Criminal Tax Defense in Houston
If a special agent introduced themselves at your door, your audit changed character, or you received a federal grand jury subpoena, what you do in the next 48 hours can determine whether this becomes a civil case or a federal indictment.
Criminal tax defense in Houston means representing taxpayers and tax professionals who are under federal investigation for tax crimes, IRS Criminal Investigation contact, grand jury subpoenas, or charges under 26 U.S.C. §§ 7201, 7203, and 7206. North Star Law represents clients through every stage, from the first special-agent contact through declination, plea, or trial in the U.S. District Court for the Southern District of Texas.
Key Takeaways
• Federal criminal tax cases are charged under 26 U.S.C. § 7201 (tax evasion, 5-year felony), § 7203 (failure to file or pay, 1-year misdemeanor), and § 7206 (false statements, 3-year felony) and tried in U.S. District Court, for Houston, the Southern District of Texas.
• An audit becomes a criminal investigation when the revenue agent makes a fraud referral to IRS Criminal Investigation; in many cases the taxpayer is never formally told the case has crossed over.
• Only an attorney can assert the attorney-client privilege; a Kovel engagement extends that privilege to the CPA working at the attorney's direction. Communications with your accountant standing alone are not privileged.
• Voluntary disclosure under the IRS Voluntary Disclosure Practice can sometimes resolve a case civilly before a referral to the Department of Justice, but only if the disclosure is timely, complete, and made before CI initiates a case.
How It Works: Four Steps From First Contact to Resolution
Step 1: Crisis Intervention
You call us the day a special agent contacts you, the day your CPA tells you the revenue agent is asking unusual questions, or the day the grand jury subpoena lands on your desk. We take the call directly, advise you to make no further statements to the IRS or any third party about the underlying conduct, and arrange a privileged consultation immediately. Time matters, every statement you make before counsel is engaged becomes evidence the government can use against you.
Step 2: Privileged Engagement
If you decide to move forward, we execute a written engagement letter, file Form 2848 (Power of Attorney) when appropriate, and, where the case requires accounting analysis, issue a Kovel letter to your CPA so the accountant works at our direction and within the attorney-client privilege. From that point forward, the IRS communicates with us, not with you, and your accountant's work product on the criminal matter is shielded by privilege rather than discoverable through subpoena.
Step 3: Defense Strategy
We investigate the government's case from the inside out. We identify the agents and prosecutor handling the matter, request the administrative file or grand jury exhibits we are entitled to, reconstruct the underlying tax accounting independently, evaluate the government's theory on willfulness, and identify defenses, reliance on professional advice, lack of willfulness, statute of limitations under § 6531, sufficiency of disclosure, and the cash-hoard defense in net-worth or expenditures cases. The strategy is built around the specific charging theory the government is pursuing.
Step 4: Resolution
Federal criminal tax cases resolve in one of four ways: declination by the Department of Justice (no charges filed), referral back to civil examination, negotiated plea agreement under Federal Rule of Criminal Procedure 11, or trial in U.S. District Court. Every step before the case is referred to DOJ matters because each is an opportunity to keep the case off the criminal track entirely. We see the matter through whatever path the case takes, including post-conviction sentencing under U.S.S.G. § 2T1.1 and supervised release.
Privilege Is the Foundation of Every Criminal Tax Defense.
An attorney-CPA is the only professional who can simultaneously analyze your tax exposure and protect your communications under the attorney-client privilege. North Star Law is admitted to U.S. District Court S.D. Texas, U.S. Tax Court, and is led by a JD/CPA with over 20 years of experience.
Call (832) 384-4526 for a free consultation.
What Is Criminal Tax Defense?
Criminal tax defense is the representation of individuals and businesses who are the targets, subjects, or witnesses in a federal criminal investigation involving tax crimes. The cases are investigated by IRS Criminal Investigation (CI), prosecuted by the Tax Division of the Department of Justice or the U.S. Attorney's Office, and tried in federal district court. They are categorically different from civil tax controversy, even though they often arise out of the same underlying transactions.
