June 3, 1993
MEMORANDUM
TO: All CES Attorneys
FROM: Stanley F. Krysa, Director
Criminal Enforcement Sections
SUBJECT: Civil Settlements in Plea Agreements
It is not unusual for the taxpayer, in the course of negotiating a plea
agreement, especially in cases arising from a grand jury investigation, to seek
to include a civil settlement for the years involved. Very often, in such a
situation, the Internal Revenue Service is agreeable to settlement. The Internal
Revenue Service often believes the money to be paid is likely all it could ever
realize because of Rule 6(e) restrictions and scarce audit resources. The Tax
Division, however, has long followed a policy against approving plea agreements
that include such global settlements. This policy wisely reflects the
substantial differences between criminal and civil tax litigation.
Criminal tax investigations are frequently narrow in focus and
substantially more targeted than any civil audit. For example, a criminal
investigation centering on a complex return will normally focus on large items
of unreported income or improper deductions that are easily provable rather than
complex tax adjustments that may result in further taxes due, which, either
because of difficulties of proof or the uncertain state of the substantive tax
law, cannot form the focus of a criminal case.
In a civil tax setting, the determination by the Internal Revenue Service
that an item of income was realized or that a deduction claimed was not allowable
constitutes a prima facie case for inclusion or disallowance, as the case might
be, and the taxpayer bears the burden of proving that determination wrong.
Accordingly, reasonable inferences from known facts can support a finding of
civil liability, but often would not provide a basis for indictment.
The Tax Division cannot authorize a plea agreement in a case that, by its
terms, bars the Government from a further examination of the target's civil tax
liabilities. We can and will, however, approve acceptance of a plea that
includes certain civil admissions by the target. Thus, we would be willing to
authorize a plea agreement in which the target would make the following civil
admissions:
- An admission by the defendant that he received enumerated amounts of
unreported income or claimed enumerated amounts of illegal deductions for years
set forth in the plea agreement.
- A stipulation by the target that he was liable for the fraud penalty
imposed by the Code (formerly Section 6653 and now Section 6663) on the
understatements of liability for the years involved.
- An agreement by the target that he or she will file, prior to the time of
sentencing, initial or amended personal returns for the years subject to the
above admissions, correctly reporting all previously unreported income or proper
deductions, will provide the Internal Revenue Service information, if requested,
regarding the years covered by the returns, and will pay at sentencing all
additional taxes, penalties and interest owing. Such an agreement should also
include a provision pursuant to which the target agrees that he or she will
promptly pay any additional amounts determined to be owing with respect to that
return because of computational errors.
- An agreement by the target that he will not thereafter file any claims for
refund of taxes, penalties or interest for amounts attributable to the return
filed incident to the plea.
As a final note, all such provisions must be drafted with considerable
care. A plea agreement is an undertaking by the United States and, if not
properly crafted, could be construed to foreclose the civil side of the Internal
Revenue Service from examining and making any civil audit adjustments to the
returns involved after they are filed.
In reviewing or negotiating any proposed plea agreements the above
principles should be applied. If you have any questions contact your respective
Chiefs. All plea agreements negotiated by you should be in writing. They should
be submitted for review and approval by the Chief before executed.
October 1997
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