When a tax case has been deemed to have criminal potential by the IRS, they will conduct an administrative investigation. The administrative investigation is generally the first step into the criminal tax arena. We say generally because criminal tax cases can also be initiated directly through a grand jury investigation, although the administrative investigation is the preferred method (in some special cases, CI or the USAO may request a grand jury investigation be conducted right out of the gate). See infra part i. What is a Grand Jury Investigation.
The transition from a civil audit to a criminal investigation may not always be clear. If you believe you are being subject to an administrative investigation from the IRS, you should contact an attorney immediately.
How will I know if I’m Being Investigated for a Tax Crime?
Criminal investigations are multi-year investigations. They are very focused and the agents who work these cases put in a lot of time. Often, when the subject of these investigations becomes aware that a criminal agent is looking into their conduct, it is already too late, because the government is very far along on the case.
The government will make its presence known, either through contacting third-party witnesses or the subject of their investigation directly.
Government agents stay under the radar until they are pretty far along in their case. It is not as if they get assigned a case and go knocking on somebody's door. They work behind the scenes, looking at tax returns that were filed. They look at other information, such as source documents, like bank records, to build a case.
Only after they have built that case and they are certain or fairly certain that they are going to attain a conviction, do they go out in the field and start corroborating it.
By the time you become aware that a criminal agent is on to you, it may be very very far along — maybe almost the point where you are going to be indicted. That is why it is important to involve a criminal tax attorney who knows what they are doing. They will build a strategy to figure out why the feds are looking at you and what you can do about it in this stage.
The earlier that you get counsel involved, the earlier that we can build a strategy. The earlier that we can start mitigating issues, the better. We will start working immediately, to mitigate your risk, build your defense, and work quickly to solve your criminal tax issue.
What Starts an IRS Administrative Investigation?
An administrative investigation is initiated after CI becomes aware of potential violations of internal revenue laws. CI can be made aware of these potential violations in a number of different ways, and each criminal tax case is different.
One significant way CI may be made aware of a criminal violation is through a referral from other sections within the IRS. Commonly, this type of referral occurs when a revenue agent for the IRS conducts a civil audit and finds “badges or fraud” which suggest possible criminal activity. Badges of fraud are specific indicators that revenue agents are taught to look for during their investigation to determine if a case is potentially criminal. IRM 126.96.36.199 (6-9-15). These specific indicators include, but are not limited to, omissions of line items or sources of income, concealments of accounts or property, failure to file a return, overstatement of deductions, and failure to keep accurate records. See Id.; see also infra What is the IRS Looking For. However, just because a revenue agent finds some badges of fraud, it does not mean they need to refer the case to CI.
If at any point during a civil audit, the revenue agent consults with their supervisor and FTA and determines that there is “a firm indication of fraud” the revenue agent must suspend their civil investigation and should refer the case to CI. IRM 188.8.131.52 (1). A firm indication of fraud is determined on a case by case basis. It requires firm indicators fraud which are described in the internal revenue manual as affirmative actions which are done for the specific purpose of deceit. For example, a firm indicator of fraud could be keeping fake or inaccurate records of business transactions.
The revenue agent may not unreasonably delay this referral in order to obtain information for a criminal investigation by acting as though the taxpayer is still being civilly investigated. See United States v. Knight, 898 F.2d 436 (5th Cir. 1990); United States v. Peters, 153 F.3d 445 (7th Cir. 1998), (statements made during a civil audit need not be suppressed as Fourth or Fifth Amendment violations since the civil audit was routine and not a disguised criminal investigation). See also United States v. McKee, 192 F.3d 535 (6th Cir. 1999) (fraud conviction upheld even though IRS agent obtained information from defendant after she, according to defendant, had firm indication of fraud and should have turned investigation over to CI). The reason for this, is that there are rights and protections afforded to you during a criminal investigation that are not guaranteed during a civil audit. See id. See also Smith v. United States, 250 F. Supp. 803, 806 (D.N.J. 1966).
However, if you are being criminally investigated by the IRS, they may not directly come out and say it. This is because revenue agents are not required to expressly state why the civil investigation is being suspended. In fact, they are instructed not to disclose the reason for this suspension. IRM 184.108.40.206. However, if the taxpayer being investigated asks if the case is being referred to CI, the revenue agent is not allowed to give a deceitful response. United States v. Powell, 835 F.2d 1095 (5th Cir. 1988) (although evidence obtained by IRS through fraud, trickery, and deceit is not admissible in criminal tax prosecutions, mere fact that Revenue Agent failed to warn taxpayer that investigation may result in criminal charges is not fraud, trickery, and deceit). See United States v. Knight, 898 F.2d 436 (5th Cir. 1990); United States v. Peters, 153 F.3d 445 (7th Cir. 1998), (statements made during a civil audit need not be suppressed as Fourth or Fifth Amendment violations since the civil audit was routine and not a disguised criminal investigation). They may, however, decline to discuss the “badges of fraud” discovered or the criminal potential of the case. IRM 220.127.116.11. All that the revenue agent legally has to say is that when there is a firm indication of fraud, a referral to CI is required. Id.
