There are numerous reasons why you may be subject to IRS criminal investigation. From accidental tax evasion to tax frauds, you may find yourself getting involved in an investigation for tax problems. It may happen because of a simple oversight on your or your accountant’s part. As such, it is crucial that you know about the process of an IRS criminal investigation.
The Internal Revenue Service Criminal Investigation (IRS-CI) Division is responsible for investigating financial and tax-related violations in the United States. Their goal is to criminally prosecute a taxpayer who has been found to conduct tax fraud.
Here are some of the most common criminal violations handled by the IRS-CI:
- Tax evasion
- Tax frauds, such as identity theft tax fraud
- Currency violation
- Money laundering
- Terrorist financing
IRS-CI is the exclusive federal agency that investigates these Internal Revenue Code criminal violations. According to the IRS, they have an approximately 90 percent conviction rate for federal tax-related prosecutions.
Difference Between IRS Audits and IRS Criminal Investigation
Unlike the misconception, there is a difference between IRS audits and criminal investigations.
During an audit, the IRS attempts to identify whether your tax liability has been correctly calculated. It will require you to provide the necessary documents to back up your filed tax returns. The procedure varies in different cases. In some cases, they will only employ the help of correspondence to verify your documents. While in others, they will come directly to your house or office in person to look through your records.
The auditor may also bring a fraud technical advisor (FTA) along to determine signs of fraud. When signs of fraud have been confirmed, they will refer the case to the IRS criminal investigation unit. Then, the IRS will file a claim against you that will eventually lead to prosecution.
IRS-CI Investigation Categories
There are four interdependent programs under the IRS-CI. These are the Legal Source Tax Crimes Program, Illegal Source Financial Crimes Program, Counterterrorism Financing, and the Narcotics Related Financial Crimes Program. All these investigation categories utilize the CI jurisdiction statutes, including the grand jury process and enforcement strategies against tax and financial violations.
Here are the four standard IRS-CI investigation categories:
- Legal Source Tax Crimes: This is the primary resource commitment of the IRS-CI. They investigate taxpayers working under legal fields who have legally earned their income but evaded paying taxes.
- Illegal Source Financial Crimes: This IRS-CI program aims to identify all tax-related criminal violations and money illegally gained.
- Counterterrorism Financing and Espionage: This unit employs the expertise of computer forensic experts to investigate financial terrorism. The espionage investigations under the IRS-CI also fall under this category.
- Narcotics-Related Financial Crimes: This program is one of the IRS-CI initial initiatives, going way back to 1919. Its goal is to dismantle huge drug and money laundering groups and organizations.
IRS-CI Investigative Process
IRS-CI Special Agents have advanced training in the general criminal investigation, with specialization in financial and tax-related violations. They conform to the investigation methods accepted by the judiciary. Like other federal agents, they also carry firearms and wear badges. However, these Special Agents conduct highly extensive and thorough investigations on tax evasion or tax fraud that last for years.
They are trained to conduct any of the three primary proof methods for generating conviction-leading evidence. It includes the direct-specific item method and the indirect net worth and expenditures method. Special Agents use these methods to gather evidence on ill-gotten wealth against their filed tax returns.
Here are the different investigative proof methods conducted by the IRS-CI:
Specific Item Method
This method aims to substantiate any specific items not accurately reported in the tax return. There must also be proof that the omitted items were purposeful understated in the tax liability. The three standard scheme categories under this method are:
- Income understatement
- Expense overstatement
- Credit or exemption frauds
Net Worth Method
The Net Worth Method aims to establish proof of an undeclared taxable income. Here, the Special Agents calculate the change in net worth or the subject’s asset minus their liabilities. Then they would adjust this net worth to change accordingly towards an accurate gross income figure. The gross income figure would then be corrected for any itemized deductions or exemptions. The final updated taxable income figure would determine whether under or non-declaration of income has been made.
Similar to the Net Worth Method, the Expenditures Method also aims to identify undeclared income. The process begins by appraising the net worth of the subject. The income is under declared when the expenditures cost more than the income in the report, and net worth remains the same.
The IRS Criminal Investigation Procedure
A tax-related criminal violation may result in conviction and fines, including the prosecution and jail time cost. Typically, the subject is not aware that the IRS-CI unit is investigating them until the later phases of the investigation. It is because IRS-CI Special Agents ensure that they have gathered enough proof to incriminate the subject.
Sources of Evidence
IRS-CI relies on objectivity in gathering admissible evidence. This way, the case would lead to allegations that are admissible for legal prosecution. Some of the sources of evidence information for an IRS criminal investigation include:
- IRS records
- Business records
- Bank reports and records
- Criminal histories
- Government records
- General public records
- Court records
- Telephone records
The investigation progresses through the help of informants or undergoing undercover investigations. Like other federal agents, IRS-CI Special Agents use search and arrest warrants to get these files and records.
IRS-CI Special Agents assess and evaluate potential criminal tax violations from IRS records and standard law enforcement sources. They work together with different agencies to conduct their investigation and recommend prosecution to the U.S. Department of Justice.
There are generally two stages of prosecution recommendation from an IRS criminal investigation:
- The IRS Collection or Examination personnel would usually make the initial referral. They would then investigate, make an assessment, and make a conclusion for the prosecution recommendation.
- The IRS-CI would then forward the second stage to the U.S. Department of Justice.
Again, a simple oversight can lead you towards being a subject of IRS criminal investigation. Thus, it is crucial to be mindful of filing your taxes and getting involved in suspicious financial groups. By keeping the guidelines above in mind, you can stay away from the IRS-CI’s radar and live free from tax issues.