Under IRC Section 7525 (A) (enacted 7/22/98): With respect to tax advice, the common law protections that apply to a communication between a taxpayer and an attorney applies to a communication between a taxpayers and any Federally Authorized Tax Practitioner (“FAPT”) (which includes attorneys, cpas, enrolled agents, see IRS Pub 947, and Treasury Dept. Circular 230) does not apply in criminal matters.
For those US Taxpayers who commit tax crimes (i.e. tax felonies: IRC 7201 Willful Evasion of Tax; IRC 7212 Obstruction of Tax Collection, 18 USC Sec. 371 Conspiracy to Commit Tax Evasion ( a “Klein Conspiracy”) and others (see below), they may not have an absolute attorney-client privilege.
Under IRC Sec. 7525, the FATP privilege may only be asserted in a “non-criminal tax matter before the IRS” and a “non-criminal tax proceeding in a Federal court brought by or against the United States (IRC Sec.7525(A).
The Bottom Line: Tax advice has a limited attorney client privilege only for “non-criminal tax matters”.
In addition, anyone who has knowledge of a tax (or other) felony, who does not report this tax felony to a judge of a US court, or other person in a civil or military authority, may be held liable for misprision of a felony (18 USC Sec. 4) and imprisoned for not more than 3 years (18 USC sec. 4).
In addition to tax felonies, the taxpayer who willfully evades taxes may be liable for separate felonies for money laundering (if they use the tax evasion proceeds to buy assets or otherwise), wire fraud and/or mail fraud, all of which are separate 20 year felonies. The US Supreme Court in the Pasquantino case (544 US 349, 2005) held that tax evasion may also include the related crimes of wire fraud and mail fraud as well as money laundering, and further stated: that a taxpayer failure to pay taxes was an “embezzlement” from a national (state) treasury.
Please see list of criminal penalties below.
IRS/Offshore Accounts: Criminal Penalties
(6-Year Statute of Limitations)
1. Tax Evasion (Willful Evasion of Tax)
(lRC Sec. 7201) up to five years in prison
Fine: $100,000 (individual)
2. Obstruct (Impede Tax Collection)
(lRC Sec. 7212) up to three years in prison
3. Conspiracy to Impede Tax Collection
(18 USC 371) separate charges of impeding – up to five years in prison
4. Failure to File Tax Return
(lRC Sec.7203) up to one year in prison
5. File False Tax Return
(lRC Sec. 7206(1)) up to three years in prison
6. FBAR Violation
(31 USC Sec. 5322(b)), 31 CFR 103.59(c)
Willful Violation: up to ten years in jail
Additional Criminal Penalties:
1. Perjury: (U.S. taxpayer, who fail to disclose foreign accounts under Form 1040/Schedule B, Part lll, question 7 (a))
2. FATCA Filings: (i.e. Failure to disclose foreign financial assets on $50,000/lRS Form 8938).
3. Money Laundering: Disguise of the nature or the origin of funds (18 USC Sec. 1956 and 1957)