inform the taxpayer that they are conducting a civil investigation, and that the information obtained can be shared with CI. Under no circumstances should the revenue officer inform the taxpayer that the case has been referred to CI. This is CI's responsibility. The revenue officer should immediately notify the special agent of the contact with the taxpayer.").

⁵⁴IRM §9.5.1.5 (9/27/11). See also Policy Statement P-4-26, at IRM §1.2.13.1.11.

⁵⁵"If CI has an open subject criminal investigation or related investigation or is interested in initiating a criminal investigation, civil examiners and special agents must meet and coordinate the gathering of evidence to support the separate criminal and civil investigations while being mindful of legal requirements and constraints. Communication is essential for a successful parallel investigation" (IRM §9.5.1.5.2 (9/27/11)).

⁵⁶IRM §9.5.1.5.3.2 (9/27/11).

⁵⁷IRM §9.5.1.5.3.2.2.

⁵⁸IRM §9.5.1.5.3.2.3.

⁵⁹Id.

⁶⁰Brady v. Maryland, 373 U.S. 83 (1963).

⁶¹Giglio, 405 U.S. 150 (1972).

⁶²IRM §9.5.1.5.3.2.3. Other factors to be considered include efficient and effective use of resources; the potential for a civil injunction; the amount of time to complete the civil or criminal investigations; ongoing or planned undercover operations or search warrants; and identification, potential examination, and deterrence of promotion participants (id.).

⁶³IRM §9.5.1.5.3.2.4.1.

⁶⁴IRM §9.5.1.5.4(1) (emphasis added).

⁶⁵IRM §§9.5.1.5.4(2) and (3).

⁶⁶IRM §9.5.1.5.4.1.

⁶⁷IRM §5.1.5.5.

⁶⁸IRM §5.1.5.8.

⁶⁹IRM §5.1.5.6(3). The IRM section does instruct the revenue officer to "provide accurate information and not mislead the taxpayer."

⁷⁰Miranda v. Arizona, 384 U.S. 436 (1966). IRM §9.4.5.11.3 puts this responsibility on the special agent.

⁷¹IRS Memorandum for Appeals Employees, Control No. AP-08-0714-0004 (7/2/14).

⁷²IRM §§8.2.1.5, 8.2.1.8.3, and 8.6.1.6.

⁷³See Baxter v. Palmigiano, 425 U.S. 308 (1976).

⁷⁴Korn, No. 11-cr-00384-WMS-JJM (W.D.N.Y. 6/13/13).

⁷⁵IRM §5.1.5.6.

⁷⁶Sec. 7525.

⁷⁷See Hibschweiler, "Can Your Tax Client (or You) Go to Jail? (Part II)," 37 The Tax Adviser 280 (May 2006).

⁷⁸Nessim, "Taking the Fifth," California Lawyer (November 2013), available at www.callawyer.com. See also RIA, Federal Tax Coordinator Analysis, ¶T-1138, "Taxpayer's Right to Fifth Amendment Protection."

⁷⁹See Staton and Scatena, "Parallel Proceedings: A Discovery Minefield," 34 Arizona Attorney 17 (July 1998), available at www.myazbar.org.

⁸⁰See Zackim, 91 T.C. 1001 (1988), rev'd on other grounds, 887 F.2d 455 (3d Cir. 1989), and Trivedi, "Parallel Criminal and Civil Investigations Require Caution, Practitioners Say," 134 Tax Notes 1091 (Feb. 27, 2012).

⁸¹See Policy Statement P-4-26, at IRM §1.2.13.1.11.

⁸²Trivedi, "Parallel Criminal and Civil Investigations Require Caution, Practitioners Say,"134 Tax Notes 1091 (Feb. 27, 2012).

Contributors

Justin Andreozzi is an associate and Randall Andreozzi is a partner with the law firm Andreozzi, Bluestein, Weber, Brown LLP in Clarence, N.Y. Arlene Hibschweiler is a clinical associate professor in the School of Management’s Department of Accounting and Law at the State University of New York at Buffalo in Buffalo, N.Y., where Randall Andreozzi is also a part-time adjunct professor. For more information about this column, contact Prof. Hibschweiler at ah33@buffalo.edu.