Evidence Handed to the IRS Criminal Division on a "Civil" Platter: Constitutional Infringements on Taxpayers

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Fear of being audited by the Internal Revenue Service (IRS) pervades the lives of American taxpayers. (1) Taxpayers anxiously fear that the IRS may discover some evidence of taxpayer mis-reporting, and seek retribution. But while the threat of a hefty monetary penalty in conjunction with a routine civil tax audit may devastate a tax-avoiding citizen, the peril of criminal punishment imposes draconian consequences by comparison. (2) Accordingly, taxpayers, if audited, may justifiably fear that the true purpose of an IRS investigation is to garner evidence to support a criminal prosecution. Often, this fear is realized. (3) Although an IRS examination may commence as a civil audit, IRS agents frequently use information garnered during a civil investigation to instigate criminal proceedings against unsuspecting citizens. (4)

The IRS divides the responsibility of enforcing the nation's tax laws between its civil and criminal divisions. (5) During a typical civil tax investigation, an IRS agent's primary responsibility is to determine the correctness of a tax return as filed. (6) In comparison, the IRS agent's main objective during a criminal tax investigation is to determine whether the taxpayer has engaged in fraudulent tax reporting. (7) Interestingly, the most frequent catalyst of a criminal investigation is the civil audit itself. (8) However, the juncture where a civil examination turns criminal is not always clear. (9)

Because the American legal system invokes strict constitutional safeguards to protect individuals subject to criminal investigations, (10) it is critical that IRS regulations prohibit civil agents from circumventing these safeguards by using the civil audit to garner evidence for a criminal prosecution. The situation that most taxpayers fear is that they will permit an IRS agent to examine their private books and records during the course of a routine audit, and the agent will subsequently use this information for criminal prosecution. Accordingly, the IRS has explicitly enacted regulations that prohibit an IRS agent from developing a criminal case against a taxpayer under the guise of a civil investigation. (11) If the agent uncovers evidence of criminal wrongdoing during the course of a civil audit, the agent must then refer the case to the criminal division for prosecution. (12) Nonetheless, the stark reality is that revenue agents often gather the same evidence as their criminal division counterparts and effectively offer this evidence to the criminal division on a silver platter. (13)

These transgressions severely threaten the American voluntary tax reporting system. (14) The present revenue collection system centers on the self-reporting and voluntary compliance of taxpayers. (15) However, if taxpayers are uncertain as to whether tax investigations are criminal or civil in nature, they will not submit to routine tax examinations and the system of voluntary compliance will collapse. (16) While the IRS properly requests permission to examine books and records of taxpayers to collect tax revenue, use of such information to secure evidence for criminal prosecution poses a danger to the entire system. (17)

What is worse, taxpayers frequently have little recourse against agent misconduct based on the current state of the law. (18) Legislation fails to specify a remedy for violations of taxpayers' constitutional rights, (19) although these infringements clearly violate IRS regulations. Furthermore, judicial action insufficiently redresses these wrongs. Courts defer tremendous judgment to the individual IRS agents, and generally do not enforce vulnerable taxpayers' rights against the IRS. (20)

This Comment proposes that when the IRS fails to conduct a criminal investigation in accordance with its own internal regulations, the IRS violates a taxpayer's constitutional rights. This Comment has five parts. Section I discusses the silent transition of an IRS civil audit to a criminal investigation, and the regulations set forth in the Internal Revenue Manual (IRM) that forbid the IRS from conducting a criminal investigation under the guise of a civil audit. …