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Alliantgroup’s ‘Nightmare’ Probe by IRS Is Only Just Beginning

Posted on June 16, 2022

The IRS has yet to formally announce any criminal charges following its raid of Alliantgroup LP’s headquarters, but the rarity of the situation bodes poorly for the firm.

Agents from the Justice Department and the IRS Criminal Investigation division swept into the Houston office of tax consulting firm Alliantgroup on May 20, executing a court-authorized search warrant. Although the investigation could take years to play out, observers say that even the few facts of the case that are known so far portend a troubled future.

“This doesn’t happen very often to legitimate firms. This is kind of your worst nightmare,” Linda Galler of Hofstra University’s Maurice A. Deane School of Law told Tax Notes.

“It would be very rare for IRS CI to even get involved if there wasn’t some kind of targeted information they were trying to obtain,” agreed Aaron M. Esman of Moore Tax Law Group LLC. Although CI regularly investigates smaller entities, “a raid in and of itself . . . is rather rare for an entity of this size,” he said. “This is not exactly a common scenario.” 

The IRS has remained silent on what it was pursuing in the raid. Alliantgroup maintains that it is fully cooperating with the investigation, which it anticipates will be “amicably resolved.”

Not Your Everyday Case

That CI went so far as obtaining a court-ordered search warrant and publicly raiding a national firm suggests it’s not investigating a minor infraction.

“This is serious business. This is not taken lightly, and that’s reflected among other things in the procedural steps that have to be taken,” said Steve R. Johnson of Florida State University’s College of Law.

A search warrant — which would have been necessary for the raid on Alliantgroup’s office — is used in the criminal context, which indicates that if any charges result, it would be a criminal prosecution, Johnson said.

The government has two primary ways of developing information in a criminal tax case: CI can build a case, interview witnesses, issue summonses, and so on, or it can proceed via a grand jury, both to indict or to investigate, Johnson explained. In complex situations, the grand jury tool is preferred, he said.

“I suspect that the search warrant here was issued in support of a grand jury investigation,” Johnson said, although he noted it’s possible that no indictments will result from the investigation.

For CI to obtain a search warrant in the first place for an investigation is unusual, Johnson said. He explained that to obtain that warrant, the CI agent would first approach his group manager. If the manager thinks a search warrant is appropriate, the agent must bring that proposal for a warrant to the IRS Office of Chief Counsel, which would take an active role in preparing the proposed warrant and supporting affidavit.

The IRS then must obtain approval from the Justice Department, which has “fairly specific policies” in its manual for obtaining search warrants in criminal tax cases involving accountants and lawyers, and requires approval from the assistant attorney general for the Tax Division, according to Johnson.

But that’s still not enough. Once the Justice Department signs off on the warrant, the government must go to a federal district court and get a judge to approve it, Johnson said. Because that takes place in an ex parte proceeding — in which the subject of the warrant is kept in the dark about the investigation — the judge is obligated to exercise independent judgment on the merits of the search warrant when weighing the proposal. The proposal details the basis for the search warrant, such as describing the items to be seized, providing a time frame for the seizure, and providing enough information to establish probable cause that a crime has taken place, Johnson explained.

“You get the impression from these procedures that search warrants are taken pretty darn seriously,” Johnson said.

Who’s at Stake?

It remains to be seen whether any charges stemming from the investigation fall on individuals or on Alliantgroup.

After the Enron Corp. scandal blew up in 2001, the government focused its attention on Arthur Andersen LLP — one of the Big Five accounting firms at the time — and the firm was eventually criminally charged and began winding down its business. “Once an accounting firm that does auditing work is publicly charged with a crime, you can’t go to them,” Galler said.

The Supreme Court reversed the firm’s conviction in 2005, but by that point, the damage to the firm’s reputation had already been done and it never recovered. In the aftermath, the rumor on the street was that the government was now reluctant to charge a public accounting firm with a crime because those firms serve an important function in the public markets. Bringing down another major public accounting firm by tarnishing the firm’s reputation via criminal charges could have economywide ripple effects and was thus frowned upon, Galler said.

