IRS CHECK CASHING CASES Anatomy Of A Criminal Tax Case
Reading this article will only take 10 minutes, however if you invest the time you will learn what has taken me many years to understand in the context of IRS criminal tax procedures. My goal, as always is to first give you a birdseye, big picture view of a typical IRS criminal tax case and to highlight procedures you should be aware of before and after a case is forwarded to the Department of Justice Tax Division for prosecution. If you are interested in learning about the actual step by step process a taxpayer goes through when he or she is criminally prosecuted, please read the attached addendum.
In your day to day interaction with clients and government agencies you rarely will be involved in an IRS criminal tax matter. However, in the event that your client is investigated, you may be asked to be interviewed by IRS Special Agents and you also may be served with a Grand Jury Subpoena to provide documents and testimony regarding your client. This article will help you answer some of your client’s questions and concerns in the event they are contacted by a Special Agent or learn of a Grand Jury Subpoena served on you, vendors, a check cashing service or their customers.
Recently, many of my IRS criminal cases that were prosecuted were based on check cashing investigations. My clients wanted to know how did the IRS find out about their check cashing activities. In one case the taxpayer was asked during the initial audit interview if she cashed checks and she responded yes to the revenue agent. That is one of the reasons why a representative should handle the initial civil audit interview pursuant to IRC section 7521 (c). In another case, the IRS audited check cashing companies and secured copies of customer checks deposited to the check cashing services business bank accounts. Based on the check information the taxpayer was selected for an IRS audit due to the frequency and materiality of the cashed checks.
In another case, the IRS audited a business that paid contractors by check and noticed on the back of the canceled checks paid to the contractors that the were not deposited into the contractors business bank accounts but rather cashed at a check cashing company. Therefore, there are a number of ways a taxpayer using check cashing companies can be identified for civil and criminal investigation by the IRS.
What Evidence Can The IRS Obtain Regarding A Taxpayer’s Check Cashing Activity?
The IRS can issue an administrative summons directly to the check cashing company for all of its deposited items that will identify the checks cashed in a civil case. In the criminal context, a grand jury subpoena can be issued to the check cashing company to identify all of the checks cashed buy a taxpayer under criminal investigation.
What Charges Can The Department Of Justice (DOJ) Assert Against A Taxpayer With Unreported Income Identified By A Check Cashing Investigation?
In most of the cases I represented the Department of Justice (DOJ)charges the taxpayer with IRC section 7206(1). Knowingly signing an income tax return that they know to be false. The threshold of proof on the subscription charge is much less than is required if the DOJ charged the taxpayer with tax evasion pursuant to IRC section 7201(a).
Defenses To A Check Cashing Case
In all check cashing cases the representative should try to reduce the unreported income amount identified by agents by arguing the following:
- Cash deposited into the business bank accounts can be used to offset the amount of unreported income identified in a check cashing case because the IRS can’t determine if the cash came from the cashed checks or was the result of another customer’s cash deposit. The burden of proof in a criminal case requires the Government to establish guilt beyond a reasonable doubt. The cash deposited from an unknown sources creates the reasonable doubt;
- Cashed checks that were forged for example, by a company manager can be used to reduce the unreported income from check cashing activities (by looking at the back of the cashed checks you can compare all of the signatures on the cashed checks and determine if the signature is your client’s signature or someone else’s) ;
- Cash expenses other than cash payroll can be used to offset the unreported income identified in a check cashing case for example, material and supplies paid by cash. In general cash payroll is not allowed to reduce the identified unreported income from check cashing because payroll taxes should have been paid on the cash payroll and that is a tax loss to the Government, not income tax loss but a tax loss none the less. Payments to contractors may be allowed as an expense however, the Government’s counter argument can be that backup withholding was evaded by not reporting the cash payments to contractors.
Tax Loss (The Amount Of Tax Lost By The Treasury Due To The Taxpayer’s Fraudulent Conduct) Is The Most Important Concept In A Criminal Tax Case
The reason this paragraph caption is highlighted is because its really the essence of a criminal tax case.
The prosecutor wants to charge the Defendant with the maximum tax loss and the Defense wants to minimize the tax loss amount both for sentencing and civil tax purposes. In order to determine roughly what the tax loss amount is multiply the unreported income less allowable cash expenses by 28 percent. That will provide you with a rough estimate of the tax loss amount. Then look up the amount in the sentencing guideline tables to determine the potential sentence the Judge can order. It is also important to reduce the tax loss amount for civil tax purposes because the unreported income agreed to in the criminal case will be used by the IRS civil agents to assess tax after the criminal case is concluded and the unreported income amount will also be provided to the Franchise Tax Board for their corresponding adjustments.