The threshold distinction is this: a civil examination ends in a tax deficiency, civil penalties, or no change. A criminal investigation can end in a federal indictment, a felony conviction, prison time, restitution, and a public criminal record. A taxpayer who confuses the two, and treats a criminal investigation as if it were a civil audit, almost always makes the case worse. The first job of defense counsel is to recognize what kind of case is actually in front of you, and to manage every interaction accordingly.
How Does an Audit Become a Criminal Investigation?
Most federal criminal tax cases begin life as civil examinations. The transition happens quietly, through a process that the taxpayer rarely sees in real time. Treasury Regulation § 601.106 and Internal Revenue Manual 25.1.3 require a revenue agent who develops firm indications of fraud to suspend the civil examination and refer the case to Criminal Investigation. The revenue agent is not required to tell the taxpayer that the referral has been made. From the taxpayer's perspective, the audit may simply slow down, change agents, or quietly disappear, and reappear months later as a CI special agent contact.
This is what practitioners call an eggshell audit, a civil examination where the taxpayer or the return preparer knows, or should know, that the return contains errors that could give rise to a fraud referral. A reverse eggshell audit is the more dangerous variant: a civil examination where the IRS already knows the return is fraudulent and is using the civil track to develop evidence for a criminal case the special agents have not yet formally opened. In both situations, the strategic objective is to avoid making admissions and producing documents that build the criminal case while the taxpayer is still working in the civil lane.
Warning signs your audit may have crossed into a criminal investigation:
The revenue agent stops returning calls or quietly closes the file with no adjustment.
A new agent, sometimes introducing themselves as a special agent, reaches out instead.
The questioning shifts from amounts to intent: "Why did you...", "Did you know...", "Who advised you..."
Document requests expand to include personal financial records, third-party bank accounts, or related entities outside the original audit scope.
The agent issues an administrative summons under § 7602 or you receive a grand jury subpoena.
What Are the Principal Federal Tax Crimes?
Three statutes account for the substantial majority of federal tax prosecutions. Each requires a different combination of elements, and each carries different consequences. The charging decision often turns on which elements the government can prove beyond a reasonable doubt, which is why the early defense work focuses on shaping the evidentiary record before the charging decision is final.
26 U.S.C. § 7201, Tax Evasion
Section 7201 is the headline federal tax crime. It makes it a felony, punishable by up to five years in prison and a $250,000 fine ($500,000 for corporations), to willfully attempt to evade or defeat any federal tax. Conviction requires the government to prove three elements: (1) a substantial tax due and owing, (2) an affirmative act of evasion (not mere failure to file or failure to pay), and (3) willfulness. The Supreme Court's foundational decision in Spies v. United States, 317 U.S. 492 (1943), distinguishes evasion from failure-to-file and identifies the kinds of acts that satisfy the affirmative-act requirement: false statements, concealment of assets, structuring transactions to avoid records, keeping false books, and using nominees.
26 U.S.C. § 7203, Willful Failure to File or Pay
Section 7203 makes it a misdemeanor, punishable by up to one year in prison per count, to willfully fail to file a return, pay tax, keep records, or supply information. Section 7203 is most often charged when the government cannot prove the affirmative act required by § 7201, or when the prosecutor wants a less serious charge. Each tax year of nonfiling is typically charged as a separate count, so multi-year nonfilers can face significant aggregate exposure even on the misdemeanor track.
26 U.S.C. § 7206, False Statements and Aiding-and-Assisting
Section 7206 is the perjury and aiding-and-assisting statute. Section 7206(1), making and subscribing a false return, is charged when the taxpayer signs a return that is materially false. Section 7206(2), aiding and assisting in the preparation of a false return, is the principal statute used against tax preparers and return promoters. Both are felonies punishable by up to three years in prison and a $250,000 fine. Unlike § 7201, § 7206(1) does not require proof that any tax was actually evaded. The signed return itself, plus willful materiality, is enough.
