Section 7122 (a) of the IRS Code states that the IRS may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
Treasury regulations under section 301.7122-1(a)(1) states that: if the IRS determines that there are grounds for compromise under section 7122 the IRS may, at the discretion of the IRS, compromise any civil or criminal liability arising under the internal revenue laws prior to reference of a case involving such a liability to the Department of Justice for prosecution or defense.
Treasury regulation section 601.203(a)(1) deals with Offers in compromise and permits the IRS Commissioner to compromise, in accordance with the provisions of section 7122 of the Code, any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense.
Criminal violations are charged only against the tax deficiency that results from fraud. The civil tax deficiency is much broader and includes all tax due on a return, i.e., the tax from the evaded income and the adjustments to the subject’s itemized deductions.
There are differences between the criminal tax liability and civil tax liability, Adjustments of a controversial or offsetting nature may not be included in a criminal tax computation to remove controversial issues from the criminal action. Adjustments of a minor, technical, or a non-fraudulent nature may be considered solely for civil purposes. Evidence that may not meet the burden of proof necessary in a criminal investigation may be adequate for a civil case.
IRS Policy Statement 4-26 provides, among other things, that the consequences of civil enforcement actions on matters involved in the criminal investigation and prosecution case should be carefully weighed and requires balancing the civil and criminal aspects of investigations to maximize civil enforcement without imperiling criminal prosecution.
There are many types of civil penalties which may be applicable to any given case. The civil sanctions, generally assessed as additions to the tax and often referred to as ad valorem penalties, are covered in IRC Chapter 68. .
When the term "willfulness" is found in a civil penalty statute, it means actions "knowingly" , " consciously" , or "intentionally" taken. The IRS view is that “willful” is a voluntary course of action, rather than an accidental cause of action. When used in criminal revenue statutes, the word “willful” means a voluntary, intentional violation of a known legal duty. The word is also employed to characterize a thing done without ground for believing it is lawful or conduct marked by careless disregard whether or not one has the right to so act.
The fraud penalty under section 6663, when assessed, is 75 percent of the underpayment of tax due to fraud. In the case of a joint return, the penalty does not apply with respect to a spouse unless some part of the underpayment is due to the fraud of that spouse. If there has been an acquittal in a criminal prosecution, the acquittal is not decisive of the civil fraud issue. A criminal conviction for income tax evasion does decide the fraud issue and the subject is collaterally estopped from raising it in the civil proceedings.
The negligence penalty under section 6662 may be settled in an Offer in Compromise. When assessed, the penalty is 20 percent of the underpayment. The negligence penalty cannot be assessed against any portion of the understatement against which the fraud penalty is assessed. The term "negligence" includes any failure to make a reasonable attempt to comply with the tax laws. The penalty also applies to any careless, reckless, or intentional disregard of the tax law.
The failure to file penalty under section 6651(a)(1) is frequently settled in in an Offer in Compromise. A delinquency penalty of five percent a month may be imposed when a tax return is filed delinquently without reasonable cause, or when a taxpayer fails to file a return without fraudulent intent. The penalty, limited to 25 percent, is imposed on the net amount due.
An Offer in Compromise will also settle the late payment penalty under section 6651(a)(2), In the case of failure to pay the amount shown as tax on any return on or before the date prescribed for payment, a penalty is added to the amount shown on the return. The penalty equals 0.5 percent of the amount of the underpayment of tax for the first month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not to exceed an aggregate of 25 percent.
The trust fund recovery penalty of section 6672 is subject to settlement in an Offer in Compromise. This is a 100 percent penalty equal to the total amount of tax evaded may be imposed on any person who is required to collect, truthfully account for, and pay over any tax and willfully evades, fails to collect, account for and/or pay over such tax, or willfully attempts in any manner to evade or defeat any such tax.
An offer in compromise will apply to civil penalties derived from money laundering. Both Title 18 and Title 31 provide for civil penalties in relation to money laundering violations. Title 18 USC Â§1956(b) provides that violators under 18 USC Â§1956(a)(1) or (a)(3), or 18 USC Â§1957 are liable for a civil penalty of not more than the greater of $10,000 or the value of the property, funds, or monetary instruments involved in the transaction. The civil penalty is intended to be imposed in addition to any criminal fine.
