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As any successful entrepreneur will tell you, it’s vital to plan for the best — but be prepared for the worst. And it’s hard to imagine anything more daunting than a criminal tax investigation.

First of all, it’s important to note that all criminal tax investigations aren’t triggered by alleged taxpayer malfeasance or illicit behavior. A simple mistake or oversight, some eyebrow-raising deductions, or an accountant’s incompetence or malpractice can all initiate a routine audit, which can be elevated to the level of a criminal investigation. And that’s where the IRS’s Criminal Investigation Division (CID) enters the picture.

About the IRS’s Criminal Investigation Division (CID)

Forget about the bumbling, bureaucratic “couldn’t hack it in the private sector and so become a public servant” IRS auditors you see on TV and in movies. The CID is comprised of Special Agents who are highly trained financial investigators. They also carry a gun, which tells you pretty much all you need to know about how serious and often dangerous their work is.

Once CID gets involved in an audit, expect the process to take years. Your family members, friends, co-workers, employees, bank officials, associates, financial planners, accountants and so on may be interviewed for the purpose of obtaining tax evasion or tax fraud evidence. If the facts add up to a conviction, the fines are massive and a custodial sentence is not outside the realm of possibility. For example:

  • S. v. Mauricio Cohen Assor (Florida, 2011) – The defendant received 120 months in jail, as did his son.
  • S. v. Monty D. Hundley (New York, 2005) – The defendant received 96 months in jail.
  • S. v. Brett G. Tollman (New York, 2004) – The defendant received 33 months in jail. His mother and other relatives were also convicted and received jail time.
  • S. v. Diana Hojsak (San Francisco, CA, 2007) – The defendant received 27 months in jail.

Signs Your Audit May be Headed for Criminal Prosecution

If during an audit any of the following “tell-tale” signs emerge, then it’s possible that your case may be heading for a criminal referral:

  • The IRS agent inexplicably and without warning or notice ceases communication.
  • The IRS agent suddenly shifts from fact-related questions, and starts asking state-of-mind questions (e.g. “Didn’t you realize…” and “What were you thinking when…”).
  • You receive a summons for closed tax periods.
  • You receive a summons for periods other than those listed in the original examination notice.

What to Do it a Criminal Investigation is Initiated or Possible

If your case becomes a criminal investigation, or if you believe that things are heading in that direction, then here are four things to do right away:

  • Terminate all direct contact with the IRS – and don’t even think of contacting the field agent who was conducting your audit. He or she can’t and won’t help you. In fact, trying to communicate with them will make things worse for you. Besides, they have no authority to do or stop anything.
  • Get your tax records together. If necessary, request third parties to send them to you ASAP.
  • Do not communicate with third parties (other than the above-noted request, which should be done in writing), as this could be construed as witness tampering.
  • Retain a tax attorney who has experience dealing with the IRS. Remember that any conversations with your accountant, bookkeeper or any other financial planner – along with any work product – isn’t protected by attorney/client privilege.

The Bottom Line

I won’t sugar coat it: a criminal tax investigation is serious business. But it doesn’t have to be devastating, or derail your entrepreneurial dreams or vision. Stay calm, get informed, know the rules, and follow the advice of your tax attorney down to the letter. You’ll make it through.



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