Other statutes that figure regularly in federal tax prosecutions include 18 U.S.C. § 371 (conspiracy to defraud the United States, the so-called Klein conspiracy), 31 U.S.C. § 5324 (structuring currency transactions to evade reporting), and 18 U.S.C. §§ 1956 and 1957 (money laundering tied to tax fraud proceeds). Most criminal tax indictments charge multiple counts across multiple statutes, which is why the defense analysis has to address each charging theory separately.
Every Federal Tax Crime Requires Willfulness.
The government must prove the defendant voluntarily and intentionally violated a known legal duty, Cheek v. United States, 498 U.S. 192 (1991). Lack of willfulness, reasonable reliance on professional advice, and good-faith misunderstanding of complex law are all live defenses in the right case.
Call (832) 384-4526 for a free consultation.
How Does IRS Criminal Investigation Work?
IRS Criminal Investigation is the federal law enforcement arm of the IRS. Its special agents are sworn federal officers, carry firearms, and have authority to investigate not only tax crimes but also money laundering, currency reporting violations, and tax-related cybercrime. Most cases come to CI through one of four channels: a fraud referral from a revenue agent, a tip from an informant or cooperating witness, a parallel investigation by another federal agency, or a project-based investigation initiated by CI itself.
The investigation proceeds in phases. The primary investigation, sometimes called a subject investigation, is the period when CI is gathering evidence to determine whether a prosecutable case exists. If the special agent recommends prosecution, the case moves through the CI Special Agent Report, the Criminal Tax counsel review, and ultimately to the Tax Division of the Department of Justice (or, for some cases, directly to the U.S. Attorney's Office). Each level can decline the case and return it to civil examination. The defense window, the period during which prosecution can sometimes be averted, runs from the special agent's first contact through the DOJ Tax Division review.
In Houston, federal criminal tax cases are tried in the U.S. District Court for the Southern District of Texas. North Star Law is admitted to practice before that court.
What Is a Kovel Engagement and Why Does It Matter?
A Kovel engagement is a written arrangement under which an attorney engages a CPA to provide accounting services in support of the attorney's legal advice, extending the attorney-client privilege to the accountant's work. The arrangement is named after United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the seminal Second Circuit decision recognizing the privilege extension.
Kovel matters in criminal tax defense because tax crimes often turn on questions that cannot be answered without accounting analysis: How much income was actually understated? Was the return preparer's advice reasonable? Are the underlying books accurate? If the CPA performing that analysis is engaged directly by the taxpayer, the analysis and supporting workpapers can be subpoenaed by the grand jury and used against the taxpayer. If the same CPA is engaged through a Kovel letter, working at the attorney's direction, in support of the attorney's legal advice, the analysis is privileged.
The Kovel privilege has limits. It protects communications made in furtherance of legal advice; it does not protect ordinary tax-return preparation. The accountant cannot be the taxpayer's regular preparer, at least not for the matter at issue. The engagement letter, the scope of work, and the billing arrangement all need to reflect that the CPA is working for the attorney, not the client. Done correctly, Kovel is one of the most powerful tools in a criminal tax defense. Done sloppily, it can collapse on a motion to compel.
When Does Voluntary Disclosure Make Sense?
The IRS Voluntary Disclosure Practice (VDP) is a path for taxpayers with material noncompliance, usually unreported income or unreported foreign accounts, to come into compliance through a structured submission and pay back tax, interest, and a civil fraud penalty in exchange for a near-certain outcome of no criminal referral. The current procedures are set out in IRM 9.5.11.9 and the Form 14457 disclosure package. The Department of Justice has published guidance recognizing voluntary disclosure as a near-categorical bar to criminal prosecution when the disclosure is timely, complete, and accompanied by full payment or a credible payment plan.
