Civil tax cases often turn into criminal tax cases. In those instances the IRS initially investigates the tax crime and then refers the case to the Department of Justice. The IRS efforts to investigate the potential tax crime often require that they obtain information from third parties, such as the taxpayer’s employer, neighbors, and financial advisers. These types of inquiries can be detrimental to the taxpayer’s reputation in the community and livelihood – all before the taxpayer has had a chance to defend him or herself. The Congress and the courts have recognized that these types of visits should be minimized if at all possible.
The Congress and the courts have specified that the IRS must gather information from the taxpayer before looking to third parties. The idea is that taxpayers should be able to fully comply with IRS tax investigations in order to limit the damage that they suffer when the IRS conducts a criminal investigation. Yet the IRS has interpreted the law, as outlined by Congress and the courts, to mean that the IRS can gather information from third parties without first considering whether the taxpayer would produce the information if it is “helpful” or “appropriate.” That interpretation negates the very law it is based upon.
That interpretation is often detrimental to the taxpayer’s fundamental civil liberties. For example, imagine a situation where the taxpayer hires a non-lawyer tax practitioner to resolve a tax dispute with the IRS. In that case the IRS would initially begin soliciting information from the taxpayer and third parties to build a civil case against the taxpayer. But the IRS would begin soliciting information to support a criminal case if the IRS suspects that a tax crime has been committed. At that point the taxpayer may be subject to questioning by government actors without the aid of competent counsel, which raises some serious Constitutional issues. But ignoring those issues, the IRS may turn to third parties to gather information to support the criminal case. Those third parties will probably include the taxpayer’s non-lawyer tax practitioner. Believing that they are helping the taxpayer resolve a civil tax matter, the non-lawyer practitioner may make damaging statements or turn over otherwise privileged information to the government. This can result in the non-lawyer practitioner making the government’s criminal case.
This situation results in the government being able to gather information that might not otherwise be admissible in court if it were gathered after the government had announced its plan to pursue a criminal case against the taxpayer.
But can you fault the non-lawyer practitioner? In most cases the tax practitioner does not have any legal training to spot these issues and there may be no indication that the government has begun soliciting information for anything other than a civil case. After all, at that point the IRS may not have even contacted the Department of Justice.
If that is not bad enough the investigation may reveal that the non-lawyer practitioner has knowledge of information surrounding the criminal tax matter. In that event the investigation may result in the non-lawyer tax practitioner being compelled to testify in court against the taxpayer. Congress has passed a statute exempting some tax practitioners from having to make such disclosures, but that law was poorly drafted and to my knowledge it has never been tested in court. The statute appears to be so poorly drafted that it would not withstand judicial scrutiny.
If we continue to allow non-lawyer tax practitioners to represent clients with tax matters then we should limit the IRS’s ability to solicit criminal information from them.