Tax tips from prison: Don’t lie to IRS

The IRS is big and powerful. Yet, it is also has a kind of everyman quality. After all, on some level, everyone must deal with the IRS. You have to file annual tax returns, and you might even expect some occasional other interaction, at least by correspondence.

Because everyone has at least some reason to deal with the IRS, you might think that it is best to interact with the IRS directly. But that is a nuanced subject, and it can be a mistake, particularly if you are not 100 percent sure you are composed and going to provide accurate information. Misspeaking can be expensive, or downright dangers.

Consider the recent case of a Catholic priest for the Roman Catholic Diocese of San Jose. He was sentenced to 36 months in prison for tax evasion and bank fraud. The case provides cautions about how to respond to IRS questions.

Father Hien Minh Nguyen, age 56, eventually admitted in court that over a period of four years, he stole money from his parishioners they donated to the Diocese of San Jose. From 2008 through 2011, he willfully evaded paying income taxes on it. The money was for the Catholic church, but Father Nguyen admitted that he deposited it into his personal bank account.

Then, he did not tell his income tax return preparer about it. He did not keep records of the donations he stole, and he filed false income tax returns that did not report the money. This is certainly a series of bad conduct and mistakes, so it might seem hard to single out misleading the IRS.

But Father Nguyen certainly compounded his tax problems with his own statements to the IRS. Eventually, Father Nguyen pleaded guilty to tax evasion and was convicted of bank fraud following a bench trial. Before Father Nguyen admitted to the tax evasion and pleaded guilty, though, he was visited by the IRS.

And he started talking. Agents from the IRS Criminal Investigation Division showed up unexpectedly, and asked to interview him. The IRS agents said that Father Nguyen was not legally required to submit to the interview. The IRS agents informed the priest that he had the legal right not to answer questions.

But perhaps he thought, how bad could it be? He may have assumed that clamming up might indicate guilt or show that he had something to hide. But it was clearly a mistake to agree to the interview. He should have politely taken their business cards, and said that his lawyer would call them.

Father Nguyen tried to talk his way out of the awkward situation. And as the IRS certainly noticed, Father Nguyen then proceeded to give inconsistent and conflicting answers. The IRS even asked him about his waffling responses to questions. As he may have gotten a bit rattled, Father Nguyen asked for a break.

Yet even after the break, Father Nguyen went back to answering the IRS's questions. Once again, he gave inconsistent answers to the IRS. He gave responses that it later become clear were replete with untrue statements. Father Nguyen's lawyer would later claim that the IRS had tricked, deceived or coerced the priest.

His lawyer was trying to keep the damning statements the priest had made to the IRS out of evidence. But it was no use. The court was satisfied that the IRS had done what it was required to do. Father Nguyen had not been tricked, deceived, or coerced.

It is important to remember that there is a part of the IRS that is criminal. If you are visited by IRS Criminal Investigation Division special agents, you should consult with an attorney. You are not legally required to talk to them. In fact, the Fifth Amendment to the U.S. Constitution guarantees your right against self-incrimination.

You may believe that by answering a few simple questions, you will not hurt yourself or your position -- especially if you are just a witness. Don't be so sure. Regardless of how adept you are at communication, speaking up may help the IRS build a criminal case against you.

Besides, the IRS may (quite honestly) tell you that you are not the target of the investigation, and are merely a witness. Even so, you are entitled to retain counsel.

In the early stages of IRS criminal investigations, a person may be told he or she is a witness. You may therefore think there's no harm in being forthcoming. You might assume your cooperation will make it more likely that the IRS will appreciate you, and leave you alone.

However, as the investigation continues, a witness can become a target. Even if you are convinced you are merely a witness and will remain so, the U.S. Supreme Court has ruled that you have the right to assert your constitutional privilege against self-incrimination. See Bellis v. United States, 417 U.S. 85 (1974). If you are approached and questioned by a special agent, ask for his or her business card.

Firmly but politely state that you do not want to answer any questions, and that you will have your attorney contact the special agent. You can fully cooperate through your attorney. This may sound paranoid, but the ramifications of getting flustered and running off at the mouth can be serious.

Particularly given the fluid nature of who is a witness and who is a target, even statements you think sound innocent may not be. As for Father Nguyen, in addition to the term of prison imposed, the court ordered him to serve three years of supervised release, and to pay a total of $1,883,883 in restitution, including $434,518 to the IRS.

Finally, don't make misstatements to any part of the IRS. Most referrals from the civil to the criminal part of the IRS come from plain old civil audits. You don't want to misspeak to the IRS, or engage in behavior during an audit that obstructs the IRS.