Developing Tax Fraud Cases for Criminal Prosecution

February 13, 1967 REVENUE MEMORANDUM ORDER NO. 13-67 SUBJECT : Developing Tax Fraud Cases for Criminal Prosecution TO : All Regional Directors, Chief, Special Investigation Division, All District Revenue Officers, and Others Concerned For purposes of implementing Revenue Administrative Order No. 5-66 dated April 28, 1966, creating the Prosecution Division, and Revenue Special Order No. 415-66 dated September 19, 1966, launching the National Office Tax Fraud Program in relation to Revenue Memorandum Order No. 12-63 dated March 7, 1963, on the subject "Criminal Prosecution of Taxpayers Discovered to Have Committed Tax Fraud", the following rules are hereby promulgated for the guidance of all concerned. LLjur Under the tax fraud program of this administration, we propose to provide a strong deterrent to the commission of all forms of tax evasion. In order to implement this program, the Prosecution Division under the Legal Department and the National Office Tax Fraud Group in the Investigation Division, were created for the purpose of developing an effective tax enforcement program against smuggling, tax evasion and violation of laws and regulations administered by the Bureau of Internal Revenue. Under this tax fraud enforcement program, criminal prosecution will be availed of to complement the tax collection aspect of revenue administration in cases where fraud, or willful intent to commit fraud are present. The Prosecution Division, in addition to its functions as defined in Revenue Administrative Order No. 5-66 dated April 28, 1966, will coordinate closely with the National Office Tax Fraud Group and synchronize their activities to attain the objectives under the aforesaid program. The principle is well settled that fraud can never be presumed. Since proof of fraud must center on "willfulness" as its crucial core, and "willfulness" being enmeshed, as it must be, with "intent" and "state of mind", it is hardly susceptible of proof by direct evidence. Circumstantial evidence is, therefore, admissible on the issue of fraud. " As rightly argued by the Solicitor General's office, since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case . The failure of the appellant to declare for taxation purposes his true and actual income derived from his furniture business at the Clark Field Air Base for two consecutive years is an indication of his fraudulent intent to cheat the Government of its due taxes. 'The substantial underdeclaration of income in the income tax returns of the appellant for four consecutive years, coupled with his intentional overstatement of deductions made the imposition of the fraud penalty proper.' (Eugenio Perez vs. Court of Tax Appeals and the Collector of Internal Revenue, G.R. No. L-10507, May 30, 1958). (Republic of the Philippines vs. Blas Gonzales, G.R. No. L-17962, April 30, 1965). (Emphasis supplied) But this rule is to be distinguished from the rule in criminal prosecution which requires a higher degree of proof to convict an accused on criminal charges for tax evasion where guilt must be established "beyond a reasonable doubt." This requirement of guilt beyond a reasonable doubt in criminal prosecution for evasion of tax is a guarantee that no taxpayer should be proceeded against criminally because of the whim, caprice, recklessness, or ill-will of any one examiner or agent or official, but only after a most careful weighing of his case in the investigation of the taxpayer's tax liabilities. In order to effectively prosecute perpetrators of fraud against revenue, the following guidelines shall be observed by all concerned: 1. The National Office Tax Fraud Group shall undertake and conduct the investigation of cases where the taxpayer is suspected of having committed violations of the National Internal Revenue Code and related statutes tantamount to criminal fraud for purposes of instituting criminal action. In consonance with Revenue Memorandum No. 61-66 dated October 6, 1966, on the subject entitled "Submission of Referral Report for Potential Fraud Cases", the investigation process shall include, among others, the gathering of pertinent evidence, documentation, interviews, examination of records, research and related matters, with the end in view of substantiating not only the assessment, but also the criminal charge. 2. Where fraud is determined upon completion of the investigation conducted by the special agents of the National Office Tax Fraud Group, the entire docket of the tax fraud case shall immediately be forwarded by the said National Office Tax Fraud Group, thru the Revenue Operations Head (Special Operations) to the Prosecution Division, thru the Revenue Operations Head (Legal), where the evidence thus gathered by the National Office Tax Fraud Group shall be reviewed, collated, sifted and evaluated with the view to filing the proper criminal charge against the erring taxpayer. 3. The institution of criminal charges against taxpayers who commit fraud shall precede the assessment of the tax arising from fraud. The reason for this is to defeat or obviate the obnoxious practice of taxpayers' counsels in protesting and appealing the decision of denial of the Commissioner of Internal Revenue to the Court of Tax Appeals and raising in the criminal case the issue that fraud is a prejudicial question, the same being the subject of appeal in the Court of Tax Appeals. 4. If the evidence to support the charge of fraud is, in the opinion of the Prosecuting Attorney assigned to the case, not sufficient to warrant prosecution, the records of the case shall immediately be returned to the National Office Tax Fraud Group, thru the Chief, Investigation Division, with instructions to secure the additional evidence desired, specifying the nature and kind thereof. 