Pleading Fifth Amendment in IRS Tax Investigations Explained

Pleading the Fifth Amendment in IRS Audits and Investigations

Pleading Fifth Amendment in an IRS Civil or Criminal Investigation?

Pleading the Fifth Amendment in IRS Audits and Investigations requires careful consideration. The IRS 5th amendment analysis is complicated, because an IRS examination is civil — but can lead to a criminal investigation based on the civil audit findings. In addition, while there are certain rights afforded to pleading the fifth amendment and remaining silent in a criminal investigation — they do not extend to civil audits. In other words, by claiming the fifth amendment in an IRS civil investigation (unlike a criminal investigation) — it may lead to certain inferences of a criminal tax violation. In general, the Fifth Amendment protects an individual from self-incrimination. In tax matters, whether or not to invoke the Fifth Amendment is dependent largely in part by the type of case. For example, is the Taxpayer under criminal tax investigation or civil investigation. If the Taxpayer is in an audit and believes information they give may result in a referral to a criminal investigation (eggshell audit), it is important to carefully assess the situation to determine whether pleading the fifth amendment in appropriate. If it is a criminal matter where a Taxpayer may face potential criminal violations and incarceration — the stakes are higher and pleading the fifth is a much more common occurrence. Let’s review the basics of pleading the Fifth Amendment in IRS Civil or Criminal Investigation:

What is the Fifth Amendment (Amendment V)?

• • • “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

IRS Civil Investigation and Pleading the Fifth Amendment

When an individual is in an audit and wants to plead the Fifth amendment, they are not able to claim a blanket response such as just claiming the fifth as to all questions being asked.

Rather, the Taxpayers must pass a two-part test:

• • Is there a real and substantial hazard of incrimination; and

  • Will each answer or the act of producing each record would be sufficiently testimonial and incriminating to activate the fifth amendment privilege.”

In US v. Reise, the Court summarizes the 5^th Amendment test as follows:

• • • First, the taxpayer seeking the protection of this privilege to avoid compliance with an IRS summons “must provide more than mere speculative, generalized allegations of possible tax-related prosecution. . . . [T]he taxpayer must be faced with substantial and real hazards of self-incrimination.” United States v. Reis, 765 F.2d 1094, 1096(11th Cir. 1985) (per curiam). “The witness is not exonerated from answering merely because he declares that in so doing he would incriminate himself —  his say-so does not of itself establish the hazard of incrimination.

    • It is for the court to say whether his silence is justified. . . .” Hoffman v. United States, 341 U.S. 479, 486 (1951). “There can exist a legitimate fear of criminal prosecution while an IRS investigation remains in the civil stage, before formal transfer to the criminal division.”Argomaniz, 925 F.2d at 1353 (citing United States v. Sharp, 920 F.2d 1167, 1170 (4th Cir. 1990) (The privilege against self-incrimination “may apply in the context of an IRS investigation into civil tax liability, given the recognized potential that such investigations have for leading to criminal prosecutions.”)).

    • The privilege does, however, have its limits. “It would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime.” United States v. Sullivan, 274 U.S. 259, 263-64(1927). Accordingly, the privilege may not be invoked to avoid providing the amount of a person’s income.

    • In Argomaniz, the Eleventh Circuit clarified that Reis “does not state that the privilege may never be invoked in a civil IRS investigation.” Argomaniz, 925 F.2d at 1353. “Instead, it stands for the proposition that a blanket claim of self-incrimination will not be successful in a civil IRS investigation. To the extent that Reis could be read otherwise, it is obiter dictum.” (citation omitted) (emphasis in original).

    • Second, the Fifth Amendment privilege may not be asserted generally, but must be made on a question-by-question basis. See Argomaniz, 925 F.2d at 1355 (district court must review assertions of privilege on a question by question basis); see also United States v. Roundtree, 420 F.2d 845, 852 (5th Cir. 1969) (“The district court may then determine by reviewing . . . [the taxpayer’s] records and by considering each question whether, in each instance, the claim of self-incrimination is well-founded.”).

    • Further, in Fisher v. United States, 425 U.S. 391(1976), the Supreme Court addressed summonses issued by the IRS seeking working papers used in the preparation of tax returns. Because the papers had been voluntarily prepared prior to the issuance of the summonses, they could not be “said to contain compelled testimonial evidence, either of the taxpayers or of anyone else.” Id. at 409-10. Accordingly, the taxpayer could not “avoid compliance with the subpoena merely by asserting that the item of evidence which he is required to produce contains incriminating writing, whether his own or that of someone else.” Id. at 410.

IRS Compulsion Orders & Pleading the Fifth Amendment

Oftentimes, the movies make it seem like once a person pleads the Fifth Amendment, that is the end of the interview and the Government can no longer come after the taxpayer for that information — but this is false. When it comes to the Internal Revenue Service and a person claiming Fifth Amendment rights against self-incrimination — there is a process that the IRS follows in order to require a response — referred to as a compulsion order. It generally commences after the Taxpayer receives a Summons to Appear but rejects the summons based on “Taking the fifth.”

Internal Revenue Manual Compulsion Order Procedure 

Compulsion Order Requests When Summons is Issued and a Fifth Amendment Claim Is Offered During an Interview

• • • Once a witness has been summoned, has appeared and invoked the Fifth Amendment right against self-incrimination in response to specific questions posed by the special agent, then;

      • The return date of the summons may be continued until authorization to issue a compulsion order has been sought and granted.

