Filing Returns During a Criminal Tax Investigation (6/7/11)

In Dingman v. Commissioner, T.C. Memo. 2011-116, while the taxpayer was under criminal investigation, the taxpayer's attorney delivered delinquent returns and checks for some of the tax due to the IRS criminal investigation special agent. The IRS processed the checks and credited the amounts to his account on February 19, 2003; what exactly happened procedurally to the returns is unclear. On February 26, 2006, the IRS assessed a Section 6651(f), fraudulent failure to file, penalty. Bottom line, the court held that February 19, 2003 was the latest date that the returns were filed (by inference from the fact that the checks were credited that date) and thus that the ultimate assessment was untimely.

That is a highly summarized narration of some complex discussion of the administrative background and processing. The key points are:

1. The IRS argued that delivery of the returns to the IRS CI Special Agent was not filing and that it should be allowed to pursue the assessment because there was no record of the returns being received by the proper office for filing at a time early enough to make the assessment untimely. In other cases, the IRS has successfully urged in other cases that delivery to the IRS CI Agent was not proper filing. In this case, if all that had happened was a delivery of the returns and checks to IRS CI with nothing further, perhaps the IRS would have had a better argument. But the checks were processed which permitted the court to infer that the returns also had been processed.

2. The Court noted that the guidance for taxpayers as to precisely where to file was confusing and in many respects obsolete.

3. On this basis, the Court held for the taxpayer.

In the course of its discussion, the Court addressed the filing of returns while a taxpayer is under criminal investigation:

The record supports a conclusion that petitioner clearly intended to file the returns when his counsel submitted them to the CID. The returns were accompanied by payment of petitioner's 1996 and 1997 Federal income tax liabilities and were filed at a time when the returns could have been used against petitioner in the criminal investigation. n22 We believe that an inference that petitioner intended to file the returns by submitting them to the CID is warranted on the record before us.

n22 Submitting returns while a criminal investigation is ongoing can have very serious and adverse consequences for the taxpayer and is not undertaken lightly. See, e.g., Smith v. United States, 348 U.S. 147, 157-158 (1954) (prior tax returns sufficiently corroborated the taxpayer's statements as to his financial history and the opening net worth); United States v. Karsky, 610 F.2d 548 (8th Cir. 1979) (prior returns relevant to a determination of the taxpayer's state of mind for establishing willfulness which is an essential element of the crime of failure to file an income tax return under sec. 7203); Malnik v. Commissioner, T.C. Memo. 1985-467 (a criminal investigation expanded to 1963 after the taxpayer filed his 1963 return during a criminal investigation).

Practitioners know that the decision of whether to file delinquent or amended returns during a criminal investigation is dicey. That decision must be made as part of a larger strategy where the potential benefits and burdens must be clearly assessed.