Do not give a substantive interview before you have counsel.

That is the entire answer, and everything below explains why. A special agent of IRS Criminal Investigation who appears at your door or your office is not conducting an audit. Special agents investigate potential criminal violations of the internal revenue laws. They are sworn federal law enforcement officers with authority under I.R.C. section 7608(b) to execute search and arrest warrants, serve summonses, make arrests, and seize property.

You are not required to answer their questions. You have a Fifth Amendment right to decline. Anything you say and any document you provide may be used against you in a criminal proceeding. The agent will tell you this, because IRM 9.4.5.8.3.1.1 requires the administrative warning at the outset of a first interview with a subject. People answer anyway, out of a belief that cooperation will make the matter go away or that silence looks guilty.

It will not, and it does not. Declining an interview until you have counsel is ordinary and expected. Giving a two-hour unprepared interview is the single most common way a manageable case becomes an indictment.

How This Differs From an Examination

A revenue agent determines the correct tax. A special agent develops evidence of a crime.

The signals are practical. Two agents arrive rather than one, because criminal investigators work in pairs and one takes notes that become a memorandum of interview. They appear unannounced rather than by appointment. They carry credentials identifying Criminal Investigation. They are more interested in what you knew and intended than in what your records show. And an ongoing civil examination may go quiet without explanation, which frequently means the examiner made a fraud referral.

The absence of a warning is not reassurance. Third parties are interviewed without any warning at all, and by the time a subject learns of an investigation the government has often been working for months, interviewing employees, customers, bankers, and former spouses, and obtaining records by summons from institutions that had no obligation to tell you.

What They Are Investigating

The principal offenses are willful. Section 7201 tax evasion requires an affirmative act of evasion, a tax deficiency, and willfulness, and is a felony. Section 7203 covers willful failure to file, pay, keep records, or supply information, and is a misdemeanor in most applications. Section 7206(1) covers signing a return under penalties of perjury that the signer does not believe true as to every material matter, and is a felony that does not require any tax due at all. Section 7206(2) covers aiding or assisting in the preparation of a false return. Section 7212(a) covers obstruction. Related charges frequently accompany them: conspiracy to defraud the United States under 18 U.S.C. section 371, money laundering under 18 U.S.C. sections 1956 and 1957, and willful FBAR violations under 31 U.S.C. section 5322.

Section 7206(1) deserves emphasis because it is misunderstood. The government need not prove a deficiency. A materially false statement on a signed return is the offense. That is why "I paid the tax later" does not resolve the exposure.

The Protections You Assume You Have

Your accountant is not privileged in a criminal matter. I.R.C. section 7525 creates a limited privilege for tax advice by a federally authorized tax practitioner, but by its terms it applies only in noncriminal proceedings before the IRS and noncriminal federal court proceedings, and it excludes written communications in connection with the promotion of a tax shelter. In a criminal tax case, section 7525 provides nothing.

Worse, the accountant is a witness. The person who prepared the returns, who has the workpapers, and to whom you explained the transactions is precisely who the government will interview and summons. Conversations you thought were confidential are the government's proof of what you knew.

Kovel is narrower than it is described. United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), holds that the attorney-client privilege may extend to an accountant engaged by counsel where the accountant's assistance is necessary or highly useful to effective consultation between client and lawyer. It is not a general accountant privilege. It requires the engagement to run through counsel, before the work begins, for the purpose of assisting the rendering of legal advice, and it does not protect ordinary accounting or return preparation work dressed up after the fact. Continuing to use the same accountant on the same basis and calling it Kovel does not create privilege. It creates a witness who now believes he is protected.

The return preparer's file is discoverable. Nothing about return preparation is privileged, whoever performed it.

Documents

Preserve everything relating to the years and issues at hand, and stop any automatic deletion.

Do not alter, backdate, reconstruct, or destroy anything. Obstruction is a separate and often easier charge to prove than the underlying tax offense, and conduct after the investigation begins is conduct the government can prove directly, without reconstructing years of returns. A client who would have faced a difficult evasion case can hand the government a straightforward obstruction case in a week.

Do not discuss the investigation with employees, business partners, or family members you believe are loyal. They can be subpoenaed, and your statements to them are not privileged. There is no accountant, employee, business partner, or friend privilege.

