Can a Criminal Prosecution Delay a Civil Tax Case? – Houston Tax Attorneys

Imagine that you earned significant income and failed to file tax returns. You later file the tax returns once the IRS caught on to you, but you omitted a large part of your income.

The government indicts you on criminal tax evasion charges, and starts an IRS audit. Before the criminal trial, the IRS audit concludes and results in a large deficiency that you do not agree with.

You file a petition with the tax court to challenge the liability, but you do not want to participate in the tax court proceedings as you fear that this may have a negative impact on the pending criminal case. So you ask the tax court to hold off on the civil court case pending the criminal case–and the tax court says no. The result, by exercising your right to not self incriminate, you lose your ability to challenge the civil tax liability.

Is this legally correct? The court addresses this in Gottesman v. Commissioner, T.C. Memo. 2025-94. This is a case where the taxpayer asserted that fear of criminal prosecution should justify delaying civil tax assessment efforts.

Facts & Procedural History

The taxpayer in this case operated a medical practice in Arizona from 2009 through 2012. He worked as an independent contractor for various medical clinics. He also ran his own medical services business as a sole proprietorship and held membership interests in two medical partnerships.

Despite earning substantial income as a doctor, he failed to file federal income tax returns for tax years 2009 through 2012. He did not request extensions for time to file or make payments for this period.

The IRS began examining the taxpayer in 2014 for his 2008 through 2013 tax years. The court notes that the doctor refused to cooperate with the tax audit process, he failed to maintain adequate books and records for his businesses, and he used nominee arrangements to conceal assets and income from IRS investigators.

The IRS revenue agent did a bank deposit analysis using bank records obtained through administrative summonses and third-party information returns. This showed that the doctor had signficant income and income tax liabilities.

In 2015, the doctor submitted delinquent tax returns for the years in question. He did so as part of a collection due process hearing. The tax returns may have included fraudulent understatements of his actual tax liability, according to the court. This included underreported business income on Schedule C, omitted partnership distributions and guaranteed payments, and unreported investment income. The discrepancies were substantial. For 2009, the doctor’s corrected tax liability per the IRS was $206,125, but his tax return showed only $89,285. The total deficiencies for all of the years exceeded $328,000.

In 2019, a federal grand jury indicted the doctor for tax evasion under Section 7201. The indictment alleged that from 2009 through 2019, he willfully attempted to evade payment of income tax for tax year 2008. The doctor had relocated to Mexico by this time and remained outside U.S. jurisdiction despite an active arrest warrant.

The IRS issued a IRS Notice of Deficiency in May of 2021. The doctor timely petitioned the U.S. Tax Court for redetermination. In his amended petition, he acknowledged being under criminal investigation and expressed “imminent fear of prosecution.” The doctor’s participation in the tax court case was minimal. He filed seven motions for extensions of time throughout the proceedings. When the IRS filed its answer containing factual allegations, the doctor failed to respond. The court deemed all undenied allegations admitted under Tax Court Rule 37(c).

The IRS moved for summary judgment based on the deemed admissions and supporting evidence. Rather than responding to this motion, the doctor filed a motion to stay all proceedings. He argued that his pending criminal indictment and fear of arrest justified postponing the civil case indefinitely. He also asserted a blanket Fifth Amendment privilege against self-incrimination.

Tax Evasion Under Section 7201

Section 7201 makes it a felony to willfully attempt to evade or defeat any federal tax. This is the primary criminal tax evasion provision. It calls for up to five years imprisonment and substantial fines.

To establish tax evasion, prosecutors have to prove three elements under Section 7201. First, they have to show that additional tax was due and owing. Second, they have to show that the defendant willfully attempted to evade or defeat payment of that tax. Third, they have to show that the defendant committed an affirmative act constituting evasion.

The willfulness requirement distinguishes criminal tax evasion from civil tax violations. Mere failure to pay taxes, even if substantial, does not constitute criminal evasion without proof of willful intent to avoid known legal duties. This requires an “affirmative act.” These “affirmative acts” of evasion typically include filing false returns, maintaining inadequate records, concealing assets, using nominee accounts, or dealing primarily in cash to avoid detection–as noted by the tax court in this case. Compare that to passive failure to file returns or pay taxes. Passive failures generally do not satisfy this element without additional evasive conduct.

How Do Civil Deficiency Proceedings Work?

Evasion claims are criminal proceedings, on the civil side of it, there are deficiency proceedings.

A civil tax deficiency case begins when the IRS determines that a taxpayer owes additional taxes beyond what was reported on their returns. This usually means an IRS audit. The IRS must issue a statutory notice of deficiency before assessing additional taxes, except in limited circumstances.

Taxpayers then have 90 days (150 days if addressed outside the United States) to petition the tax court for redetermination of the deficiency. Filing a timely petition stops IRS collection efforts and the tax court is then tasked with determining the correct tax liability.