Voluntary disclosure is not available to every taxpayer in trouble. The disclosure must be timely, meaning before the IRS has identified the taxpayer through its own investigation, before a third-party informant has triggered an inquiry, and before the IRS has obtained the relevant information through a treaty request, John Doe summons, or similar process. The disclosure must be truthful and complete, covering all years of noncompliance, all entities, and all sources of unreported income. And the taxpayer must demonstrate ability to pay, the IRS will not entertain a voluntary disclosure where the taxpayer is not prepared to address the resulting tax liability.
The strategic call on whether to pursue voluntary disclosure is one of the most consequential decisions in a criminal tax matter. Done correctly, it can convert a potential indictment into a civil resolution with no criminal record. Done at the wrong time, for example, after CI has already opened a case, it can be a confession that the government uses to convict. The decision requires a sober evaluation of where the case actually stands within the IRS, which is often hard to determine from the outside, and which is one of the principal reasons a criminal tax matter requires experienced counsel from the first call.
What This Means for You: When to Call Now
Time is the most important variable in a criminal tax matter. The earlier counsel is engaged, the more options remain. The window for voluntary disclosure closes the moment the IRS opens its file. The window for declination at the DOJ level closes the moment the indictment is returned. The opportunity to keep an eggshell audit on the civil track closes the moment the revenue agent makes the fraud referral. There is no later in this practice, only earlier and too late.
Call North Star Law immediately if any of the following has happened: a special agent has contacted you, your accountant, or your business; you have received a federal grand jury subpoena; your civil audit has changed character, new agent, new questions, new document scope; you know your return contains material errors and you suspect the IRS is starting to look; you are considering voluntary disclosure on unreported income or foreign accounts; you have been contacted by the Tax Division of the Department of Justice or the U.S. Attorney's Office. Do not speak with any government investigator, civil or criminal, until you have spoken with us first.
What to do (and not do) before counsel is engaged:
Do not destroy, alter, or hide any documents. Document destruction after notice of a federal investigation is a separate federal crime under 18 U.S.C. § 1519.
Do not contact other potential witnesses to coordinate stories, that conduct can be charged as obstruction of justice or witness tampering.
Do not consent to interviews, file new amended returns, or make new statements to your accountant about the underlying conduct.
Do preserve everything, emails, files, accounting records, voicemails, and put a litigation hold on routine document destruction.
Do call counsel immediately. Time is the most important asset in a criminal tax defense, and you start losing it the moment the special agent identifies you as a target.
Why North Star Law for Criminal Tax Defense?
Criminal tax defense is one of the most technical areas of federal practice. It requires the legal training to handle a federal felony defense, the accounting depth to deconstruct the government's tax theory, and the procedural experience to manage parallel civil and criminal exposure without making either case worse.
Phillip Zagotti is a licensed attorney and Certified Public Accountant with over 20 years of experience in tax controversy and tax-related litigation. He is admitted to practice before the United States Tax Court, the United States District Court for the Southern District of Texas, the United States Bankruptcy Court for the Southern District of Texas, the United States District Court for the Central District of California, the United States Bankruptcy Court for the Central District of California, and the State Bar of California; he holds a Texas CPA license. The dual qualification matters in criminal tax defense because the government's theory of the case is always built on a combination of tax law and accounting analysis. An attorney who is not a CPA usually has to retain an outside expert to deconstruct that theory. We do that work in-house, under the attorney-client privilege, which changes both the cost structure and the speed of the defense.
Phillip is the co-author of Taxed: A Taxpayer's Guide to Tax Defense and Resolution, published on Amazon, and writes regularly on federal tax controversy and criminal tax defense. He represents Houston taxpayers and tax professionals in IRS Criminal Investigation matters, eggshell audits, voluntary disclosure submissions, and federal tax prosecutions in the Southern District of Texas.
Flat Fees for the Defense Phase. Honest Quotes for Trial.
Pre-charge defense work, the period when most cases are resolved, is engaged on a flat-fee basis with payment plans available. If the case proceeds to indictment and trial, we discuss the trial fee structure transparently before the case advances. You will know what the defense costs before you commit.
