A Federal Grand Jury
In forty-plus years of practice as a CPA I have never been “called” to a Federal Grand Jury to testify. A large portion of this past week was spent involved with just such an activity. It was unpleasant. A Federal Grand Jury is a serious meeting; the Grand Jury is discussing matters that could have an irreversible and catastrophic impact on people’s lives. Serious is an understatement!
The families involved face the potential of irreversible damage that will include massive financial costs and may well include time in jail.
“Called” is the appropriate word. I say “called” because attendance is not optional. I received a summons and was “required” to appear and testify in a potential tax evasion case involving a former client. Had I been legally and ethically allowed to avoid this “call” I certainly would have.
The Grand Jury’s job is to decide if the prosecution have enough evidence to issue an indictment. An indictment is a required precursor to prosecution. Unlike state law, upon issuing an indictment, the case advances to court within 70-days. Things move fast!
A Federal Grand Jury
As indicated, a Federal Grand Jury is a dark unpleasant place; as if to emphasize the unpleasantness of this situation, the Grand Jury is convened in a basement!
First: there is no defense. The defendant and the defendant’s attorneys are not allowed inside the Grand Jury.
Second: the prosecution presents their evidence indicating a federal crime. The grand jury is being told the story entirely from the point of view of the prosecution. As I said before, there is no defense presented.
Third: federal prosecutors are busy people. They will not waste their professional time unless they feel that they have a good case. The prosecutors must believe that they have an “excellent” prospect of getting a guilty verdict when this case advances to court.
Fourth: it is very likely, given 1, 2 and 3 above that the Grand Jury will issue an indictment. It’s not automatic. Grand Juries have been known to decline to indict but it is rare.
This is a client newsletter
I think this guy is innocent; stupid! Stupid, but innocent. Frankly, my opinion doesn’t matter. The facts in this case, for purposes of this newsletter are irrelevant. The purpose of this newsletter is to teach about this unusual aspect of criminal tax law.
And, more important …
This experience with the Federal Grand Jury has reinforced for me two things:
- It is very important to file fair and accurate tax returns. To state this as a negative: Do Not Cheat on your taxes.
- It’s also important to be smart in filing your tax return. To state this as a negative: Do Not Be Stupid when filing your tax returns. Stupid is the right word when stupid can land you in jail.
Do Not Cheat
Well – Duh!
Do Not Be Stupid
I think we all know what cheating is; we know it’s bad and to be avoided. Stupid is different; maybe we do not all understand what stupid is in connection with tax law. I use that word, “Stupid” when Stupid can land you in jail.
I hate negative words…
To restate this as a positive: how can you be smart in filing tax returns.
Good Records: Good record keeping is essential. Do not assume that you know how to keep good records; ask! Bring your records to us and have me or our staff take a look at your process. Let us make suggestions. It’s not difficult to keep good records and you do not necessarily need QuickBooks or other formal accounting systems to keep good records. I have good clients that keep excellent records with a simple filing system, bank reconciliations and excel sheets.
In today’s plugged in and cyber-connected world, there are multiple options that will allow you to keep excellent records.
Recognize high risk transactions: Auto reimbursements and other expense reimbursements need to have a bit of additional attention. There are other high risk transactions that you may not recognize; for example, putting your wife on the payroll for the sole purpose of maximizing the family’s retirement accounts. On the surface, that does not sound too risky; but it is. It is impossible for me to list all the risky tax transactions; the list is simply too long. But! (I love that word “But”.) But there is a “Rule of Thumb” that will help you gauge the risk of a tax transaction. The rule is this: Yes or no; does the tax transaction have economic substance relative to your trade or business. To restate this rule in different terms: is the tax transaction “ordinary & necessary” for the conduct of your business.
Compensation planning: Planning compensation allocations, retirement contributions, and tax withholdings and other payroll transactions needs to be done with a high degree of professional care. Payroll and payroll reporting problems will generate IRS mail quicker than any other tax transaction.
Do the normal things well: The normal things are: bank reconciliations, expense categories and required supporting documentation such as receipts, and separating personal cash and business cash are all essential. And ask us to take a look and advise.
And – Be honest! Simple ethical principles apply to tax law: tell the truth. To quote a wise man, “The truth is like a lion. You don’t have to defend it. Let it loose. It will defend itself”: Augustine of Hippo.
Maybe this case is important
Maybe the details of this particular care are important.
The errors that triggered this catastrophic tax disaster is the commingling of personal and business funds and very bad tax records.
I cannot state this more clearly: Do Not Commingle Business & Personal Funds! Ever! Commingling is more that bad business; it is dangerous.
Bad Tax Records! This client had very bad tax records. The problem is that the records seemed to be complete and accurate on the surface. They looked good. They were reasonable (meaning that they didn’t seem to be inaccurate). The internal bookkeeper was, or appeared to be competent. We offered on multiple occasions to review the books but the offer was declined due to the “costs”. For the client, this was a disastrous decision.
Consequences: I am deeply concerned about this taxpayer and his family. Other families depend upon him for their livelihood. If he is indicted and convicted the repercussions are severe!
I have never been to a Federal Grand Jury before. I hope I never go again.