“Guilty!” is heard often in federal court, whether the defendant is pleading to the charge or a jury is finding it as a verdict. In cases involving financial crimes, the main witness will be a government employee who is a forensic accountant testifying to the total financial loss.

During the 2022 fiscal year, IRS-Criminal Investigation had more than 1,500 defendants who were sentenced in white-collar crimes. In almost every sentencing hearing, the federal judge will sign a court order requiring the defendant to pay restitution, which becomes a 20-year judgement against the defendant. This judgement allows the United States Attorney’s Office to find and sell the defendant’s assets to pay for the judgement. If the IRS was a victim in the criminal tax investigation, the court order will be sent to the IRS to be classified as a tax assessment, meaning that adverse IRS civil collection actions can be taken as well.

On average, a criminal tax investigation will take 18 months to complete, and that doesn’t include the judicial process of indictment, arrest, trial and sentencing, which can add additional year or two to the process. In many criminal tax investigations, the defendant will need an expert with financial skills to help the criminal tax attorney and defendant. That’s where the CPA is invaluable to the defense team, because the CPA can assist the attorney in evaluating the evidence and independently calculate the loss and possible restitution.

There are a few key areas where the CPA can bring value to a criminal defense attorney and the defendant:

• Burden of proof is different. Calculating the tax loss in a civil audit is different than in a criminal prosecution. The main reason is the burden of proof on a civil audit is on the taxpayer and not on the government. If a taxpayer does not have the proper documentation for a charitable contribution, the IRS can deny the deduction and assess additional tax. In a criminal trial, however, the burden of proof is always on the government to prove the crime beyond a reasonable doubt, whether the allegations are bank robbery, money laundering, illegal drug sales or a criminal tax violation. A deduction on a tax return is assumed to be true until the government proves otherwise. Knowing this burden of proof, the CPA can properly evaluate the loss amount and not rely wholly on the government’s loss calculations.
• 6020(b) calculations. The IRS is in the business of assessing and collecting taxes. When taxpayers don’t file tax returns, the IRS is allowed in its civil authority to estimate the tax due under Title 26, United States Code, 6020(b). And as you can imagine, the IRS will estimate the liability in their favor. If there are unfiled payroll tax returns, the IRS will assume a 20-percent federal income tax withholding rate. This is more than twice the average withholding rate. The estimated amounts under 6020(b) become the basis to calculate the tax loss, and restitution in criminal court. If a CPA is tasked with reviewing tax calculations, one of the first questions to be asked is if the IRS calculations are from the 6020(b) statute.
• U.S. Courts can estimate loss. The federal government is not required to be precise in calculating the loss and restitution. The U.S. Sentencing Commission issues a report every year that advises federal judges on the appropriate sentence for various federal crimes. In white-collar crimes, the financial loss that is attributed to the defendant is the driving factor in determining the length of imprisonment. If a defendant falsified deductions or had unreported income, the courts are allowed to estimate the tax loss using a flat rate (28 percent for individuals, 35 percent for businesses) if a more accurate calculation is not available. The good news is that a more accurate loss calculation can be used if shown to the court.

These three areas are where a CPA can bring value in litigation support in criminal tax cases. If hired, the CPA should review the tax loss through the lens of the government’s burden of proof, question the IRS’s calculations and, if possible, calculate a more accurate amount so that a federal judge doesn’t have to estimate the tax loss.