5. On the other hand, if the evidence shows that the taxpayer did not commit fraud which will warrant the filing of a criminal action, the Prosecution Division shall prepare a Memorandum to be approved by the Commissioner of Internal Revenue stating the reason or reasons why criminal prosecution will not lie against the taxpayer. Said memorandum shall be coursed thru the National Office Tax Fraud Group for notation or comment, after which, the same, notwithstanding opinion to the contrary, shall be forwarded to the Commissioner of Internal Revenue for final decision. If the said memorandum of the Prosecution Division is approved by the Commissioner, the entire record of the case shall be returned to the Assessment Department for the issuance of the assessment notice and demand. The taxpayer, nevertheless, may still be prosecuted for other offenses as warranted by the evidence submitted by the National Office Tax Fraud Group. aisadc 6. After the criminal action has been filed with the fiscal's office, or with the proper court, and notwithstanding the evidence on hand, the fiscal drops the case or the judge decides in favor of the taxpayer, or the taxpayer in a tax-fraud case dies (his criminal liability having been extinguished by death), the entire docket of the case shall immediately be forwarded to the Litigation Division, or the Legal and Litigation Branch concerned, as the case may be, for collection of the civil liabilities. "Acquittal in a criminal case does not operate as a bar to the collection of the taxes assessed and the corresponding surcharge. " (Maria B. Castro vs. Col. of Internal Revenue, G.R. No. L-12174, April 26, 1962) "Neither acquittal nor conviction on Criminal Charges involving the same tax fraud is a bar to the imposition of civil penalties". (Balter, Fraud Under Federal Tax Law, Second Edition, 1953, Sec. 138, p. 255.) "The outcome of the criminal case is not decisive of the civil fraud issue." (Handbook for Special Agents, Intelligence Division, Internal Revenue Service, U.S. Treasury Department, Section 311, p. 300.) 7. Assessment notices and demands, as well as the decisions of the Commissioner of Internal Revenue in connection with fraud cases, shall be sent to the taxpayer by registered mail with return card. The registry receipt, as well as the return card, should be attached to the docket and properly secured against loss. 8. Neither the assessment notice nor the letter of demand in fraud cases shall suggest the payment of a compromise penalty in extra-judicial settlement of the violation since to do so, may bar the Government from instituting criminal action against the taxpayer. 9. The 50% fraud penalty shall be imposed only in bona fide fraud cases and not in non-fraudulent ones, the assessment of which, under Section 331 of the Tax Code, prescribes in five years. It has been noted that the 50% surcharge for fraud has invariably been imposed on non-fraudulent cases in order to circumvent the statute of limitations. This is not sanctioned by law. 10. After criminal action shall have been taken on a tax fraud case referred to the Prosecution Division by the National Office Tax Fraud Group, it shall immediately return the records of the said fraud case to the Assessment Department for the preparation or issuance of assessment notice and such other administrative action/actions as may be deemed necessary to take in the premises. 11. Inasmuch as indemnity for the civil liability is not deemed included in criminal actions brought under the provisions of the National Internal Revenue Code, there being no expressed provisions in the Tax Code to that effect (People vs. Jean Arnault, G.R. No. L-4288, November 20, 1952; 48 OG 4805), a separate civil action for the recovery of the civil liability should be instituted by the Litigation Division after the criminal action shall have been instituted, unless the right of the government to institute the civil action is about to prescribe, in which case the civil action may be filed by the Litigation Division simultaneously with, or ahead of the criminal, as may be necessary in the premises. 12. After an assessment notice or demand has been issued in a fraud case, the record of the said case shall immediately be referred to the Warrant Section of the Tax Accounts Division, Collection Department, for the issuance of a preventive embargo or warrant of distraint and levy, as the case may be. 13. The docket of a tax fraud case shall always be made available to the Prosecution Division at any time upon request. 14. The Chief, Legal and Litigation Branch of all Regional Offices shall submit a report, thru their respective Regional Directors, to the Prosecution Division, of all fraud cases previously filed by them in Court and in the Fiscal's Office, if any, said report to contain the name and address of the taxpayer, the amount and year involved, kind of tax, I.S. or Criminal Case No. and the present status thereof. A copy of the information and the decision (if already decided) in each case shall be furnished this Office, Attention: Prosecution Division, for proper coordination and recording purposes. Henceforth all fraud cases in the regional offices shall be forwarded to the Prosecution Division for appropriate action. 15. Unless the evidence in the possession of the taxpayer is sufficiently strong to overthrow the findings made by the special agents of the National Office Tax Fraud Group, requests for reconsideration or reinvestigation shall in no case be entertained. This Order shall take effect upon its approval. MISAEL P. VERA Commissioner of Internal Revenue APPROVED: EDUARDO Z. ROMUALDEZ Secretary FLOWCHART FOR THE PROCESSING, PROSECUTION & COLLECTION OF FRAUD CASES DEPARTMENT OF FINANCE 1st Indorsement March 30, 1967 Respectfully returned to the Commissioner of Internal Revenue, Manila, the within Revenue Memorandum Order No. 13-67, dated February 13, 1967, bearing the subject matter, "Developing Tax Fraud Cases for Criminal Prosecution" approved. LLjur EDUARDO Z. ROMUALDEZ Secretary February 13, 1967 MEMORANDUM FOR: The Deputy Commissioner Re: Proposed memorandum order development of tax fraud cases 1. Under the present set-up, it is believed that the reports coming from the Investigation Division should be coursed thru the Special Operations Department. 2. Paragraph 5, page 3 The proposed memorandum for the signature of the Commissioner should be coursed thru the Tax Fraud Unit of the Special Investigation Division for comment in the same manner as in paragraph 4, before final approval by the Commissioner. 3. Paragraph 9, page 4 How about civil fraud cases? As an example, supposed the discrepancy discovered is for substantial under-declaration of income and the taxpayer dies before the termination of the investigation? The 50% surcharge may still be assessed as part of the tax that will be collected against his estate notwithstanding the fact that the taxpayer's (deceased) criminal liability is extinguished by reason of his death. cdi