But Alliantgroup is not a public accounting firm — it’s a private tax advisory firm, albeit a large one with offices nationwide, so it doesn’t have that same public interest defense in its favor, Galler continued. “So here, you could certainly have the firm charged, if it seems appropriate to those who are making decisions on this, or there could be individuals charged.”

Johnson agreed that the government was “scarred by Arthur Andersen going under” when it comes to targeting entities, but said it has also faced setbacks for going after individuals. He noted, for example, that the government’s indictments against 13 individuals associated with KPMG’s tax shelter marketing in the early 2000s were dismissed because the Justice Department was found to have violated the defendants’ Sixth Amendment right to counsel by pressuring KPMG to violate its contractual obligation to pay for their defense. That situation could “inspire caution on DOJ’s part” when it comes to prosecuting individuals, he added.

If Alliantgroup is ultimately charged, how harsh those indictments are would be a situational decision, Johnson said.

The Justice Department’s manual includes a long list of criteria to be considered, such as the nature and seriousness of the offense; the pervasiveness of wrongdoing within an entity and its history of similar conduct; whether the entity timely and voluntarily disclosed wrongdoing, and its level of cooperation with the investigation; the robustness or even mere existence of the company’s corporate compliance programs and its remedial actions; and the effect of the company’s actions on its employees and shareholders.

Over the years, the Justice Department has issued a series of memos on criminal prosecutions describing the need for vigorous enforcement of criminal laws against corporate wrongdoers, Johnson said. However, he noted that the current memo says that the department’s “Tax Division has a strong preference for prosecuting responsible individuals, rather than entities, for corporate tax offenses.”

Tax advisers who stake out aggressive tax positions for their clients are often convinced that they at least have a reasonable basis for that position, but then there are those who cross the line, Galler said. She recalled the example of Paul M. Daugerdasdubbed “the most prolific, pernicious, and utterly unrepentant tax cheat in United States history” by the Justice Department.

Daugerdas, who was a partner at Jenkens & Gilchrist, a national law firm at the time, was found to have orchestrated a massive tax shelter scheme from 1994 to 2004 that helped wealthy individuals evade $1.6 billion in taxes. Even before Daugerdas’s conviction in 2011, the IRS investigation into his actions led the firm to fold in 2007.

“He basically took the firm down with him,” Galler said.

Johnson emphasized that although it’s purely speculative at this point, the allegations shared by former Alliantgroup employees on blogs like Going Concern about the company and CEO Dhaval Jadav suggest that prosecutors could go either way in charging the entity or individuals, but the ultimate outcome may look about the same.

“It almost doesn’t matter: If you prosecute the company, the company is going to go away. If you successfully prosecute this guy, the company is going to go away,” Johnson said. “So is it noon? Or is it 12 p.m.?”

Tax Pros and Cons

As for how potential charges play out, individual conduct is key, Esman of Moore Tax Law said.

In any matter being investigated by CI, Esman said, he would expect everyone who might be involved in the underlying issue to retain individual counsel, including lower-level employees who could be called in as witnesses or have information to provide.

Individual conduct — rather than mere association with a firm that’s in legal jeopardy — would also be a deciding factor in whether there are professional ramifications, such as a lawyer’s ability to practice, Esman said. He noted that Circular 230 governs the rules of practice before the IRS for accountants, enrolled agents, and lawyers, who could face penalties including censure, disbarment, or suspension, while state bar associations and state accountancy boards could also dole out professional consequences.

Individuals at a firm that is criminally charged could also face reputational harm. Alliantgroup has a substantial number of former high-level IRS and government officials listed prominently on its leadership page and as members of its strategic advisory board, including two former IRS commissioners and a half-dozen former federal lawmakers.

Individuals who have made a career of working for the IRS are often deeply committed to professionalism, Galler said.

“They really view themselves, for the most part, as performing a public service, as they should,” she said. Given the gravity of this investigation, and how previous criminal investigations have played out, those former government workers may well be considering leaving the firm or disassociating themselves somehow, she said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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