      • The witness should be advised that the proceedings under the ” initial” summons have been adjourned and the witness’ reappearance will be scheduled. In this regard, the special agent should keep in mind that, in addition to the time needed to consider such application within the IRS, a minimum of one month from the date of receipt of the request by DOJ will be needed to obtain an authorization from the Tax Division.

      • When the issuance of the compulsion order has been approved, the witness can be directed to reappear and compliance with the summons will then be directed by issuance of an order pursuant to 18 USC §6004.

      • Except in unusual circumstances, a new summons is not necessary to request the witness’ reappearance after a compulsion order has been authorized. However, if the special agent does not properly adjourn the hearing, a new summons may need to be issued.

      • In the event a witness fails to appear or otherwise comply once the order is approved, compliance should be sought pursuant to a summons enforcement action.

Compulsion Order Requests When No Summons Was Issued Prior To A Fifth Amendment Claim Offered During an Interview

When a Fifth Amendment claim is advanced during an interview or conference not initiated by use of a summons:

• • • Substantive questions shall be asked to ascertain all relevant areas where the right will be claimed so that an accurate assessment of the need to request authorization to issue a compulsion order may be made.

    • Such authorization will not be requested if it is apparent that the Fifth Amendment right is only being claimed in response to nonessential questions.

    • This information will also enable the IRS to decide whether to issue a summons.

    • Questioning shall proceed until the witness expressly refuses to answer further questions on the basis of a right against self-incrimination and until the scope of the claim can be determined.

    • If the SAC decides that an effort will be made toward obtaining an order compelling testimony, the following procedures will be followed:

• • • • • The witness will be summoned.

        • The witness will be sworn.

        • A verbatim transcript will be made of the interview.

        • Substantive questions will be asked to determine the scope of the Fifth Amendment claim.

• • • When the witness has been summoned, has appeared and again invokes his/her Fifth Amendment privilege in response to specific questions posed by the special agent, then procedures in subsection 9.4.5.12.3.1 will be followed

Fifth Amendment Protection Filing a Tax Return Self-Incrimination?

One common misconception that some Taxpayers have is that they can avoid filing a tax return by pleading the fifth amendment — which is a form of Tax Protest and considered illegal.

The IRS provides the following guidance:

• • • The Law:

      • There is no constitutional right to refuse to file an income tax return on the ground that it violates the Fifth Amendment privilege against self-incrimination. In United States v. Sullivan, 274 U.S. 259, 264 (1927), the U.S. Supreme Court stated that the taxpayer “could not draw a conjurer’s circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.” The failure to comply with the filing and reporting requirements of the federal tax laws will not be excused based upon blanket assertions of the constitutional privilege against compelled self-incrimination under the Fifth Amendment.

    • Relevant Case Law:

      • United States v. Schiff, 612 F.2d 73, 83 (2 d Cir. 1979) – The court said that “the Fifth Amendment privilege does not immunize all witnesses from testifying. Only those who assert as to each particular question that the answer to that question would tend to incriminate them are protected . . . [T]he questions in the income tax return are neutral on their face . . . [h]ence privilege may not be claimed against all disclosure on an income tax return.”

      • United States v. Brown, 600 F.2d 248, 252 (10 th Cir. 1979) – Noting that the Supreme Court had established “that the self-incrimination privilege can be employed to protect the taxpayer from revealing the information as to an illegal source of income, but does not protect him from disclosing the amount of his income,” the court said Brown made “an illegal effort to stretch the Fifth Amendment to include a taxpayer who wishes to avoid filing a return.”

      • United States v. Neff, 615 F.2d 1235, 1241 (9 th Cir.), cert. denied, 447 U.S. 925 (1980) – The court affirmed a failure to file conviction, noting that the taxpayer “did not show that his response to the tax form questions would have been self-incriminating. He cannot, therefore, prevail on his Fifth Amendment claim.”

      • United States v. Daly, 481 F.2d 28, 30 (8 th Cir.), cert. denied, 414 U.S. 1064 (1973) – The court affirmed a failure to file conviction, rejecting the taxpayer’s Fifth Amendment claim because of his “error in . . . his blanket refusal to answer any questions on the returns relating to his income or expenses.”

      • Sochia v. Commissioner, 23 F.3d 941 (5 th Cir. 1994), cert. denied, 513 U.S. 1153 (1995) – The court affirmed tax assessments and penalties for failure to file returns, failure to pay taxes, and filing a frivolous return. The court also imposed sanctions for pursuing a frivolous case. The taxpayers had failed to provide any information on their tax return about income and expenses, instead claiming a Fifth Amendment privilege on each line calling for financial information.

Pleading the Fifth Amendment in Tax Court

In one of the more Taxpayer friendly rulings, in the case of Youssefzadeh, the Taxpayer had completed the portion of Schedule B involving the amount due, but not the account information that generated the income — citing a potential self-incrimination issue and plead the fidth amendment. The IRS asserted it would go after the Taxpayer for Section 6702 Frivolous Return Penalties. In this case, the court sided with the Taxpayer based on the concept that even without the “source” name of the payor — the amounts included in the return resulted in the return being substantially correct.

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