Jack Townsend of Townsend & Jones in Houston, an Adjunct Tax Prof in the University of Houston’s Graduate Tax Program and co-author of a forthcoming book in our Graduate Tax Series, Tax Crimes and Tax Fraud (LexisNexis, 2008) (with Steve Johnson, Scott Schmacher & Larry Campagna), requests the following information in connection with his representation of one of the defendants in the KPMG tax shelter case:

I represent a defendant in the KPMG criminal case. [Wednesday], in a filing in the case, the USAO SDNY claimed that DOJ had the authority to conduct criminal tax investigations independent of an authorized grand jury investigation pursuant to the written authority required by Section 6103(h)(3). Actually, the claim was a bit less sweeping, so I quote it: "There is no prohibition on the Department of Justice conducting a non-grand jury criminal tax investigation prior to a criminal referral from the IRS." The inference from this awkwardly worded claim is that DOJ does have the authority since not prohibited.

I have been through the relevant delegation of authority to the Tax Division (28 CFR Section 0.70) and the Criminal Tax Manual and find nothing that directly addresses the issue. However, the statements made in those documents are more consistent with DOJ Tax Division or any other component of DOJ having no independent criminal tax investigative authority apart from acting as attorneys assisting the grand jury in a criminal tax investigation after referral by the IRS. And, the Webster Report on the state of IRS Criminal Investigation at several points states that the IRS is the only government agency authorized to conduct criminal tax investigations. Piecing this and my experience together, I would think that DOJ Tax Division has no authority to start up its own criminal tax investigations without referral from the IRS. And, logically, if DOJ Tax Division does not have that authority, no other DOJ component should. Since it is clear that DOJ Tax Division has not been delegated the authority to conduct such investigations, the claim quoted appears to be that DOJ Tax Division has some type of residual authority to conduct any and all investigations unless expressly prohibited from doing so. (Note that the statement I quote does not say that DOJ Tax has been granted that authority, just that the authority has not been prohibited.) Does this mean that DOJ Tax Division can also conduct IRS audits because it has not been prohibited from doing so?

I personally think DOJ Tax Division and other DOJ components have no such residual authority to do anything and everything except as expressly prohibited. Specifically, I think it has no authority to conduct an independent criminal tax investigation. But I can’t point to anything specific on that. I sure would appreciate any information this august community might have on that.

If you have any information to share with Jack on this point, contact him here.