Administrative investigations can also be initiated through information provided by other government entities or by private parties or informants. See USAM § 6-4.110. See also United States v. Cardwell, 548 680 F.2d 75, 76 (9th Cir. 1982). In deciding whether to use an informant's tips, there are a number of factors that need to be taken into account, such as the informant's criminal background and his source of information. IRM 9.4 2.5.4 (3-15-07). The reason informants must be carefully judged is because the use of informants could lead to legal issues. For example, the Fourth Amendment protects citizens from search and seizure by the Government, but not private parties. Therefore, information obtained through a private informant may not be admissible in Court. See United States v. Hall, 142 F.3d 988, 993 (7th Cir. 1998); United States v. Snowadzki. 723 F.2d 1427, 1430–31 (9th Cir. 1984). Additionally, the informant’s motives for providing the information could be used to show bias during trial.
What Is the IRS Looking for?
IRS criminal investigators are looking for what we call badges of fraud. They are looking for circumstances that would be clear indicators that the taxpayer committed a willful violation of our country's tax laws. These willful violations can include tax evasion, willfully failing to file a tax return or any other number of tax crimes.
Badges of fraud are things like concealing records, destroying evidence, lying, falsifying documents, or taking other actions to conceal or evade investigations. Those are the things that the CID is looking for. Criminal cases depend on willfulness.
You may have heard that the standard of proof in a criminal case is “beyond a reasonable doubt.”
Criminal investigators (CIs) are really seeking a very high bar to try and prove beyond a reasonable doubt that someone is guilty of a tax crime. They are getting lots of evidence to support that somebody fraudulently committed a violation by digging into these badges of fraud, interviewing people and gathering documents to support their case.
The CI is trying to paint you in the worst light possible because they want to leave no doubt; they want to leave no stone unturned in showing that you are a bad guy and that you deserve a criminal conviction.
They are developing a case, not only around the actions that were taken but trying to pigeonhole the intent that you had in committing those actions. That is really the focus of most IRS criminal investigations.
A Long, Drawn-out Process
As you can imagine, building a criminal case against a taxpayer can take a very long time. The IRS really picks and chooses its cases. Criminal investigations are very personal to the agents who work them and the IRS gives them a lot of freedom to build and develop their cases.
It gives its agents the license to work as much as they need to within reason, to build the best case they can to turn it over to the U.S. Attorney in order to secure a conviction. That is the goal of a criminal agent … to build and secure that conviction.
As a result, criminal investigations can take years. There is a lot of fact-finding. There is a lot of collecting information. There are a lot of witness interviews. There are a lot of third parties. The CIs are really trying to build as much of a case as possible so that they can get to the point where once you're caught, you’re caught.
The problem with criminal tax cases, in particular, is that the conduct in question may be several years old. We are in 2020 right now, so we could be dealing with charges that stem from 2013 or 2014. These charges are old, which drives home the point that these cases take a long time to develop.
Just remember … CIs are basically ready to convict you long before you step into a courtroom. That is why you need a strong criminal defense.
So, What Are They Doing All of This Time?
A number one tactic of an IRS criminal investigation is secrecy. Government agents do not like to shine a light on their investigations. They do not like to reveal details in their investigations or for you to know that they are there until it is too late.
A lot of times what we see in criminal investigation situations is by the time you become aware of the agent, they have already built a tremendous case against you or against people that you may know, whether you are a subject or target or simply a person of interest. That is one of the tools that they use. They use secrecy and they use time to build these cases up.
I have already touched on that the CID will be gathering evidence in the form of documents and this can take a tremendous amount of time. They will use any means necessary to gain access to your financial documents, even executing search warrants. And while you are blissfully unaware of all of this, they will be interviewing third-party witnesses.
The CID is trying to build a case. By the time they come to interview a target or subject of an investigation, they have all this information. They have their case built and they are trying to trap that person into a story or a lie. Those are the most common techniques we see with criminal investigations.
