Immunity Plan for Tax Evaders Said to Be Usual
A controversial procedure under which tax cheats could pay back taxes and avoid criminal prosecution is a long-established part of Internal Revenue Service practice nationwide and is well known among attorneys specializing in tax disputes, legal experts said Wednesday.
The informal practice is described in official IRS manuals--and thus is sanctioned by the agency--and made available to anyone, not just those with close relationships with IRS officials, the experts said.
These views contrast sharply with characterizations made by congressional investigators this week probing allegations of misconduct at IRS offices in Los Angeles and elsewhere. Investigators contended that these arrangements, involving the Los Angeles office in particular, involved favoritism and were not approved by national IRS headquarters.
“It’s legal, there’s no question about it,” said Roger Olsen, a Los Angeles tax attorney and former assistant U.S. attorney general in charge of all federal tax prosecutions between 1981 and 1987.
“If you go to tax seminars, the subject is widely disseminated. It’s not a secret,” said Eugene D. Silverman, a Los Angeles tax attorney and a former attorney with the IRS and Justice Department. “I strongly feel it should be encouraged,” he added, noting that the IRS has received millions of dollars in tax revenues that it may not otherwise have recovered.
IRS officials said Wednesday that the practice allows delinquent taxpayers to avoid prosecution for failing to file tax returns or other tax violations. It does not preclude criminal prosecution if taxpayers obtained income illegally or committed other non-tax violations. And the practice does not exempt taxpayers from interest and penalties owed, or from civil fraud penalties, and therefore is not an amnesty program.
“What we have here is a need to enforce the law, but also to be able to offer people who want to get back into the tax system . . . an opportunity to get back,” said IRS spokeswoman Ellen Murphy. She added that the agency does not know how much in taxes and penalties has been taken in, because the program is informal.
Congressional investigators described Tuesday how Sherman Oaks attorney Richard J. Trattner used the practice with the IRS’ Los Angeles office. He would offer a check for a down payment of a client’s taxes and the key to a safe deposit box containing the client’s unfiled tax returns. If the IRS indicated that it was unlikely that the client would be investigated, on the basis of a description of the case, Trattner would disclose the client’s name and the box’s location.
The arrangement for Trattner, a former special agent in the IRS criminal investigation division and assistant U.S. attorney, was never officially approved by anyone at the IRS Washington office, one investigator said. That implied that it was offered as a special favor to him because of his close ties to the agency.
Legal experts interviewed Wednesday said that Trattner’s safe deposit box method is novel. But they said that grants of immunity to tax evaders are part of an informal “voluntary disclosure” policy maintained at the IRS for years.
The IRS in about 1945 established a formal policy granting immunity to tax evaders who voluntarily paid tax liabilities, as long as the government was not yet aware of their violations.
The service abolished the formal policy in 1952 due in part to concerns that the IRS was still prosecuting anyway. But the agency has since maintained an informal policy allowing district offices to offer immunity on a case-by-case basis. The informal policy is discussed in numerous tax guides and is endorsed by the American Bar Assn. tax section, Olsen said.
It also is discussed in the IRS special agents’ handbook. The handbook, Silverman said, stipulates that the IRS “will carefully consider and weigh the voluntary disclosure, along with all other facts and circumstances, in deciding whether or not to recommend prosecution.”
Under the policy, attorneys may approach the IRS with offers to pay taxes owed by clients. The agency in turn will require that, to get immunity, clients must not be under current IRS investigation and must not have obtained income from illegal sources, among other things.
If authorities later discover that clients obtained income through criminal activities such as bookmaking, clients could still be prosecuted.
Also, under a 1974 revision, taxpayers must not have reason to believe that the IRS will soon discover their violations. That could occur if, for example, a wife negotiating a divorce settlement threatens to report her husband’s tax violations.
“What you basically do is describe the facts of your client without revealing the identity of your client and ask, on the basis of that, would they accept this as a voluntary disclosure and not prosecute,” Olsen said.
“It is a perfectly legal method of assisting taxpayers,” said Mark D. Pastor, an Encino tax attorney and former law partner with Trattner.
Trattner, in an interview, said that 30 to 40 clients have paid about $2 million in back taxes over the past 11 years through the procedure. Some derived income from illegal activities--and thus technically do not qualify for immunity, he said. Nonetheless, they are still paying back taxes anonymously, as well as filing current returns under their real identities, Trattner said.
“The fact that they made voluntary disclosures would not bar prosecution” for those illegal activities, Trattner said. “But for sympathy purposes, it is not likely that a judge would get terribly angry if they attempted to straighten out their act in good faith and come forward.”
Trattner called the congressional investigations a “kangaroo court charade” for implying that his arrangements were the result of special favors.
However, one Southland tax lawyer said the use of partial payments and a secret safe deposit could lead to bribery or other abuses. For instance, cash could be left in the safe deposit box as a bribe to the IRS agent.
Because the practice is discretionary, with no specific IRS procedures, it “could be interpreted as corrupt,” the attorney said.
But Trattner, who was not accused of bribery in the congressional hearings, said he has never dealt with individual revenue agents.
Staff writers William K. Knoedelseder Jr. and Kim Murphy contributed to this story.
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