Fraud Technical Advisors

Fraud Technical Advisors: An End-Run Around Tweel?

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United States v. Tweel is the most famous example of a motion to suppress in a tax case. In Tweel, the Fifth Circuit Court of Appeals held that it constitutes trickery, fraud, and deceit for the IRS to conduct a criminal investigation under the guise of a civil examination. Because of how fact-sensitive the holding of this case is, a recitation of the facts is necessary.

During a civil examination – the examination from which the indictment arose – Tweel’s representative was concerned that the Criminal Investigation Division (CI) was involved. As a result, he specifically asked the revenue agent whether CI was involved. The Revenue Agent answered, “no,” which was technically the right answer. CI was not involved. Relying upon the Revenue Agent’s “word,” the representative cooperated with the examination, delivering records without forcing the agent to resort to a summons.

Unbeknownst to Tweel’s representative, while CI was not technically involved, that did not mean that the investigation did not have a criminal focus. What the revenue agent conveniently left out was that while CI was not involved, the Organized Crime and Racketeering Section (OCRS) of the Department of Justice was. Indeed, the civil examination was being conducted at the behest of the OCRS, which only had authority to conduct criminal investigations.

Tweel was later indicted. He moved to suppress the documents, arguing that they had been obtained by the Revenue Agent in violation of the Fourth Amendment. Specifically, he argued that his consent was obtained through deception – the failure to disclose to him the criminal nature of the investigation.

The district courted denied the motion, but the Fifth Circuit Court of Appeals reversed. In doing so, it suppressed all of the documents that the government obtained during the audit.

That the fifth circuit court of appeals was unwilling to sit back as a government official intentionally misled a taxpayer as to the civil nature of an examination when a criminal investigator was actually pulling the strings is readily apparent. The court reasoned:

From the facts we find that the agent’s failure to apprise the appellant of the obvious criminal nature of this investigation was a sneaky deliberate deception by the agent under the above standard and a flagrant disregard for appellant’s rights. The silent misrepresentation was both intentionally misleading and material. Any findings to the contrary under the facts of this case are clearly erroneous.

Appellant showed Miller knew that the IRS was acting at the request of the Organized Crime and Racketeering Section of the Justice Department which is undeniably an instrument for criminal investigation. Miller obviously knew the accountant inquired whether a special agent was involved to determine whether he was conducting a criminal audit. Miller’s response, although on the face of it true, misled appellant to such a degree that his consent to the “search” must be vitiated by the agent’s silence concerning the origin of this investigation.

The two most important points to take from the Tweel case are the following. First, because revenue agents are government officials, they have a legal and moral duty to be forthcoming. And second, silence on the part of such an individual is deemed fraudulent when a question left unanswered would be intentionally misleading.

The IRS responded to the Tweel decision by adopting a rule “explicitly prohibiting a civil agent from developing a criminal case against a taxpayer in the guise of a civil examination.” The IRS’s own spin on Tweel is that it requires termination of a civil examination and transfer to CI once the revenue agent finds a “firm indication of fraud.” This rule is designed to transfer the case to special agents, who presumably will be more sensitive to the criminal implications of Tweel and Miranda, ensuring that no deception occurs and that appropriate warnings are administered.

In theory, this sounds all well and good. In fact, some might even be willing to heap praise on the IRS for making a good faith effort to avoid the harm that concerned the Fifth Circuit Court of Appeals. However, upon peeling away the layers, just the opposite is true.

In practice, revenue agents who suspect fraud are taught to work with a Fraud Technical Advisor to develop enough proof of fraud to convince CI to accept the case. Although the Internal Revenue Manual requires referral upon finding a “firm indication of fraud,” the practical result is that the taxpayer is asked to provide documents and oral statements well after the civil agent has uncovered firm indications of fraud, even to the point of being asked to appear for a “confrontation” interview at the end of the examination.

As is often the case, agents have been known to confront taxpayers with evidence of fraud during these interviews in order to obtain a response. Not surprisingly, the taxpayer does not disappoint. And more often than not, the response is incriminating. But because the examination is technically only “civil,” the revenue agent has no obligation to administer Miranda warnings to the taxpayer before confronting him.

The IRS believes that the use of Fraud Technical Advisors to develop evidence of fraud before referral to CI completely avoids the issue in Tweel. Its’ justification is that there is no criminal agent using the civil agent as a stalking horse for a criminal investigation as there was in Tweel.

The defense bar views the use of fraudulent technical advisors instead of criminal investigators as a distinction without a difference. Why? Because the IRS is gathering proof for a criminal case without warning the taxpayer that the case is more than just a standard civil examination.

This author adopts the view of the defense bar. Despite the IRS’s arguments to the contrary, all that it has created is a new level of criminal investigations, one that it has embedded within the examination and collection functions in order to avoid the appearance that a special agent is directing the inquiry. To that end, the IRS continues to conduct potential examinations and collection actions while gathering information to bolster a potential criminal case.

This flies in the face of the requirement that agents refer matters to Criminal Investigation once there is a “firm indication of fraud.” Indeed, by developing the fraud case on the civil side of the house with the assistance of a fraud technical advisor, the IRS essentially does an end run around the “firm indication of fraud” standard, as well as most of the case law.

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