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.
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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.