Civil penalty assessments for Title 31 violations are assessed by the IRS. The statute of limitations for such assessments expires six years from the date of the transaction that is the basis for the civil penalty. A civil monetary penalty and a criminal penalty may be imposed for the same Title 31 violation. The civil penalty under 31 USC Â§5321(a)(1) applies to the willful violation of any reporting requirement under Title 31 (except for foreign financial accounts and transactions). This section provides that a domestic financial institution or nonfinancial trade or business, and any partner, director, officer, or employee thereof, who willfully violates any reporting requirement provision under Title 31, may be assessed a penalty not to exceed the greater of the amount involved in the transaction (up to $100,000) or $25,000.
Another penalty under 31 USC Â§5321(a)(2) applies to the failure to file a Currency and Monetary Instrument Report (CMIR), or filing a CMIR with a material omission or misstatement. A person who violates this section may be assessed a civil penalty up to the amount of the monetary instrument involved, to be reduced by the amount of any related forfeiture.
Section 31 USC Â§5321(a)(3) applies to the- failure to file a report related to foreign currency transactions or failure to comply with a 31 USC Â§5320 injunction. This section provides that a person who does not file a report related to foreign currency transactions or has failed to comply with a 31 USC Â§5320 injunction may be assessed a penalty up to $10,000.
Section 31 USC Â§5321(a)(4) applies to the structuring of transactions. This section provides that a person who willfully structures transactions in violation of any provision of 31 USC Â§5324 may be assessed a penalty up to the amount of the currency or monetary instruments involved, to be reduced by the amount of any related forfeiture.
Section 31 USC Â§5321(a)(5) applies to the willful violations related to reports and recordkeeping requirements for foreign financial accounts and transactions (excluding foreign currency transactions). A person who willfully fails to file a Report of Foreign Bank & Financial Accounts (FBAR) or files an FBAR with a material omission or misstatement, or does not make and retain records for interests in foreign financial accounts, may be assessed a penalty not to exceed $100,000.
Section 31 USC Â§5321(a)(6) applies to the negligent violation of any reporting or recordkeeping requirement of Title 31. This section provides for a penalty assessment of up to $500 on any financial institution or nonfinancial trade or business which negligently violates any reporting or recordkeeping requirements of Title 31, as well as a $50,000 penalty assessment for a pattern of negligent activity by a financial institution or nonfinancial trade or business.
Section 31 USC Â§5321(a)(7)applies to penalties for international counter money laundering violations. This section imposes a monetary penalty in an amount that is not less than two times the amount of the transaction, but not more than $1,000,000, on any financial institution or agency that violates any provision of subsection (i) or (j) of 31 USC Â§5318. The prohibition on United States correspondent accounts with foreign shell banks, or any special measure imposed under 31 USC Â§5318A.
Section 31 USC Â§5330(e) applies to the failure to register a money-transmitting business. This section imposes a $5,000 penalty each time a person fails to comply with the registration requirements for money transmitting businesses under 31 USC Â§5330.
Section 12 USC Â§1955 applies to the willful violation of recordkeeping requirements. This section provides that any person or partner, director, officer, or employee of a domestic financial institution who willfully or through gross negligence violates any regulation under 12 USC Chapter 21, Financial Recordkeeping, may be assessed a penalty up to $10,000. Each day a person fails to comply with the registration requirements constitutes a separate violation.
An Offer in compromise will also resolve Title 31 civil penalties assessed against a financial institution. The assessment of a civil penalty in a Title 31 investigation is applied when ther is no prosecution.
An Offer in Compromise (OIC) is a binding agreement between the IRS and a taxpayer that legally compromises taxes owed. This means that the IRS will accept less than the full amount a taxpayer owes in certain circumstances. IRS has centralized the filing of all offers in compromise through either the Brookhaven IRS Campus or the Memphis IRS Campus, depending upon the state where the taxpayer resides. Offers in Compromise involving criminal Investigation cases are concerned with offers involving joint investigations by the IRS Criminal Investigative Division with the other operating divisions after the criminal aspects are completed and offers made while criminal proceedings are pending
The IRS SB/SE, Technical Support, Advisory is responsible for coordination of all civil enforcement actions on cases under criminal investigation and provided in Policy Statement 4-26.
The Department of Justice (DOJ) has settlement authority once a referral has been made to DOJ. DOJ Criminal Tax Counsel may request an examination or investigation of a subject’s financial status in connection with an offer in compromise submitted in a case in which criminal proceedings are pending in CI, DOJ Tax Division, or the US Attorney's Office. Criminal Investigation will conduct the investigation jointly with the examination function of the appropriate operating division.