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New York Criminal Tax Investigations

Article excerpt

Strategies Used by the Special Investigations Unit

As many tax professionals are by now aware, the New York State Department of Taxation and Finance (DTF) has been reorganized to include a new bureau called the Office of Tax Enforcement. This new bureau is composed of the previously existing Audit Division, the Collections and Civil Enforcement Unit, as well as the new Special Investigations Unit (SlU). William Comiskey, formerly the chief prosecutor at New York State's Medicaid Fraud Control Unit, is the deputy commissioner in charge of the Office of Tax Enforcement.

Recently, the Office of Tax Enforcement has focused on implementing what it calls a "tax gap enforcement strategy." The goal of this strategy is to enhance voluntary compliance (by deterring unlawful taxpayer conduct) and in the process increase the collection of lawfully owed taxes in order to alleviate the negative impact of New York's budget shortfall. To this end, the Office of Tax Enforcement is seeking to use a "carrot and stick" approach to change taxpayer behavior. The carrot includes a new voluntary disclosure program, under which taxpayers may voluntarily approach the tax department to report past delinquencies and obtain a certain degree of amnesty. The stick has been a significant increase in criminal investigations, referrals, convictions, and plea bargains (Jack Trachtenberg and Michelle Meroia, "New York's Less Kind and Gentle Tax Department: Preparing for Criminal Investigations," State Tax Notes, March 31, 2008). According to Comiskey, the DTF has quintupled the number of staff fighting fraud since the inception of this program. Indeed, there were more cases referred to SIU for criminal investigation in the first three months of 2008 then there had been in total for the prior four years combined (Jason Subik, "State getting tough on sales tax cheaters," Daily Gazette, August 12, 2008).

Because of the new emphasis on tax enforcement, the state has staffed SIU with a multidisciplinary cadre of new attorneys, auditors, investigators, forensic accountants, and others charged with the task of ferreting out fraud. SIU has also been charged with conducting comprehensive investigations across a broad range of tax (and non-tax) areas. As a result, many SIU cases that begin with a focus on one type of tax often will spill over into an investigation of other areas. For example, the authors have seen cases start with a focus on sales tax, but quickly evolve into an investigation of alleged fraud related to income tax, franchise tax, and withholding tax. Other cases have grown to include money laundering, embezzlement, and other fraud-related charges. More recently, SIU has targeted fraud that it believes is being committed by accountants and tax preparers.

How Does SIU Find Its Targets?

The Office of Tax Enforcement is becoming more sophisticated in identifying and investigating potential fraud and now has more resources to carry out its mission. It has adopted (or reinstituted) some enhanced tactics to bolster its fraud detection efforts. These include the following:

8 Issuing more subpoenas to taxpayers and third parties for records and testimony;

* Subpoenaing accountants to take advantage of the fact that there is no accountant-client privilege;

* Establishing a new data resource unit for third-party records (e.g., data-mining);

* Increased coordination with outer states and federal agencies; and

* Proposed legislation aimed at increased compliance and enforcement, including a new law mat would require banks and financial institutions to annually report the amount of deposits into accounts of registered sales tax vendors; and a new whistleblower statute for tax evasion.

The Office of Tax Enforcement has also increased its use of undercover and covert operations. This has included enlisting and making deals with allegedly corrupt taxpayers or preparers. New York State has even begun sending in undercover agents acting as taxpayers to meet with accountants and other tax preparers. …