Call (832) 384-4526 for a free consultation.
Frequently Asked Questions
Q: What is the difference between a civil audit and a criminal investigation?
A: A civil audit is conducted by a revenue agent in the IRS Examination Division and is meant to determine the correct tax liability. It ends in a tax adjustment, a civil penalty, or no change. A criminal investigation is conducted by a special agent in IRS Criminal Investigation (CI), is meant to develop evidence of federal tax crimes, and ends in declination, referral back to civil, a plea agreement, or an indictment in U.S. District Court. The personnel, the procedures, and the consequences are different. The first job of defense counsel is to recognize which one is actually in front of you.
Q: What is an eggshell audit?
A: An eggshell audit is a civil examination where the taxpayer (or the return preparer) knows or has reason to know that the return contains errors serious enough that the examiner could refer the case to IRS Criminal Investigation. The taxpayer is walking on eggshells, every answer the examiner gets, every document the examiner sees, can become part of a criminal investigation. Eggshell audits require an attorney from the first day. Communications with a CPA or enrolled agent who is not retained through a Kovel engagement are not privileged and can be compelled by subpoena.
Q: Can I just hire my CPA to handle a criminal tax case?
A: No. The § 7525 federally authorized practitioner privilege does not apply in federal criminal tax cases. The only privilege that protects criminal tax communications is the attorney-client privilege, which is held by attorneys. A CPA can be brought into the defense team through a Kovel engagement under United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), an arrangement under which the attorney engages the accountant to provide analysis at the attorney's direction. Without that structure, the accountant's notes, workpapers, and conversations with the client can be subpoenaed and used as evidence.
Q: What does it mean if a special agent contacts me?
A: It means IRS Criminal Investigation has opened a case in which you are a target, a subject, or a witness. Special agents are federal law enforcement officers who investigate tax crimes. They do not handle civil audits. If a special agent has contacted you, even informally, even just to "ask a few questions", you should decline to answer any substantive questions, ask for a card, end the conversation politely, and call defense counsel before any further contact. Anything you say to a special agent can be used to charge you. There is no off-the-record conversation with CI.
Q: What is voluntary disclosure and when is it too late?
A: The IRS Voluntary Disclosure Practice (VDP) is a procedure under which a taxpayer with material noncompliance, typically unreported income or foreign accounts, comes forward, files corrected returns, pays the resulting tax, interest, and a civil fraud penalty, and in exchange receives near-certain protection against criminal prosecution. The disclosure must be timely (before the IRS independently identifies the taxpayer), truthful, complete, and accompanied by ability to pay. Voluntary disclosure becomes unavailable the moment CI opens a primary investigation against the taxpayer, the moment a third-party tip puts the taxpayer on the IRS's radar, or the moment the taxpayer's name surfaces in a treaty request, John Doe summons, or similar process. Timing is everything.
Q: How long do federal criminal tax cases take?
A: From first special-agent contact to final resolution typically runs eighteen months to four years, depending on the complexity of the case and whether it goes to trial. The pre-indictment phase, primary investigation, special-agent report, Criminal Tax counsel review, DOJ Tax Division review, can take a year or more on its own. That long pre-indictment window is one of the reasons engaging counsel early matters: most of the work that can avert prosecution happens during the pre-indictment phase, not during the trial.
Q: What is the statute of limitations on federal tax crimes?
A: The general criminal statute of limitations for federal tax crimes is six years from the date of the offense, under 26 U.S.C. § 6531. The six-year period applies to § 7201 (evasion), § 7206(1) (false return), § 7206(2) (aiding and assisting), and several others. Section 7203 (failure to file or pay) also runs six years for most violations. The clock generally starts running on the date the false return was filed or the date the failure-to-file became willful. Statute of limitations is one of the first issues defense counsel evaluates because a stale charge cannot be prosecuted, regardless of the underlying conduct.