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20 Memorandum -- Civil Settlements in Plea Agreements

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:

  1. 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.

  2. 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.

  3. 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.

  4. 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 Tax Resource Manual 20