Obviously, the facts in every case are different and the methods that the CID uses in every case are different, but those are the ones we routinely see. We see government agents spend a lot of time working on these cases and developing them in order to secure their convictions. They have all of the resources of the U.S. Government at their disposal to move forward against the taxpayer.
That is why it is very important when you think you are the subject of a criminal investigation to get criminal tax counsel involved as soon as possible so that we can start throwing roadblocks in the way of that investigation and ultimately work on securing your innocence.
What Should I Expect During An IRS Administrative Investigation?
In an administrative investigation, Special Agents may conduct interviews of the taxpayer and other witnesses to obtain information. This stage can become very complicated, and it is important to contact an attorney if you are under CI investigation. During an administrative investigation, you have not been formally charged with a crime and lines can therefore become quite blurry.
For instance, anyone who has watched a crime television show has probably heard of the “Miranda Warnings.” (“You have the right to remain silent. Anything you say can and will be used against you in a court of law. You have the right to talk to a lawyer and have him present with you while you. If you cannot afford to hire a lawyer, one will be appointed to represent you before any questioning if you wish.”) The full traditional Miranda warnings do not need to be read in an administrative investigation where you are not in custody and free to leave at any time. Beckwith v. United States 425 U.S. 341 (1976). In fact, you will not be appointed a lawyer at this stage, and technically, your right to an attorney comes from statutes and agency rules. See Smith v. United States, 250 F. Supp. 803, 806 (D.N.J. 1966). However, the CI Special Agent should read some simplified form of the Miranda Warnings or inform you of these rights as directed by the Internal Revenue Manual. § 9.4.5-8
CI Special Agents can make you hand over documents or force witnesses to provide their testimony through an IRS administrative summons. 26 U.S.C § 7602. The summons does not require any approval by a court prior to its use. See id. However, if a witness does not comply with the administrative summons, the IRS can ask the court to enforce it. Generally, a summons is used when informal requests for documents are not sufficient. See United States v. McLaughlin, 126 F.3d 130 (3d Cir. 1997), cert. denied, 524 U.S. 951 (1998). In United States v. Powell, the Supreme Court established the minimum requirements for an administrative summons: (1) the inquiry must have a legitimate IRS administrative purpose, rather than just for settlement or harassment; (2) the testimony or documents sought must be relevant to that purpose; (3) the information sought must not be within the IRS’s possession, interpreted to mean must not be reasonably available within the IRS’s system of keeping records; and (4) the Code’s administrative steps must have been met. 379 U.S. 48 (1964).
The CI Special Agents may also seek search warrants, with the assistance of the USAO. 26 U.S.C § 7602(d). For a warrant however, the special agent must show that there is a need and probable cause to believe that a crime has been committed. Fed. R. Crim. P 41(d)(1).
After the conclusion of an administrative investigation, if the CI agent determines that there is sufficient indication of a violation of tax law, the CI special agent will prepare a special agent's report (“SAR”) recommending prosecution. The SAR contains a detailed account of the investigation and the special agent's recommendations. The SAR will be reviewed through many levels of the IRS before it is referred. If after this report the CI still concludes that the case should be prosecuted, the CI Special Agent-in-Charge (“SAC”) will refer it to either the tax division or the USAO. USAM § 6-4.243.
If the CI refers the case to the Tax Division, the referral will typically go to a special section of the Tax Division called the Criminal Enforcement Section (“CES”). CES is responsible for reviewing these referrals and deciding which cases are ripe for prosecution, which cases will not be prosecuted, and which cases may need further grand jury investigation. If CES determines that the case is ready to prosecute or should be investigated by a grand jury, this is called a Justice Referral. If you have more questions about this portion of the process, check out Part III. How Are Crimes Charged?
In some select cases, the IRS may refer a case directly to the USAO for prosecution. Some types of cases in which this option is available are trust fund cases and excises taxes, These types of referrals are still monitored by the Tax Division, and the Tax Division can intervene if it believes a case referred directly to the USAO was not proper. USAM https://www.justice.gov/jm/jm-6-4000-criminal-tax-case-procedures#6-4.213
IRS can also refer the case to the USAOand the Tax Division at the same time in order to obtain quicker plea of guilty if taxpayer’s attorney states that he or she wishes to plead guilty, and if subject income is obtained through legal means (i.e., drug or mob money would not qualify). See USAM § 6-4.310.
Once a criminal referral is made, the IRS can no longer issue a summon or ask the court to enforce it. 26 U.S.C. § 7602(d). If the Tax Division turns down a referral, CI can still conduct further investigation and resubmit the referral to the Tax Division. Id.