Being convicted of a federal tax crime can shatter your life. While the IRS moves slowly, unfortunately, when the IRS does finally sets their sights on you, life can become fairly miserable.
This is not to say everyone who owes the IRS money or has unfiled taxes or unreported foreign accounts will be indicted and convicted of federal tax evasion. As a matter of fact, that's about as far from the truth as we can get. In reality, there are under 3,000 tax crime indictments per year. Compare that to the 20 million taxpayers that are in poor standing with the IRS. It is apparent that both convictions and indictments affect a tiny portion of taxpayers that have some level of criminal exposure.
There are millions of people who have the potential of being charged with a tax crime, and yet out of those millions, only a fraction will be selected for punishment (~.00015%). These odds are low. Yet being charged will happen to someone. If you have a tax issue, know how to protect yourself and decrease your odds of making it to the federal court.
We're going to look at strategies for avoiding an indictment for federal tax evasion and lay out what to do if you are unlucky enough to attract the attention of the Department of Justice (DOJ) for federal tax evasion or other tax crimes.
Ham sandwich federal tax evasion indictments
The founding fathers of the United States mandated a Grand Jury clause into the Bill of Rights as a protection from arbitrary, unwarranted prosecutions. In theory, in order for the prosecution to get an indictment, they have to convince a jury that there is probable cause that a crime occurred. However, the Grand Jury process has been turned on its head. It is well known in the legal community that “prosecutors have so much control over grand juries that they could convince them to 'indict a ham sandwich.'”
Unlike a preliminary hearing held in court with the defense side present, the Grand Jury does not make its decision in the context of an adversary proceeding. Rather, Grand Jurors see and hear only what prosecutors put before them. Last year, according to IRS statistics, there was a 94.4% chance that if the DOJ wanted an indictment, the Grand Jury will return one (out of every 3,178 cases brought before a jury, 3,000 would result in an indictment). That number is staggeringly high.
"In part because there’s no one on the "other side" to contest the prosecutor’s evidence, Grand Juries almost always return an indictment as requested by the prosecutor. According to a U.S. Department of Justice study on plea bargaining, Grand Juries are notorious for being ‘rubberstamps’ for the prosecutor for virtually all routine criminal matters.” (Plea Bargaining: Critical Issues and Common Practices, by William F. McDonald, (U.S. DOJ, National Institute of Justice, 1985)."
– Sara Bergman, Esq., the Criminal Law Handbook
"Ham sandwich" federal tax evasion prosecutions
Once charged with a crime such as Federal tax evasion, defendants are in a tough position. First, they must bear the costs of a defense, assuming they are not indigent.
Second, even if they consider themselves entirely innocent of Federal tax evasion, they will face strong pressure to accept a plea bargain—pressure made worse by the modern tendency of prosecutors to overcharge with extensive “kitchen-sink” indictments: Prosecutors count on the fact that when a defendant faces a hundred felony charges, the prospect that a jury might go along with even one of them will be enough to make a plea deal look attractive.
"Then, of course, there are the reputational damages involved, which may be of greatest importance precisely in cases where political motivations might be in play. Worse, prosecutors have no countervailing incentives not to overcharge. A defendant who makes the wrong choice will wind up in jail; a prosecutor who charges improperly will suffer little, if any, adverse consequence beyond a poor win/loss record. Prosecutors are even absolutely immune from lawsuits over misconduct in their prosecutorial capacity."
– Glenn Harland Reynolds, “Ham Sandwich Nation: Due Process When Everything Is a Crime,” Columbia Law Review
So how likely is it, once indicted, that you will plead guilty or be found guilty? Once indicted of federal tax evasion or another tax crime, there was a 93.7% chance of conviction last year.
Very little circumstantial evidence is needed to prove intent of federal tax evasion or other tax crimes
In order to be convicted of federal tax evasion, the Department of Justice must prove — beyond a reasonable doubt — that you had a specific intent to defraud the United States Treasury. Don't let this strong language fool you, this is an incredibly easy burden to reach.
First, it is impossible to conduct an MRI of your brain to determine what your intent was. You may have made an innocent mistake, but no one can know that for sure but you. The only way to prove intent is through circumstantial evidence (which is true for other crimes of specific intent).
However, with federal tax crimes specifically, the DOJ has a big advantage. You signed a tax return and turned it in, right? When you signed it, you swore it was truthful to the best of your knowledge and you understood all of the tax code and instructions (or if you didn't file — and the jury will be certain that you always need to file a tax return — why did you fail to do so? How is your lack of filing not automatically making you guilty of federal tax evasion?).
So the question becomes whether or not you can explain why you didn't pay the taxes the IRS says you owe and why you are not guilty of federal tax evasion. You can believe me when I say that is one tall order.
If you read the fine print on your 1040, you will find that you swore you understood the tax code. You swore you read the instructions and your knowledge of all relevant tax laws has been established through your signature. So… what's your explanation? (Incidentally, don't offer an explanation as it could be a very bad idea to testify in your own defense).
How to avoid a federal tax evasion criminal prosecution
This should be a simple one. To completely avoid a federal tax evasion prosecution, one would think avoiding the investigation lottery altogether by being in compliance would do the trick. That is, if you have unfiled returns with the IRS, file all your returns for all years in question. If you owe the IRS money, get into a collection alternative. If you have unreported income, amend your returns or — if advised by an attorney — enter into a tax amnesty program.
If you are looking at a tax shelter, understand that if the tax shelter turns out to be “abusive,” the person selling you on the tax shelter may be the very person who testifies against you in a criminal trial. Be incredibly cautious when it comes to tax-avoidance schemes. Some are legitimate, some are not. The law assumes you know the difference.
