As a former agent and Assistant Attorney General – Tax, I know how long it takes for agents to build a successful criminal tax evasion case. It isn’t unusual for agents to expend upwards of 1000 hours on a single case. If successful, the defendant often winds up in jail. There are other ways of combating willful tax evasion, however.
Most cases, even those involving fraud, are never prosecuted. The IRS has a vast array of collection remedies and some very powerful penalties it can levy, particularly in fraud cases where the IRS can add an additional 75% penalty. Since revenue officers don’t have to go to court in order to lien real estate, garnish wages or seize property, the IRS usually lets the collection division bring reluctant taxpayers into compliance.
Sometimes, however, the IRS asks the Justice Department to seek a court injunction. Why the injunction? Civil cases are much easier to prove and if the taxpayer disobeys the court, he or she can be held in contempt and jailed. Use of civil injunctions is infrequent but in the right case, it is a powerful tool. Such is the case in a Manhattan federal court against Medway Construction.
According to the complaint, Medway has a long history of noncompliance. Since 2004, the company doesn’t appear to have paid withholding or employment taxes. As of June, 2014, the IRS says the balance exceeds $922,000.
Compliance is so poor that the IRS says it has already lost the ability to collect an additional $340,000 in tax because of the passage of the collections statute of limitations. (The IRS generally has 10 years to collect delinquent taxes.)
The IRS says it has tried to collect against both the company and its owner, Narzim Mohammed, but has been mostly unsuccessful. Since the company isn’t filing current returns and won’t tell the IRS how many employees it has, assessing and collecting current taxes has also become difficult.
The IRS has several criminal tools it can use. Willful failure to file returns is a misdemeanor. Ditto for willful failure to pay taxes, although the latter requires a showing that the taxpayer had funds to pay. Tax evasion, of course, is a felony and requires the government to prove either affirmative acts of evasion of assessment or evasion of payment. Although this case certainly looks like tax evasion, it is often difficult for the government to prove when there are absolutely no returns and no information. Remember, in a criminal case the government has to prove its case beyond a reasonable doubt.
Section 7402 of the Internal Revenue Code allows the IRS to seek a court injunction even if the IRS has other remedies. Thus far, it appears that the IRS’ audit and collection remedies have not been successful. In Medway’s case, the Justice Department wants the court to order Medway to comply with the tax laws or face the court’s contempt powers and an order closing the business.
The complaint was filed on July 24th and already, on August 8th the court issued a preliminary injunction ordering Medway to file all missing tax returns within 90 days and from transferring its assets until the case is resolved.
Although all the facts have not come out in a trial yet, it appears that the Medway case is a classic example for use of injunctive relief. This case may or may not be tax evasion, however, preparing a case and proving it could take over a year. In just 15 days, the IRS has convinced a court to intervene and force Medway to comply.
Have a tax problem, collection issue, audit question or need help with an IRS tax appeal? Let a tax lawyer from Mahany & Ertl help. We are a nationwide boutique law firm concentrating in IRS tax matters. For information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. All inquiries protected by the attorney client privilege.