Tuesday, March 6, 2012

Concerns and Strategies in Parallel Investigations (3/6/12)

One of the risks in eggshell civil audits -- where risk of criminal prosecution is material -- is the possibility of parallel investigations.  Parallel investigations are simultaneous civil investigations and criminal investigations.  These can involve the same agency and cooperating agencies (such as the SEC and the DOJ).  In the case of civil audits, they would typically involve different branches of the IRS -- the civil examination function and CI.  The risk is that the civil examination will further the criminal investigation, whether with malice aforethought or not.  And, certainly, if the taxpayer is the target of the CI investigation, the taxpayer may want to take a different approach in his or her cooperation in the civil investigation.

Tax Notes has an excellent recent article where practitioners discussed some of the issues in parallel IRS investigations.  Shamik Trivedi, Parallel Criminal and Civil Investigations Require Caution, Practitioners Say, 2012 TNT 35-23 (2/22/12), available to the Kostelanetz & Fink website, here.

Key points are:

1. Due to a change in the IRS policy statement (currently in PS 4-26, here), more parallel investigations are being observed.

2. It is unclear whether the civil agent has an affirmative obligation to advise the taxpayer of the CI investigation, but it is clear that the civil agent is not supposed to lie if asked specifically about the CI investigation.  Hence, a straight-forward question to the agent might get the answer.  If the agent declines to answer, then the inference is that there is probably some CI activity.

3.  Other types of criminal oriented activity could also be involved in the civil examination, specifically agent discussions with the Fraud Technical Adviser, an examination person whose job is to help determine whether a potential referral to CI is appropriate.  If an inquiry is made about CI activity, it should also include FTA activity as well.

4.  Although not developed in the article, practitioners sometime will have some concern about asking whether any type of criminal oriented activity is going on.  Practitioners may therefore approach the issue with less direct communications designed to test the water with the civil agent.  Often that will work.  But, in the final analysis, a direct question will get the answer or at least an answer from which a reasonable inference may be drawn.

5.  As noted, the practitioner and the taxpayer should reassess the level of cooperation in the civil examination if criminal investigation and prosecution is material.  This is true in all eggshell audits, but particularly true if there are parallel investigations.

JAT Comment:  As noted, the parallel investigation will usually be a CI investigation.  It could also be a grand jury investigation.  Although I believe that there is some type of computer flagging of a taxpayer's master file if the taxpayer is involved in a criminal investigation, the civil agent is not supposed to know about the grand jury investigation unless the civil agent were on the grand jury assistant list (which would be a no-no).  I suspect that, in the case of parallel grand jury investigations, the civil examination is stopped so as not to create pressure on the grand jury investigation, but the question would be whether, if the practitioner asked the agent involved in the suspended civil investigation whether there is any criminal investigation -- grand jury or CI, the agent could provide a response.  Maybe it needs to be phrased as whether the civil agent is aware of any such investigation.  The civil agent almost certainly will be aware from the coding in the file and will have to either answer honestly or not at all, either way the practitioner will have learned something.


Comment of Anonymous Mar 7, 2012 11:46 AM, here.
This is a particularly thoughtful and thorough comment by someone I believe to be a skilled and experienced practitioner of civil and criminal tax controversy law. I particularly recommend it to law students interested in civil and criminal tax controversy matters.


  1. Excellent posting!

    Here is what I have to add:

    1. When in doubt, ask the civil agent whether he/she is aware of any CI, Grand Jury or other investigation directly. This should be done as part of a recorded communication in accordance with the applicable law. If, upon persistent questioning, the agent declines to answer or hedges with his/her answer, a full record should be made. Such evasive answers could be used substantively (as for example, admissions of a party opponent, statements admitted per FRE 106 based on a curative admissibility theory or rule of completeness) and/or for the purpose of impeachment.

    2. The Fifth Amendment should be invoked early, often, consistently and persistently if there is any hint of potential incrimination or if answers to questions could logically lead to other questions the answers to which may tend to incriminate the subject/target/witness.

    3. As always -- lawyer up; lawyer up; and lawyer up -- with an experienced white collar criminal defense attorney.

  2. Jack-

    Thanks for posting this. From my perspective, how you deal with the possibility of a parallel investigation, or a known parallel investigation, is always a case-by-case decision, based on the particularized facts of the case. Much of the time you follow the conventional wisdom, but not always.

    I've been involved in situations where we (successfully) took an approach that, as a general matter, appeared to be counter-intuitive based on conventional wisdom.

    Not only do you need experienced, competent counsel, but you need to know the facts (to the extent you can) and to know the government personnel involved (to the extent you can).

    That being said, there are some general points I'll add. First, in a civil audit context, I do not believe that Circular 230 requires a practitioner to articulate that their client is invoking the 5th amendment when the practitioner refuses to provide documents/information to the revenue agent pursuant to an informal request. So in some circumstances your client may be able to "invoke the 5th" in a civil audit without telling the government that they are doing so.

    If asked directly why there is no production or response, you may need to articulate that the client is invoking the 5th, and sometimes the circumstances may be such that you want the IRS agent to know the client is invoking the 5th Amendment. But you may not have to tell the IRS agent that the client is invoking the 5th unless a) the agent asks you a direct question regarding the reason for the failure to respond, b) a summons is issued and your client chooses to appear in response to the summons, or c) some other unusual circumstances require that you articulate the grounds for failure to respond/produce docs.

    Second, if you are in Tax Court (or other civil litigation involving the IRS) and the client is considering invoking the 5th and seeking a stay due to a parallel investigation, it may be helpful to have the client hire separate counsel for the purpose of asking the court for a stay. The Tax Court judge may, consciously or unconsciously, be thinking that the stay motion might be a delaying tactic by you as counsel for your client. Having an attorney who was previously not connected with the civil litigation come to the Court and explain that they have reviewed the situation independently, they have advised the client, and client wants to invoke the 5th will make it more difficult for the civil court to refuse to grant the stay. Of course, this is easy to do if there is already separate counsel in the civil and criminal matters.

    Third, parallel investigations don't just have pitfalls for private practitioners. They also create opportunities that would not otherwise exist. Always be on the lookout for those opportunities and use them to your client's advantage.

    Fourth, a comment that is technically not on topic: invoking the 5th in a federal civil tax litigation based on possible self-incrimination with respect to potential crimes under state law. I've used this approach with success in an unusual situation. The government's case in the civil tax-related action depended almost entirely on a document that could only be authenticated by two persons, one of whom was my client. The other person who could authenticate the evidence died of natural causes prior to trial (and without being deposed), and I advised the government that my client would invoke the 5th at trial due to the possibility of prosecution under state law. The government quickly settled the civil case on favorable terms.

    Best regards,

    Anonymous (the one who previously commented on the bankruptcy discharge issues)

  3. This is very informative! What are your thoughts on the constitutionality of the new IRM instructing civil agents to give a blanket statement (something along the lines of "any information shared with us could be used in a criminal investigation") as a response to a direct inquiry into the presence of a parallel investigation? It appears that under common law this type of evasive statement is not considered "trickery or deceptive", but it gives the taxpayer no information in regards to his question and he still has not been read his rights. This new system seems to be forcing tax practitioners to not cooperate, which is most likely a policy that the IRS would find ineffective. Thoughts?


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