Yet all these steps do not guarantee you will never be charged with a tax crime. Why? All it takes is one person to say something about you. An ex-spouse or an ex-business partner are obvious people who might be willing to fabricate evidence against you. A hidden risk is your own financial planner, attorney, CPA, or tax professional.
So what are you to do? Continually vet your financial partners. Are they doing something risky? For instance – drug abuses, gambling issues, or mental health issue may create a strain they leads them to do something illegal. Maybe they'll embezzle money or break some sort of federal law with a fraudulent investment scheme. What can happen when confronted by the government is that these people will try to "save their own skin" and may be more than happy to provide the government with whatever testimony the government wants. Even if it is not true.
There is no absolute way to disprove testimony about things you supposedly said. You may be thinking, "wait, I know something about evidence, such as testimony is hearsay. The rule is someone can't introduce hearsay evidence." While that is generally true "statements against interest" are a hearsay exception, because for whatever reason the courts consider bad things someone said you said about yourself to be extra-reliable, and thus should be considered by the jury.
So to avoid a tax charge, or any charge really, watch who you do business with.
What to do when confronted with criminal prosecution
If you are issued an indictment for federal tax evasion, know that it is possible to beat the IRS. That might seem contradictory to the previously mentioned statistic, but it is 100% true. Real criminal tax attorneys have won cases against the IRS time and time again. In order to do so effectively, it's important to know what you are up against. You need an attorney who the DOJ actually respects, not one that they're ready to walk all over. Many well-known (not to mention expensive) tax attorneys have never been in a criminal trial and don’t know the first thing about how to win a case (Disclosure: Although we have trial experience, and even a few victories, no one at our firm considers themselves to be a criminal trial attorney. Rather, we work with and give support to the best criminal tax trial attorneys around the country).
That's why, when you're hiring a professional to represent you in a criminal trial, you learn about their past successes and uncover whether or not they actually fight for their clients.
It's not uncommon for a taxpayer's attorney to have a conflict of interest; sometimes they were the ones who advised the action that earned the DOJ scrutiny in the first place! The DOJ knows this and knows they can offer a terrible plea deal that many attorneys — especially those who were part of the alleged crime or failed to advise their clients against taking part in it — are terrified of going to trial. So the IRS puts the pressure on the attorney who in part, strong arms the taxpayer into accepting the deal.
If you are a far cry from wealthy (and that includes many in the middle class), you have no choice but to get a federal public defender. I have nothing but good things to say about the public defenders I have worked with. The only problem is that they are not given enough time to work on a case. In many instances, they even enjoy taking cases to trial. However, due to their workload, it's safe to say that they can't take every case to trial.
Now, the DOJ likely does respect a public defender. However, one thing to consider is that your public defender can't be expected to do everything, so you need to respect their time. We routinely help out federal public defenders with the voluminous compliance work. You will always get a better deal if the IRS sees your tax filings are in order, and you will do a huge favor for your public defender if you have an outside expert explain some of the complicated nuances that they may not be sure about or have the time to perform.
If you do have the resources to contest an indictment of federal tax evasion, it's important that you take a look at the actual costs. You can expect to pay hundreds of thousands of dollars in legal fees for a national white-collar defense attorney who actually wins cases. Unfortunately, there are not enough of these impeccable criminal defense attorneys to go around. Worse yet, it's not easy for the layperson to identify the best.
There will be other fees as well. You will probably need local counsel, which comes in the form of an attorney who knows the unwritten rules of the court that you will be prosecuted in. You will need experts, like trial support attorneys and expert witnesses (like our firm) who can get you into compliance and find hidden arguments. If you really want to win, you may be paying mock juries to sit in deliberate mock trials; mock trials can provide amazing intel.
Once you show the DOJ that you are serious, you still may wind up accepting a plea deal. However, your plea will be far more favorable than one obtained with an attorney that the DOJ knows will strong-arm you into accepting a one-sided plea bargain.
Even if you are acquitted of federal tax evasion or another tax crime, you still did not really win. You likely exhausted around a million dollars to mount an aggressive defense, have accumulated years of lost sleep and anxiety, and your faith in the fairness of justice system will be forever destroyed. Not only that, but you may have to wait for an appeal to overturn a conviction.
The best course of action — whether after conviction or acquittal of federal tax evasion — may be to listen to the words written down by a man named Matthew: "But I say unto you, love your enemies, bless them that curse you, do good to them that hate you, and pray for them which spitefully use you, and persecute you."
The world is not fair
Consider the jury of your "peers." The very jury seated in a tax prosecution case likely thinks of April 15th as a good day – that's the day that the nice IRS sends them a refund or an earned income check. They can't quite understand that a million dollars is not all the money in the world. They have no idea that your tax return could be several hundred pages long. They haven't considered that anyone might have given you the very same bad advice that put you in this situation. They have no idea what it's like to be pushed around by people who will face no consequences whatsoever if they are proven wrong. They aren't aware that federal judges favor the IRS over the taxpayer. They have no idea how horribly skewed the criminal system is against the accused; they think outcomes like the OJ Simpson murder trial are routine. The system is one-sided, and the taxpayers are the ones that suffer.
So you have two possible protections. If you know for a fact that Lady Luck is your guardian angel, then you can rest easy knowing that the DOJ will never recommend you for prosecution. The other protection — the one not involving luck — is to make sure that when you are confronted with a tax problem, you don't cut corners, you don't wave it off, but instead take it with the utmost seriousness.
Thanks to Michael Minns, Esq. for our conversations. If I ever have the misfortune of being indicted for federal tax evasion, he's the kind of criminal trial tax attorney expert I'd hope to have leading my defense.