In a prior blog post, here, we discussed some of the items of interest in the 2018 IRS Criminal Investigation Division’s 2018 Annual Report released in November 2018. In recent weeks, there have been a few additional items of interest involving IRS Criminal Investigation (CI).
CI Use of Big Data Analytics CI is continuing to make a big push in data analytics as an investigation tool and to identify cases to pursue. Last year, CI started a pilot program in which CI field offices included an investigative support group staffed by data analysts. CI is now moving forward in formalizing the program and every CI Special Agent is being trained on Palantir software to be able to manage big data. According to IRS CI Chief Don Fort, IRS CI has “prioritized the use of data in our investigations. Future criminal investigations must make use of data to help drive case selection and efficiency in the critical work we do. That means using models, algorithms, and the millions of records and evidence we have at hand to help identify areas of tax noncompliance. Data analytics and other technologies like ‘predictive policing’ help give law enforcement a clearer picture and are quickly becoming an everyday tool for CI. Although these tools will never replace good, old-fashioned investigative work, they will make us more effective and allow us to maintain our reputation as the world’s finest financial investigators.”
The IRS has amassed data from banks and other institutions through the recently ended Offshore Voluntary Disclosure Initiative that is being analyzed for potential criminal leads. In addition, the IRS is using its data analysts, data scientists and software to study and analyze publicly available data, including motor vehicle records and deed records looking for noncompliance and leads for criminal referrals.
Assertion of Crime-Fraud Exception to Attorney-Client Privilege At a recent meeting of the ABA Tax Section in Washington, Samuel Lyons, Department of Justice Tax Division Section Chief for Criminal Appeals and Tax Enforcement, discussed DOJ’s plan to more readily assert the crime-fraud exception to the attorney-client privilege. The attorney-client privilege is a client's right to refuse to disclose and to prevent any other person from disclosing confidential communications between the client and his or her attorney. One exception to the attorney-client privilege is the, “crime-fraud exception” which is defined as when communications between an attorney and client used to further a crime, tort, or fraud. In Clark v. United States, 289 U.S. 1 (1933), the U.S. Supreme Court stated that "[a] client who consults an attorney for advice that will serve him in the commission of a fraud will have no help from the law. He must let the truth be told."
Lyons specifically cited, one type of case in which the new policy regarding the crime-fraud exception to the attorney-client privilege could be used: a false assertion of non-willfulness in a streamline filing program submission. The streamlined filing program is available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. If a prosecutor reviews documents indicating that the taxpayer’s nonwillfulness statement contains false statements, review of communications between the taxpayer and the attorney may be warranted.
Summons to Law Firm for Client Identifying Information On May 15,2019, a U.S. District Court for the Western District of Texas granted the government’s petition to enforce a summons against a Texas law firm for information regarding clients who used the firm’s services to set up offshore accounts and entities. The summons to the law firm was a result of an IRS audit of a taxpayer who, according to the government, obtained the firm’s advice on setting up foreign accounts, trusts, and corporations to avoid U.S. taxation. The taxpayer settled his case with the government by signing a closing agreement in which he admitted to an unpaid income tax liability of over $2 million and agreed to various penalties. The IRS believed that the law firm may have also advised other clients to conceal income in offshore accounts and entities, and served a John Doe summons on the law firm for documents, including client lists, account records and billing records. The law firm filed a petition to quash the summons in U.S. District Court claiming (i) the information requested was subject to the attorney-client privilege, (ii) the government was acting in bad faith, and (iii) that the revenue agent’s declaration in support of the summons was “replete with misrepresentations and inaccuracies demonstrating a serious abuse of the summons process.” The court wasted no time in dismissing the law firm’s arguments, and granted the government’s counter petition to enforce the summons to turn over client identifying information. It is likely this matter will be appealed to the U.S. Court of Appeals for the 5th Circuit.