In the Dark Ages it was the Inquisition; in the Third Reich it was the Gestapo; in the USSR it's the KGB; and in this fair land it's the IRS.
The setup: You've been running your own business, and you've been "skimming"—taking money out of your cash drawer and putting it in your pocket. No records of this are kept. Ben Franklin probably did the same thing in his print shop, but in his day there wasn't any income tax.
Now here's the scene: You're at home relaxing. You answer a knock at the door. Two well-groomed young men identify themselves as Special Agents of the IRS, Criminal Investigation Division. A fit of dizziness, and perhaps nausea, overcomes you. Your worst nightmare has come true.
They show you their credentials and ask if you would be so kind as to speak with them briefly. You're taken by surprise (as intended), so you're forced to make an on-the-spot decision.
Foolishly, in the hope of turning aside a potential problem, you agree to let them in. After all, they're such soft-spoken young men. What harm can it do to have a little chat? They're probably just fishing around, and you'll easily outsmart a pair of government clerks.
You seat them in your living room, they refuse your offer of a drink, and then they tell you that as Special Agents, one of their functions is to investigate the possibility of criminal violations of the Internal Revenue laws. Then they read you your rights, after which they politely inquire if they might ask a few questions. In shock, and not wanting to make trouble, you consent.
They soften you up now and ask a few flattering questions about your business, how it's grown, how you did it all by yourself. Then their attitude swiftly changes. They ask if you have gambling winnings, and you say that you don't (mustn't appear disreputable, you know). They ask about sources of tax-free cash that your business might have, and you say that you haven't any (after all, you're not a drug dealer).
You've just thrown away some of your best defenses. Gently, methodically, and without your realizing it, the nice young men are letting you confess that you have no explainable way of living beyond your reported income.
So what's your excuse?
Perhaps you've been daydreaming over the years about explaining it all away by means of "loans" from your distant Uncle Louie. You haven't thought it through very carefully, and you certainly haven't bothered to work it out with Louie. But in your nervousness you mention that he's the source of the funds you've been investing.
"What is his full name?" one of your visitors demands, and then they begin alternating with each other. "His address?" "His phone number?" "His occupation?" The questions have suddenly become sharper, the agents' tone more urgent. You struggle to please them with hastily contrived answers, but the questions continue. "When did Louie transmit these funds to you?" "By cash or check?" "Were there any witnesses?" "Were notes signed to evidence the debt?" "Were gift tax returns filed?" It goes on and on. Your terror grows.
It now dawns on you that the Uncle Louie defense wasn't such a good idea after all, but you've already blurted it out so you're afraid to back away from it. You sense that the IRS will be sending operatives to talk with Uncle Louie in the very near future. You'll try to get to him first, but you wonder if he'll stick his neck out for you.
The gentlemen from the IRS might not explain how easily they can obtain copies of your credit card applications and your bank loan and mortgage applications. On all of those, you supplied a financial statement, and you probably never mentioned the "Uncle Louie debts." A serious omission, because now you're in trouble even if Louie backs you up. It's a crime to defraud a federally insured institution such as a bank or S&L.
Eventually, the interview draws to a close. The nice young men will return to their office and dictate a lengthy memorandum of all that was said. They will do this immediately, while your statements are still fresh in their minds. Both of them will sign it and place it in their file. They, will have a trustworthy record to rely upon. You will not.
Suppose later you decide to recant what you told them. You were just making it all up—a big joke. Ah, but that's another problem. Didn't anyone ever tell you it's a crime to lie to a federal official? (Really. Title 18, US Code, Sec. 1001.)
You have just experienced the "initial interview," a technique beloved by Special Agents. They've been preparing for weeks, or even months, building a case against you. They gathered information from informants, from public documents, and from reports filed by banks, stock brokers, etc. They know what it takes to support your standard of living, and they've compared it to the income you've been reporting.
All this groundwork was done before the initial interview. When they knocked on your door they weren't groping in the dark. But you were.
For the citizen confronted by Special Agents of the IRS, there is only one course of action to follow: Keep your mouth shut! Be polite about it, but don't invite them in and don't answer their questions.
And don't worry about making them suspicious. Things are already way beyond that stage. Just shut up; and when they're gone, call your lawyer—not your accountant, but your lawyer. This is not a bookkeeping problem you're involved in—it's the real thing.
Warren Salomon is an attorney and tax specialist practicing in Miami.