A Miami CPA Firm may sometimes be the first people contacted when their clients are faced with an actual or possible criminal tax examination. To safeguard the client, along with defending against personal exposure, a Miami CPA Firm must know in advance what legal and ethical considerations are at issue. Under usual circumstances, Miami CPA Firm offer priceless professional advice. The emergence of a criminal tax issue in a client’s fact pattern, however, alters the nature of the client’s tax matter from a compliance issue to a legal issue.
The best way to serve the client’s interest is to resist the urge to investigate further and immediately refer the client to an experienced criminal tax attorney.
The AICPA Statement on Standards for Tax Services asserts that when the Miami CPA Firm has a reason to believe that a taxpayer may be charged with any type of fraud or criminal violation, the client should be advised to consult with a tax attorney before speaking to the CPA further in regard to the matter at hand.
Common Misunderstanding of Accountant-Client Privilege
Many Miami CPA Firm mistakenly believe that their client communications are protected when representing an audited client. This is partially true in non-criminal tax matters—especially where the CPA did not prepare the return under audit.
However, CPA communications surrounding the preparation of a client’s original return that is under audit are never privileged (even where the original return was prepared by an attorney) given that a tax return is a public disclosure; therefore, no expectation of confidentiality surrounds the communications at issue.
A dilemma for CPA’s instantly develops when a civil examination turns criminal and Miami CPA Firm can find themselves legally compelled to divulge the client’s previously discussed secrets to the IRS under its’ subpoena power. Moreover, a conflict of interest inevitably arises where an actual or potential criminal tax issue arises surrounding a previous tax preparation engagement where Miami CPA Firm has a vested interest in protecting their reputation with the investigating tax authority, which can place them at odds with the needs of the investigated client.
A taxpayer with a potential criminal matter often requires both legal and accounting assistance to defend a case.
Where the attorney deems it advantageous for the client, the attorney may engage the referring CPA. By engaging the CPA’s services under a Kovel letter prepared by an attorney, the CPA can freely communicate with the client under protection of the attorney-client privilege, and the work papers prepared by the CPA can be protected from discovery under the attorney’s work product privilege where they are not involved with return preparation. Essentially, the CPA Firms and accompanying staff become an extension of the attorney’s firm as to the common client and thus the services rendered are protected.
Criminal Tax Violation Basics
Federal and state taxing authorities can bring both felony and misdemeanor tax charges against a CPA’s client—the most common of which include tax evasion, failure to file a return, failure to pay tax and filing a false return. The IRS also prosecutes taxpayers under the Federal Criminal Code on charges such as presenting false claims to the government, conspiracy and making false statements.
For example: A defendant (either a taxpayer or a tax preparer) can be convicted of making and subscribing a false return if it can be proved that the taxpayer willfully made and subscribed a return where he or she did not believe the document was true and correct when subscribed. For the federal government to prevail in a criminal prosecution, they must prove each element of an accused tax crime beyond a reasonable doubt.
Moreover, the government must bring the action within the appropriate statute of limitations for prosecution—ranging from three years to six years under the Internal Revenue Code and within five years for crimes prosecuted under the Federal Criminal Code.
To emphasize the importance of proper reporting, taxpayers and tax preparers can be charged under a number of theories and scenarios. For instance, they can be simultaneously charged with a greater offense and with a lesser-included offense within the legal definition of the greater offense (which often carries a lower burden of proof), and can be convicted of either the individual charge or both charges.
Furthermore, a single action on the part of a taxpayer may constitute a violation of several criminal tax statutes. When both criminal and civil remedies are available to the government, it has the discretion to pursue criminal remedies, civil remedies or both under the law. To complicate matters further, individuals can also be convicted of committing a tax crime with regards to another person’s or entities tax liability.
To illustrate—through the legal concept of vicarious liability—a corporate officer, director or employee could possibly be accused and convicted of attempted evasion of the related corporation’s taxes. This includes the corporation’s in-house attorney or CPA.
Some of the more commonly charged criminal tax crimes associated with a CPA are:
- Aiding and abetting a criminal tax violation;
- Filing false, fictitious or fraudulent refund claims;
- Conspiracy to defraud the United States or an agency thereof; and
- Filing a false return.
The hardest part of any criminal tax prosecution is proving the element of willfulness. The government has the burden of proving that the defendant intentionally and voluntarily violated a known legal duty. Because the state of mind is the most difficult element to prove, it’s also the easiest element to defeat.
Defenses available to defeat willfulness include inadvertence, negligence, mistake, uncertain legal duty, and reliance on others and diminished capacity. Typically the government is forced to resort to circumstantial evidence to establish willfulness. For this reason the government usually won’t prosecute unless a pattern of complained of behavior can be established, usually over a three-year period. The existence of the pattern itself tends to indicate to a jury that the behavior was intentional and willful rather than mere negligence for example.
How to Help Your Clients When They Face Potential Criminal Tax Matters
From the outset, CPAs should take necessary steps to protect any materials or documents related to services rendered connected to an actual or potential criminal tax matter. Such documents will help an attorney identify potential issues and protect the CPA Firm from any further exposure.
To facilitate this to the extent an attorney has not given direction, the CPA should have a document retention policy that extends the retention period to prevent inadvertent disposal or destruction of important documents. The CPA should consider taking such actions as adequately labeling materials, segregating the materials from other client related materials and adopting access restrictions as appropriate.
When a CPA becomes aware that a current or former client could be exposed to allegations of fraud or other criminal misconduct, the CPA should consider whether to withdraw from the performance of further tax (or other) services for the client and whether to continue a professional or employment relationship with the client.
If the relationship continues, the CPA should work with the client’s attorney to best protect the client’s rights. This means the CPA should avoid any unsupervised communication with the IRS or investigating agency personnel.
Additionally, the nature and content of any and all information that is to be shared with the IRS once the investigation has commenced should be approved in its entirety by the client’s legal counsel. This collaborative effort will provide the common client the best chance at success of avoiding harsh penalties and the possibility of jail time—and minimize the CPAs own exposure.
An alternative way in which the CPA and attorney can team up is in making a voluntary disclosure to the IRS on behalf of a common client. This is a process whereby the client’s tax attorney knocks on the door of the IRS Criminal Investigation Division and concedes that a client has cheated in some way on their taxes and wants to remedy the situation.
This is achieved by amending the previously filed fraudulent return and making payment of taxes and penalties owed in exchange for the IRS passing on criminal prosecution. The written policy of the IRS is to take the taxpayer’s voluntary disclosure as a factor that is heavily weighed in a facts-and-circumstances evaluation of whether or not to prosecute, but in practice the IRS will generally refrain from prosecuting under such circumstances where the client fully complies with the terms of the IRS voluntary disclosure policy.
The FTB has in recent years stepped up its criminal investigation section. Its stated mission is to encourage compliance with the California income tax laws by identifying, investigating and effectuating prosecution for tax evasion, fraud and employee misconduct.
The FTB’s Criminal Investigation Division maintains case inventories consisting of failure to file, false income tax returns, refund fraud and joint task force operations. Joint task force operation cases can involve local, state or federal agencies. FTB special agents perform most of the duties associated with a “peace officer”—namely, writing and serving search warrants, gathering and analyzing evidence, interviewing witnesses, interrogating suspects, making recommendations to prosecute and assisting prosecutors through all stages of prosecution.
The IRS criminal investigations usually lead to criminal tax convictions, which can carry penalties ranging from fines to imprisonment—or a combination. The reality in this practice area is that nothing is guaranteed, but by taking the proper steps, CPAs can protect themselves and place the client with criminal tax exposure in the best possible position to achieve a favorable outcome.