How Does The Court Determine How Long A Taxpayer Will Be Sentenced To Prison And If Sentenced What The Punishment Will Be?
- The Federal sentencing guidelines establishes advisory ranges of sentences for criminal cases. A Judge may depart from the guidelines based on their discretion and impose a higher or lower sentence based on mitigating or aggravating factors.
- How can a taxpayer mitigate or reduce their guideline range? A taxpayer can reduce their guideline range by paying full restitution to the IRS or as much as financially possible and taking responsibility for their actions by entering into an early plea agreement, thus avoiding the use of additional government resources. When the tax loss is based on check cashing activity, IRS agent’s have already obtained all of the proof necessary to meet the government’s burden of proof because copies of the front and back of cashed checks and the total checks cashed by year are available to the prosecution as evidence. In many check cashing cases unless there are certain unusual circumstances such as forged checks, the proof is so substantial that it does not make sense to go to trial because the taxpayer will not receive the reduction for the early acceptance of responsibility and payment of the ordered restitution.
When the criminal case is concluded and the Judge determines what sentence to impose, the case goes back to the IRS civil division for the assessment of the additional tax, interest and a 75 percent civil fraud penalty. The civil assessment can also be agreed to as part of the plea agreement.
The IRS then provides the Franchise Tax Board with the civil assessment and the FTB generally piggy backs off the Federal report and the State proposes to assess the additional tax, interest and a negligence penalty not a civil fraud penalty. The reason the state does not impose a civil fraud penalty is because the State is piggybacking off the IRS assessment and has not independently established civil fraud by clear and convincing evidence.
Addendum The Criminal Tax Process A Step By Step Analysis
1 . Most cases begin with an IRS civil audit that identifies a taxpayer cashed checks to avoid or evade reporting their income.
2 . Other criminal cases can begin with evidence of cashed checks provided to a grand jury that determines if there is sufficient evidence that a crime has been committed and this can occur with or without an IRS audit.
3 . The goal of the audit or the grand jury process is to determine that checks cashed at a check cashing business were not reported as income on a taxpayer’s income tax return.
4 . When a grand jury is assembled the taxpayer is not notified of the process however they usually are alerted by their accountants, and or a check cashing company who receives a grand jury subpoena for the taxpayer’s accounting records, or the check cashing company’s deposited items.
5 . If the grand jury concludes that there is sufficient evidence that a crime has been committed or the evidence secured during the audit establishes a taxpayer failed to report their income a taxpayer can be criminally charged either by information or indictment. Both the information and the indictment are used by the Government to states the factual basis, and the law for why it believes a crime occurred.
6 . When a taxpayer is charged for a tax crime the taxpayer must go to court and to plead guilty or not guilty to the charges. The taxpayer is then booked at the US Marshal’s office, surrenders his passport and in most cases, may leave the courthouse if proper bail arrangements are agreed to at the arraignment.
7 . If the taxpayer pleads not guilty trial preparation begins and the Judge will set a trial date.
8 . If the taxpayer pleads guilty to the charges the court will set a date for sentencing and the taxpayer will then be required to meet with pre-trial services and later with a probation officer to provide background personal and financial information that is used for sentencing purposes and to determine the taxpayer’s ability to pay restitution to the IRS (unpaid taxes due to the failure to correctly report income)and fines imposed by the court.
9 . After interviewing the taxpayer and reviewing financial records the probation officer will make a recommendation to the court regarding what she believes the sentence should be. The probation officer makes her determination based on the taxpayer’s personal background, financial situation, criminal history and other mitigating or aggravating factors. A copy of the probation officer’s recommendation will be provided to defense counsel and is subject to rebuttal by counsel.
10 . The Assistant United States Attorney will make her recommendation to the Judge regarding what she believes the sentence and fines should be and provide a copy of the recommendation to defense counsel and is subject to rebuttal by the defense.
11 . Defense counsel will prepare its sentencing recommendation to the Judge regarding what he or she believes the sentence should be addressing the federal sentencing guidelines, the recommendation of the probation officer, Assistant United States Attorney and arguable mitigating factors.
12 . At sentencing after reviewing all of the sentencing recommendations by the parties the Judge will render his decision and can order incarceration, ordered to a serve time in a half way house, require home detention or offer straight probation or a combination of the punishments. The judge will also order the number of months of supervised release after the punishments are served and the amount of the fine and special assessments he decides is merited by the facts and circumstances of the case.
