When Tax Investigations Go Criminal

When the IRS knocks on your door, it is enough to make you shake in your shoes. A visit from a revenue agent (auditor) or revenue officer (collection) who claims to have detected possible fraud means you are already in hot water.

The steps from suspicion to criminal tax investigation have already taken place, and that IS agent already has enough information to prosecute.

It is also possible that you expected this visit if you or your business have been audited recently by the IRS and you have gleaned from your interaction with the service that they may have found something fishy in the handling of your taxes.

What Leads to a Criminal Tax Investigation?

Some tax investigations result from information uncovered by an IRS audit. A revenue agent (auditor) or revenue officer (collections) detects potential fraud when auditing financial documents. Others originate with tips from the public - family, business associates, or others who have reason to believe an individual is committing tax fraud. Ongoing investigations by law enforcement agencies or US Attorneys’ offices around the US also add to the list.

More recently, the IRS has taken to looking at social media, using predictive analytics to dredge up potential evidence of tax misdoings. You should have no presumption of privacy for anything you post on social media, so the IRS sees it as fair game.

The outcome of an investigation is to show a taxpayer is willfully attempting to hide income from the federal government. Finding attempts to hide income can be indications of other criminal activity:

• Money laundering
• Fraud
• Bank Secrecy Act violations

There are four categories of investigation depending on the source of potential tax evasion. Keep in mind that the federal government can and does tax income from any activity, even if it is illegal.

• Legal source tax crimes including cases that threaten the tax system.
• Illegal source financial crimes
• Narcotics-related financial investigations
• Counter-terrorism financing

Tax crimes threatening the tax system covers questionable tax refund programs, unethical tax preparers, and excise and employment tax investigations. It also takes in those tax filers or non-filers who believe the filing requirement is not legal.

Illegal source financial crimes include fraud and non-payment of taxes on income from illegal activities or other currency violations. Money laundering is an example; to the IRS money laundering is a “tax evasion in progress.”

Within these categories there is a long list of potential areas of prosecution:

• Abusive tax schemes
• Employment tax evasion
• Non-filer enforcement
• Bankruptcy fraud

…just to name a few.

How Are Investigations Initiated and Conducted?

When the IRS receives notice of potential tax violations, special agents analyze the information to determine if criminal tax fraud or other financial crime may have occurred. The information wends its way through two layers of evaluation before a decision is made on whether there is sufficient evidence to initiate a criminal investigation.

The special agents’ frontline supervisor reviews the primary materials and either approves of the case moving forward or declines further development of the information. If the supervisor approves initiation, approval must then be obtained from the head of the office or the special agent in charge.

At all times, the material is reviewed for sufficient evidence to begin a criminal investigation. There are about 3,000 criminal tax prosecutions per year. The IRS will not commit funds for investigation and prosecution unless the case appears eminently prosecutable. Otherwise, it would be too expensive to pursue.

Once approval has been received from the required authorities, a criminal investigation can proceed. A special agent is assigned to obtain facts and evidence to establish elements of criminal activity, including:

• Affidavits from family, friends, and professional associates
• Documentation
• Search warrants
• Covert surveillance
• Subpoenaed bank receipts and other financial data

The IRS Chief Counsel, Criminal Tax Attorneys work with the special agent to make sure all legal aspects of the investigation and prosecution are addressed appropriately.

Recommended for Prosecution

Once the investigation phase is complete, the evidence is reviewed by the special agent and IRS supervisor once again, to determine whether there is sufficient evidence to prosecute or if the case should be discontinued.

If there is sufficient evidence, the agent prepares a written report with detailed information about violations of the law and recommending prosecution.

The special agent report is reviewed once more by multiple officials including:

• Supervisory special agent
• Criminal investigation quality review team aka Centralized Case Review
• Criminal investigative assistant special agent in charge
• Criminal investigation special agent in charge

Suffice it to say that many, many eyes have looked over the information before prosecution begins. The case can follow one of two paths. If the case results from tax investigations, the Department of Justice, Tax Division takes charge. For all other criminal financial investigations, the United States Attorney takes over.

Yet another review of the recommendation to prosecute is undertaken; if it determines the evidence does not substantiate violations or illegal actions, the case will be declined.

If the DOJ or US Attorney accepts the case, the IRS special agent will be asked to assist prosecutors in preparation for trial. After the special agent report, if referred for prosecution, the investigation is taken over by the prosecution team.

The goal of an IRS criminal investigation prosecution, once it is approved to move forward, is to obtain a conviction, either a guilty verdict or a guilty plea.

Consequences

If you are under investigation and you have committed tax fraud or other financial violations, your best bet is to voluntarily disclose unreported income or other tax obligations before prosecution begins.

If you do, you will likely avoid a criminal process. Procedures vary, and it depends on whether your unlawful conduct involved domestic or international activity.

What if you are prosecuted and found guilty? You can be charged with one or more felonies, receive a prison sentence of up to five or more years, and be required to pay large fines and penalties that can start at $25,000 for each separate crime.

How Can an Attorney Help?

A knowledgeable tax attorney who has experience with criminal tax investigations provides the best advice on whether and how to make a voluntary disclosure if that is in your best interests. A tax attorney may be able to resolve your tax problems quickly to minimize penalties.

If you know or suspect you are under investigation by the IRS, retain an attorney and begin conducting an independent investigation of the returns in question. Your attorney will have ample time to interview potential witnesses, review your accounting and financial records for evidence of fraud, and minimize your chances of being convicted of a felony crime.