Where documents must be produced, whether by summons or otherwise, that production should be handled by counsel. An individual's act of producing documents can itself have testimonial significance.

The Investigative Tools

Administrative summons. Under I.R.C. section 7602 the IRS may summon records and testimony. Third-party summonses to banks and other institutions carry notice requirements under section 7609 and a limited right to move to quash.

There is an important limit. Section 7602(d) prohibits issuing a summons, or beginning an enforcement action, while a Justice Department referral is in effect for that person. A referral is in effect once the IRS recommends a grand jury investigation or criminal prosecution of that person to the Attorney General, and also once a request has been made under section 6103(h)(3)(B) for disclosure of that person's returns or return information. Section 7602(d)(2)(A). This replaced the institutional-intent inquiry of United States v. LaSalle National Bank, 437 U.S. 298 (1978), with a bright-line rule. It is person-specific and period-specific, and it bars the summons power, not the civil examination.

Grand jury subpoena. Where the administrative process is inadequate, the matter may move to a grand jury investigation, which requires Department of Justice Criminal Division, Tax Section authorization. Justice Manual 6-4.120.

Search warrant. A search warrant means the government has established probable cause to a magistrate. The Department of Justice Criminal Division's Tax Section must approve warrants directed at accountants, attorneys, physicians, public officials, clergy, and certain others. Justice Manual 6-4.130. If agents arrive with a warrant, do not obstruct the search and do not consent to an interview. Ask for a copy of the warrant and the inventory, and call counsel.

Parallel Civil and Criminal Exposure

Criminal and civil proceedings can run together. The Justice Department's stated policy is to use all available remedies, and the constitutional constraint is narrow: parallel proceedings are permissible absent bad faith or a departure from the proper administration of justice. United States v. Kordel, 397 U.S. 1 (1970).

That matters practically. Statements made in the civil examination are available in the criminal case. Continuing to cooperate in a civil examination while a criminal investigation is developing, without counsel coordinating both, is how defendants supply the evidence against themselves. Conversely, a conviction under section 7201 collaterally establishes fraud for civil purposes, and section 6501(c)(1) removes the assessment statute for a fraudulent return.

Voluntary Disclosure, at a High Level

The IRS maintains a Voluntary Disclosure Practice, described at IRM 9.5.11.9 and administered through Form 14457, beginning with a preclearance request.

Three points are enough here, and none of them should be acted on without counsel.

It is a practice, not a program. It confers no statutory or contractual right, does not bind the Department of Justice, and as the IRS states plainly, will not automatically guarantee immunity from prosecution, though it may result in prosecution not being recommended.

It requires timeliness. A disclosure is not timely if the IRS has already begun a civil examination or criminal investigation of the taxpayer, has received information from a third party alerting it to the noncompliance, or has acquired information directly related to the liability through a criminal enforcement action.

It does not eliminate civil liability. Tax, interest, and substantial penalties still apply.

If a special agent has already made contact, the window for a timely voluntary disclosure has almost certainly closed. That is one reason the analysis has to be done immediately rather than after a period of deliberation.

What to Do in the First Hour

Be polite. Take the agent's card and note the names of everyone present. Say that you are willing to consider the request but will not answer questions or produce documents before speaking with counsel, and end the conversation there. Do not explain, justify, or offer context. Do not consent to a search.

Write down what was said and asked as soon as the agents leave, while it is fresh. The questions asked reveal the government's theory.

Issue a preservation instruction to everyone who holds relevant records, and suspend automatic deletion.

Do not contact your accountant to discuss the substance. Retain counsel, and let counsel decide how the accountant is engaged going forward.

Then get counsel involved the same day. The decisions that matter, whether to seek a conference, whether any disclosure is available, how documents are produced, and whether anyone speaks to the government, all have to be made before the government's file is complete.

Contact from IRS Criminal Investigation is time-sensitive, and the first interview usually determines the shape of the case. Chase Counsel accepts selected federal tax controversy matters and can be reached for an initial case screening before any interview or document production occurs. Learn more at www.ChaseCounsel.Com/federal-tax-controversy.

This article discusses federal tax procedure generally and is not legal advice for any particular taxpayer. It does not address the merits of any potential defense and is not a substitute for advice from counsel retained in a specific matter.