If you’re a high-income and global high-net-worth individual or a principal in a multitiered pass-through entity, partnership, or multinational company, you’re a priority for the IRS Criminal Investigation division. You’re also a priority if you’re a medical professional, operate in the political arena, or work in the legal profession.
We’ve seen a marked increase in the number of IRS-CI investigations of our small-business clients and expect the pace to accelerate quickly as the IRS adds more than 5,100 agents in fiscal years 2022 and 2023. Potentially 200 additional agents are being hired to review and process tax enforcement matters.
The Department of Justice also is actively looking to add more staff to its Tax Division, which is seeking a budget increase to add 20 full-time positions to its existing staff of 519 permanent positions.
We have successfully defeated criminal tax charges for our clients in three separate cases in the past several months. In each of these cases, the IRS-CI and DOJ demonstrated a willingness to move forward with dozens of counts based on threadbare evidence and often involving relatively insignificant amounts of money.
This propensity to overcharge is nothing new, but these recent cases provide important guidance on how small businesses and individuals should defend themselves.
In United States v. Hamdan, our client—a first-generation immigrant—was a successful business leader unfamiliar with the nuances of employment tax withholding and accounting. His lack of willfulness and reliance on professionals should have been obvious to the prosecutors. The jury acquitted our client on 70 counts of making false statements on tax returns.
A remaining charge related to the alleged hiring of undocumented workers was dismissed following the trial. Had the evidence of reliance on professionals not been properly developed, the outcome could have been quite different.
Our experience in Hamdan reflects the IRS’s and the DOJ Tax Division’s emphasis on civil and criminal employment tax enforcement as one of their “highest priorities.”
Likewise, in United States v. Anderson-Trahan, Jones Walker defended a state court judge who was charged with multiple counts of making false statements on her tax returns. Ernestine Anderson-Trahan, who was facing difficult life circumstances, including illness and the death of a close family member, relied on her accountant to properly prepare the forms.
We defended her case based on her good faith and lack of criminal intent. Following a trial, the jury was unable to reach a verdict. However, the district judge granted a motion for acquittal and dismissed all charges.
Due to the complexity of the tax laws, taxpayers often make errors on their tax filings but otherwise act in good faith. Jones Walker persuaded the trial judges in Hamdan and Trahan, as well as in a third case, United States v. Burdett, to include a favorable definition of “willfulness,” which became the centerpiece of the defenses. This jury charge was derived from the seminal US Supreme Court case Cheek v. United States and the subsequent authority issued by the US Court of Appeals for the Fifth Circuit.
Particularly, the court instructed the jury that, to convict, they must be persuaded beyond reasonable doubt that the defendant’s actions were willful.
We also pursued a defense of good faith, buttressed by the following jury instruction: To carry its burden of establishing that a defendant acted willfully, the government must prove the absence of good faith. In other words, the government must prove beyond a reasonable doubt that a defendant was not acting with the good faith belief that they were acting lawfully.
A person who believes in good faith that their actions comply with the law doesn’t act willfully, even if their belief they are complying with the law is irrational or unreasonable.
The word “willfully” means the voluntary, intentional violation of a known legal duty. To prove that a defendant acted willfully, the government must prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that they voluntarily and intentionally violated that duty.
A person’s conduct isn’t willful if they acted through negligence, even gross negligence, inadvertence, justifiable excuse or mistake, or due to good faith misunderstanding of the requirements of the law.
Evasion and making false statements on tax returns remain the bread and butter of IRS-CI cases. But the division’s exercise of prosecutorial discretion reflects government priorities to combat health-care fraud, public corruption, employment tax evasion, and syndicated conservation easements.
The government is also motivated by money. The government has recovered more than $11 billion in back taxes, interest, and penalties through its voluntary disclosure program and targeted countless individuals through subpoenas to foreign financial institutions. Our best advice is not to wait for a grand jury subpoena or search warrant to act.
Records of good faith efforts at tax compliance include always remitting any taxes withheld from employees (including employment and income taxes) and preempting a future finding of willfulness by relying on the advice of tax professionals. These efforts also entail including all items of gross income on income tax returns—even cash payments—as well as avoiding claiming business deductions for personal expenses and maintaining and retaining contemporaneous financial and tax records.
Combating government overreach is possible. But to do so, early development of a record of good faith efforts at tax compliance is imperative.
The cases are: US v. Hamdan, E.D. La., No. 2:19-cr-00060, dismissed 3/8/23; US v. Anderson-Trahan, E.D. La., No. 2:22-cr-00002, acquittal granted 2/16/23;US v. Burdett, E.D. La., No. 2:20-cr-00139, judgment 9/6/23
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Mike Magner is partner in Jones Walker’s litigation practice and a former federal prosecutor, focused on commercial disputes, internal investigations, and white collar matters.
Jeff Birdsong is partner in Jones Walker’s tax practice, representing businesses on state and local tax matters and not-for-profits in tax compliance.
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