Defending someone under investigation for any crime is a daunting task for defense counsel. The task is even harder in a criminal tax case because the suspected criminal conduct may have continued into part of the current tax year for which the tax reporting has not yet been done. Moreover, the criminal conduct (even if it has now stopped) impacts what will have to be reported on tax filings to be done for the past year that are coming due in the current year. Continuing the prior way of reporting (or nonreporting, as the case may be) adds potential additional criminal charges for the future false filings and is not an option. However, filing a truthful return for either the immediate past year or the current one may prove that the prior years were falsely filed or provide leads confirming the government’s suspicions about the past reporting. Let us consider a scenario that may arise in a typical criminal tax case.
It is now August 2015. Joe (a landscape contractor) has just retained you because the IRS Criminal Investigation Division (IRS-CI) has opened a criminal tax investigation of him and his business. Joe has been paying cash wages to nine of the 12 employees in his landscaping business, and some of the cash is paid to undocumented aliens. Joe has neither reported the cash payroll on the Forms 941 he has filed nor issued his employees proper W-2s (no W-2s at all are issued to the undocumented aliens). The cash is generated by Joe cashing business receipts checks instead of depositing them in his business account. Because Joe did not deposit these checks, Joe’s
accountant did not see them and used the deposits shown on Joe’s business bank statements to report Joe’s Schedule C gross receipts. Joe’s income and payroll tax returns are thus false for the last five or more years. The investigation seems to have started last month.
A taxpayer required to file a return during the pendency of a government investigation into her affairs faces a troubling dilemma, to which there is no clear solution.
Joe asks what to do about the current reporting. It is the middle of August, and both his 2014 Form 1040, U.S. Individual Tax Return, and third quarter 2015 Form 941, Employer’s Quarterly Federal Tax Return, will be due in October. He has stopped the cash payroll and replaced the undocumented aliens, but for part of this quarter, they got cash wages and his regular employees also got part of their wages in cash until they went fully onto payroll last week. Should he file a third quarter 2015 Form 941 that reports
the correct wages, or should he continue not reporting the cash already paid for this quarter and start fresh next quarter? What should he do about the 2014 Form 1040? Should he report the correct total gross receipts? Should he claim the cash payments to the employees? What about year-end W-2s?
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