I. INTRODUCTION

Forensic accountants are necessary to assist attorneys in criminal tax investigations because:

1. Complex or hybrid accounting theories are used by the Government. 2. Large quantity of documents containing items of income and expenses are involved. 3. Accounting analysis of Government’s theory and computations for purpose of developing responses and defensive theories is essential in attempting to eliminate alleged unreported taxable income, or, in the alternative demonstrating “reasonable doubt,” in defense of the taxpayer’s position.

Forensic accountants should possess particularized accounting skills to focus on accounting theories, items of income, expenses, credits and tax positions that support defense theories. The skills should include the ability to analyze to Government technical case. This analysis is thorough, a defense or defenses can be constructed. If the defense is weak or not viable, the client can be advised with one purpose being to consider a plea deposition of the case. If the plea arrangement is not to occur, the client can have realistic knowledge about the ability to succeed, at least with respect to technical defenses, and possibly the element of willfulness or intention.

II. RELATIONSHIP OF FORENSIC ACCOUNTANT TO DEFENSE COUNSEL

A. It is established law that an attorney may employ individuals to assist him or her in the effective representation of a client, within the attorney-client and work product privileges. Upiohn Co. v. United States, 449 U.S. 383, 398 (1981); United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961); United States v. Judson, 322 F.2d 460 (9 th Cit. 1963). Cf. 26 U.S.C. 7525. Additionally, information developed in anticipation of litigation is within the attorney work product privilege doctrine. Hickman v. Taylor, 239 U.S. 495, 508 (1977).

B. Prior to Indictment/Compliant Prosecution

A forensic accountant can assist the attorney in:

1. Organizing information.
2. Analyzing information that the IRS or the United States Attorney has received as the defense becomes aware of such information.
3. Noting the problems.
4. Developing analysis or analyses that reveal the risks of success and failures should the Government prosecute.
5. Prepare tax returns where there has been a failure to file.
6. Apply indirect methods, such as the Net Worth, Bank Deposit, and source and application methods in determining the risk of success of failure in defending against a projected prosecution.

C. Assistance of the Forensic Accountant during Prosecution

1. When the Government’s case becomes known, assisting counsel in:

1. Understanding the prosecution.
2. Developing technical defenses.
3. Developing accounting analysis for use in pre-trial, as well as trial, motions.
4. Preparing witnesses for examination.
5. Preparing exhibits and demonstrative charts for trial.
6. Organizing evidence, especially accounting information.
7. Analysis of the “tax loss”, which the defense can use under the Federal Sentencing Guidelines.
8. Assist counsel during the trial by advising counsel as to accounting, income, expense issues, for the purpose of on site examination or cross-examination of witnesses.
9. Testify as:

(1) SUMMARY WITNESS (2) EXPERT WITNESS

III. FORENSIC ACCOUNTANT’S ROLE AS A WITNESS

A. Summary and Expert Witness

Summary and expert witness has long been the hallmark of criminal tax prosecution, as well as complex civil tax trials. The Government usually has a “summary witness” who is a knowledgeable IRS representative educated in accounting and tax concepts. The supposed purpose is to organize “simply” the Government’s case from the documents and oral testimony introduced into the trial record. Occasionally, the Government seeks to convert the “summary witness” into an “expert witness.” Here, the dense forensic accountant is invaluable to assist counsel in developing cross-examination as well as preparing for his or her own direct examination.

The authority for such summary and expert testimony is found in Rules 701 and 702, Federal Rules of Evidence. The United States Supreme Court has recently ruled in this area in a case named Kuhrno Tire Co. v. Carmichael, 119 S. Ct. 1167 (1999). The Supreme Court has relevantly stated that a trial judge’s gatekeeper obligation under Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), is to ensure the reliability and relevance of expert testimony under Rule 702, Federal Rules of Evidence, as it applies to all forms of expertise, including specialized knowledge based on experience.

B. Forensic Accountant Testimony Limitations

1. Better Approach

The better approach is to have a forensic accountant other than the accountant who performed forensic services during the period involving the preparation for trial. The fear is that if such accountant testifies, all of the privileged communications may become disclosed on the Government’s cross-examination. The different forensic witness accountant knowledge is limited to the actual information used in preparing for testimony. This limited information can be provided by the first forensic accountant together with the attorney in preparation of the second forensic accountant’s testimony.

2. Practical Approach

The economics of the trial to the client may preclude two forensic accountants in the usual criminal tax prosecution. In this circumstance, the testimony of the forensic accountant should be carefully limited to analysis of the documentary and oral testimony in evidence. Further, the analysis should not be overbroad into everything that has been developed, used or not during the course of the engagement. The rule that the cross-examination is limited to the subject of the direct examination, together with the exercise of attorney-client privilege and work product privilege doctrine, affords a measure of protection. In many cases, the Government invokes these privileges to protect its “summary of expert witness.” Since such witness precedes the defense expert witness, the court’s ruling, usually in favor of limiting the cross-examination to the evidence in the record, should be equally applied.

Thus, it is necessary to be careful as to the information relied upon in direct examination in order to minimize the risk of disclosing all the information the forensic accountant obtained or utilized during the engagement. For the purpose of the direct examination, the forensic accountant-witness should be clear about the information relied upon, or to be relied upon. There should be clear communication between the attorney and the forensic accountant prior to testimony as to the parameters and all aspects of the testimony.

IV CONCLUSION

The use of an accountant who has been trained by education and experience to analyze financial information by direct and indirect accounting methods to assist in criminal tax investigation or prosecution is necessary and essential to effectively represent a taxpayer under such scrutiny. Creativity within the bounds of reliable accounting methods is key. Constant and clear communication with the attorney and the taxpayer are necessary in order to prepare a realistic defense, given the particular facts and circumstance. To be a forensic accountant requires not only accounting skills, but an understanding of the trial and criminal tax prosecution process.

Forensic accountants are essential to a successful representation of the taxpayer involved in a criminal tax investigation prosecution.

For additional background information you may wish to review, “Role of the Forensic Accountant during Criminal Tax Investigation” authored by a renowned forensic accountant:

Richard O. Clark

Clark and Co., P.C.

Certified Public Accountants

Highland, Michigan

(Criminal Tax Fraud 1999 Edition, Section B)