Tax Court Rule 142(a) generally places the burden of proof on taxpayers to show that IRS determinations are incorrect. This burden reflects the presumption that IRS deficiency determinations are correct. Taxpayers meet this burden by introducing evidence proving the deficiency is erroneous or excessive. This is the general rule. Section 7491 is an exception. It may shift the burden of proof to the IRS if taxpayers meet certain requirements.

There are also exceptions for unreported income, which the IRS has to first make an evidentiary showing connecting the taxpayer with alleged income-producing activities before the burden shifts back to taxpayers to prove by a preponderance of evidence that IRS determinations are arbitrary or erroneous.

This case involved unreported income. So the IRS had the burden. If the doctor in this case did not participate in the case, the IRS would have met its burden by default basically. That would mean that the doctor could not challenge the IRS’s determinations or meet his burden of proof. This is why the request for stay is so important in this case. It effectively decides the case and does so for the IRS if granted.

What Are the Standards for Granting Stays?

Federal courts have broad discretion to stay civil proceedings when justice requires such relief. The courts do not do them all that often–and not for long periods of time. The courts have generally said that stays pending criminal proceedings are “extraordinary remedies” requiring careful consideration.

Most courts apply a multi-factor test when evaluating stay requests in cases with parallel criminal proceedings. The specific factors vary by jurisdiction, but courts typically examine the relationship between civil and criminal actions, burdens on the court system, hardships to the parties, and the duration of any requested stay.

The relationship between cases considers whether they involve the same parties, time periods, legal theories, and evidence. Greater overlap between civil and criminal cases generally supports granting stays. But courts may proceed with civil cases that address different issues or time periods than pending criminal cases.

Judicial burden examines whether stays would promote efficiency and avoid duplicative proceedings. If criminal resolution might eliminate civil disputes or streamline discovery, courts are more inclined to grant stays. However, if civil cases can be resolved independently through documentary evidence, courts often prefer to proceed.

Hardships to parties weigh the prejudice each side would suffer from granting or denying stays. Criminal defendants worry about self-incrimination if forced to participate in civil proceedings. But plaintiffs may suffer from fading memories, lost evidence, or increasing difficulty collecting judgments over time.

Duration is often the most significant factor. Courts strongly disfavor indefinite stays, particularly when criminal defendants appear to be using delay tactics. Stays that might last years while defendants avoid prosecution are rarely granted.

In this case, the tax court found most of the factors in favor of not granting the stay. It concluded that the stay should not be granted. This begs the question of whether a taxpayer should effectively lose their ability to challenge an underlying tax liability when they are exposed to criminal liability for the same tax.

Losing the Ability to Challenge the Liability

The practical effect of denying the doctor’s stay motion was to force him into a difficult impossible choice. He could participate in the civil proceedings and risk providing evidence that prosecutors could use against him in the criminal case. Alternatively, he could remain silent and allow the IRS to win on the liability by default through deemed admissions and summary judgment.

This dilemma highlights a fundamental tension in the parallel track system. The Fifth Amendment protects against compelled self-incrimination, but it does not guarantee that taxpayers can avoid all consequences of asserting the privilege. When criminal and civil cases proceed simultaneously, taxpayers often find themselves caught between competing legal pressures.

The tax court’s analysis reveals how procedural defaults can effectively eliminate a taxpayer’s ability to contest the underlying merits of their case. The doctor’s failure to respond to pleadings resulted in deemed admissions that established both the deficiencies and the elements needed for civil fraud penalties. Once these facts were deemed admitted, summary judgment became virtually automatic regardless of whether the taxpayer had valid defenses.

This creates a circular problem. The civil judgment establishing tax liability and fraudulent intent could potentially be used as evidence in the criminal case to prove elements of tax evasion. While criminal cases require higher burdens of proof and independent evidence of willfulness, a civil judgment based on deemed admissions creates additional hurdles for criminal defense. The taxpayer’s exercise of Fifth Amendment rights in the civil case may inadvertently strengthen the government’s criminal case by allowing unchallenged factual findings to stand. And this all hinges on the court’s decision as to whether to grant or deny a stay in the civil case.

The Takeaway

This case shows that fear of criminal prosecution alone cannot justify indefinitely delaying civil tax proceedings. The court will scrutinize stay requests using multi-factor tests that weigh judicial efficiency, party hardships, and the duration of potential delays. Blanket Fifth Amendment assertions to avoid civil proceedings entirely may not work. And they may result in adverse judgments regardless of underlying merits or criminal exposure. This is a harsh reality for taxpayers facing parallel civil and criminal proceedings. The government’s dual-track enforcement strategy effectively forces taxpayers into difficult strategic choices about when and how to assert constitutional rights.