The 7th Circuit Court of Appeals refused to dismiss tax fraud charges leveled by the Internal Revenue Service (IRS) at the owner of a small business. United States v. Greve, 490 F.3d 566 (7th Cir. 2007). The case illustrates the perils of representing yourself in a civil tax audit involving significant omissions of income because one never knows when a civil tax audit can turn into a criminal tax problem. The facts were that Mr. Greve operated a snow plow business, and prepared his own tax returns. In preparing those tax returns he omitted a portion of his income. When the tax audit began he proceeded to confess his sins to the IRS tax auditor, but at the same time withheld significant information from her. In addition, he apparently provided false documents to the IRS in the course of the tax audit. To top it off he transferred his home into a trust shortly before the tax audit began.
After the tax audit was part-way done Greve got around to hiring a tax lawyer. The court’s opinion does not disclose whether the tax attorney had experience handling criminal tax problems. The tax attorney met with the IRS agent, and apparently received assurances that the tax audit would be “wrapped up pretty quickly” once certain requested documents were turned over. Behind the scenes, however, the IRS agent was meeting with the Tax Fraud Coordinator, and plotting a criminal tax case. After he was indicted, Greve attempted to have evidence supressed on the theory that his cooperation had been induced by false promises that if he cooperated the matter would be resolved without a referal to the IRS’ Criminal Investigation Divsion (CID). The Court did not see it that way. Although the IRS agent failed to inform Greve that she was considering referring the case for referral to CID the Court held she was not required to do so.
The Greve case illustrates a classic eggshell tax audit, and how treachorous the waters are for those who have omitted signficant income from their tax returns who are picked for a tax audit. For anyone in that situation representation by a skilled tax lawyer is critical.