IRS Vow to Amp Up Audits Puts Tax-Exempt Entities in Crosshairs

Criminal investigations of tax-exempt entities aren’t new. What is new, however, is the perceived emphasis on using them as the primary method of investigation instead of the civil examination process that tax practitioners are most accustomed to.

President Donald Trump’s September memorandum ordered the IRS commissioner to “take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism” and to refer those entities to the Department of Justice “for investigation and possible prosecution.” Three weeks later, the Wall Street Journal reported a plan by the administration to overhaul the IRS to more easily pursue criminal investigations of “left-leaning” organizations.

Civil examinations, whether of tax-exempt entities or otherwise, follow a familiar cadence: an opening letter and/or conference, requests for information through Information Document Requests, possible interviews of the client and/or their employees, and written correspondence staking out the client’s and IRS’s positions. These procedures stand in stark contrast to those employed in criminal investigations, which are often opaque to the investigation’s target.

When the IRS deems a case susceptible to criminal charges, it can seek to investigate through a grand jury. The first step is the submission of a summary of the known evidence to the DOJ. The DOJ then assesses the submission to determine whether articulable facts support a reasonable belief that the target is committing or has committed a tax crime. If there’s enough evidence to meet that standard, the case is forwarded to the appropriate US Attorney’s Office to conduct a grand jury investigation.

A federal grand jury is the most powerful investigative tool in US enforcement of criminal laws. The grand jury’s function is to inquire into all information that might bear on its investigation until it has identified an offense or has satisfied itself that none has occurred. As a necessary consequence of its investigative function, the grand jury paints with a broad brush.

A grand jury panel is composed of 16 to 23 citizens summoned by a district court. The panel considers evidence presented by a federal prosecutor through sworn witness testimony and the introduction of documents. The defendant, also known as the target, isn’t entitled to legal representation during grand jury proceedings.

Only the prosecutor appears before the grand jury; even a testifying witness isn’t permitted to have their attorney present while being questioned. Evidence is obtained from third parties through grand jury subpoenas issued by the government under the seal of the district court. Refusal to comply with a grand jury subpoena can support prosecution for criminal contempt.

Although a court reporter transcribes the grand jury proceedings, the investigation itself is conducted in secret. Secrecy is considered vital to the proper function of the grand jury, as it serves to encourage witnesses to testify without fear of reprisal, minimizes the flight risk of the target, safeguards grand jurors from external influence, and protects the accused if no indictment is returned.

At the conclusion of a tax-related grand jury investigation, the attorney overseeing the case provides an analysis of the investigation to the DOJ Criminal Division Tax Section (formerly the DOJ Tax Division), recommending that either charges be brought or prosecution be declined and the investigation terminated. Concurrently, the IRS-CI special agent assigned to the case provides a written summary of the investigation. Assuming the evidence collected is sufficient, the IRS seeks authorization to prosecute the target through return of an indictment by the grand jury.

The exercise of prosecutorial discretion in tax cases is guided by the same standards applicable in all other federal criminal prosecutions. Prosecution should commence where the targets’ conduct constitutes a federal offense, and the admissible evidence will probably be sufficient to obtain and sustain a conviction. Prosecution may be declined where the prosecutor determines the following:

• No substantial federal interest would be served by prosecution
• The taxpayer is subject to effective and adequate prosecution elsewhere
• There’s an adequate non-criminal alternative to prosecution

To return a criminal indictment, a quorum of the grand jury must find that there is probable cause the defendant committed the crime alleged.

The grand jury’s power to command evidence and testimony is immense, and the consequences of a grand jury investigation can be consequential. The DOJ has used grand juries to indict individuals and tax-exempt organizations for violations of federal tax law for decades.

For example, in 2007 a grand jury indicted Muhamed Mubayyid, Emadeddin Muntasser, and Samir Al-Monla, each an officer of Care International Inc., a tax-exempt organization that represented on its Form 1023 and annual Forms 990 that its charitable purpose was “orphan sponsorship,” when its actual purpose was to support jihad and mujahideen. The indictment alleged, and the defendants were later convicted of, conspiring to defraud the IRS and causing the filing of false tax returns.

Also in 2007, former Pennsylvania State Sen. Vincent J. Fumo (D) was charged with multiple crimes, including tax charges, related to false Forms 990 filed by the tax-exempt organization Citizens Alliance for Better Neighborhoods, which concealed significant personal and political expenditures made for his benefit. He was later tried and convicted on 137 counts of fraud, tax evasion, and obstruction of justice.

In 2019, a grand jury in the Western District of Missouri investigated Tommy Goss, Bontiea Goss, Jeremy Hutchinson, and others for misconduct involving Preferred Family Healthcare Inc., a tax-exempt entity they controlled, which participated in funding political campaign activities and failed to disclose that conduct on its Form 990. They all later pleaded guilty to charges that included aiding and assisting in the preparation and presentation of a false tax return.

In light of the administration’s current policy focus, misrepresentations by tax-exempt organizations on documents submitted to the IRS could lead to a criminal investigation and indictment for tax crimes, including conspiracy to defraud the IRS, filing false tax returns or documents, or corruptly impeding the IRS. If convicted of such charges, the civil examination “worst case” scenario of revocation of tax-exempt status could seem mild under the circumstances.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Melissa Wiley is a partner at Kostelanetz focused on administrative tax controversy, including audits and cases before the IRS Office of Appeals.

Karen Kelly is a partner at Kostelanetz and former head of the Department of Justice’s Tax Division.

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