After the Dust Settles: Civil Tax Considerations Post-Conviction

In this podcast, I discuss the important inter-connections between civil tax and criminal tax. Below is a quick and dirty outline to help you follow along.

Timing

Since time and memorial, the government has proceeded w/ criminal tax investigation and prosecution first, suspending audit and collection until completion of the criminal proceedings This policy reflects several considerations, the most important of which is that civil discovery could reveal too early, too much of the government’s criminal case. The gov’t was concerned that TPs could use civil discovery procedures to find out more about its case than what the criminal discovery procedures otherwise allowed Why is the gov’t afraid of discovery of its case? Is the gov’t trying to send people to jail by secrecy or by ambush? That historic rationale has diminished. Prosecutors today are more inclined to err on the side of caution and tend to voluntarily disclose more in light of recent and notable cases admonishing prosecutors for withholding relevant - and in some cases - exculpatory evidence from the defense. Nonetheless, the gov’t strictly adheres to its historical practice of doing the criminal side first, with the sole exception being tax shelter cases. The gov’t works the civil and criminal sides simultaneously. Outside of the tax shelter context, the historic policy of “criminal first, civil later” is the norm Even if the gov’t doesn’t suspend civil proceedings, a judge might. 

 Civil liability and pleas

A judge may be more inclined to allow a downward adjustment for acceptance of responsibility if TP-def. has paid or agreed to pay the tax liability TP loses nothing. Payment is n/ an admission of liability or an admission that the limitations period remains open. TP will still be able to argue about liability later. Nor does paying the tax eliminate the possibility of adjudicating this matter in a civil forum, such as U.S. Tax Court. TP can file a refund claim w/ the IRS

 Civil Penalties

When the gov’t gets around to the civil side, it will assert against TP n/ just deficiency and interest but also civil penalties Civil fraud penalties The most frequently asserted civil penalty is s. 6663 – the 800 pound gorilla of civil tax penalties A TP who fraudulently prevents (or minimizes) assessment of taxes may:
(1) File a false return (S. 6663 penalty applies only to filed returns) or (2) Refrain from filing a return   Filed returns
6663(a) imposes a penalty equal to 75% of the portion of the underpayment that is attributable to fraud Joint returns: In the case of married-filing-jointly returns, fraud by one spouse is n/ attributed to the other. Under 6663(c), the penalty applies only to the spouse who the IRS proves to have committed fraud In order to assert fraud against one spouse, the gov’t must have evidence of fraud as to that spouse. The wife does n/ become liable for the 6663 penalty simply b/c the husband committed tax fraud. If the gov’t wants to pursue the wife for fraud, it must independently prove fraud as to the wife, separate and apart from the husband  How is fraud established?
By badges of fraud Failing to maintain adequate books and records, Failing to file returns, Concealing assets

3. Accuracy-related penalty

S. 6662 accuracy-related penalty is an alternative to the fraud penalty Under 6662(a), the penalty amount is 20% of the underpayment The penalty applies whenever any of six conditions is present 6662 comes up in the civil-criminal context in one of two ways: TP is acquitted for tax evasion. Gov’t doesn’t have a strong case of tax fraud when it gets to the civil side. Gov’t might assert 6663, or in the alternative, 6662. If the gov’t loses the fraud penalty, at least it can get the accuracy-related penalty which does not require a showing of fraud and thus might be easier to prove There is a jointly-filed return. The gov’t thinks that it can prove fraud against one spouse but n/ the other. The gov’t will assert fraud against one and 6662 (accuracy related penalty) against the innocent spouse

4. Delinquency penalties

The civil penalty for failing to timely file returns is 6651(a)(1)

5. Other civil penalties

There are a plethora of other civil penalties that parallel criminal penalties or could apply in circumstances in which criminal tax prosecution is a potential A number of civil penalties relate to tax advisers. For example, 6694(a) penalizes income tax return preparers who negligently advise TPs leading to tax understatements. And 6700 penalizes tax preparers who organize, sell interests in, or promote abusive tax shelters