Most of the woes associated with the IRS involve money. If you are audited, the most probable outcome is that you will owe more money to the IRS. In the worst case scenarios, an audit results in your owing a lot more money. But you almost never face criminal charges.
An IRS criminal investigation is an entirely different ball of wax. The IRS pursues about 3,000 prosecutions each year for tax fraud and tax evasion. If the IRS launches a criminal investigation against you, you not only face a potentially substantial tax bill, but also possible jail time. One of your first moves should be to obtain the services of a skilled, experienced attorney who specializes in tax law.
The Knock at the Door
Your first encounter with the criminal investigation unit of the IRS may involve a knock on your door, followed by an intimidating encounter with two or more agents dressed much like K and J from the Men in Black movies. By the time this encounter takes place, the IRS has completed several steps of its investigation process and is convinced that the case against you is solid. Your best move under these circumstances is to say absolutely nothing.
Areas of Potential Criminal Prosecution
The IRS website lists the following areas of possible criminal prosecution. Some areas of criminal prosecution such as abusive tax schemes and nonfiler enforcement are more likely to apply to individuals. Others, such as money laundering and employment tax evasion, are more likely to be committed by corporations and criminal operations.
- Abusive Return Preparers
- Abusive Tax Schemes
- Bankruptcy Fraud
- Corporate Fraud
- Employment Tax Evasion
- Financial Institution Fraud
- Gaming Related Fraud
- General Tax Fraud
- Healthcare Fraud
- Insurance Fraud
- Money Laundering
- Mortgage and Real Estate Fraud
- Narcotics Related Financial Fraud
- Nonfiler Enforcement
- Public Corruption
- Questionable Tax Refunds
How Criminal Investigations Are Initiated
Those stories you read about neighbors ratting each other out to the IRS? That actually does happen. The IRS is happy to accept tips about possible tax fraud or tax evasion from family members and associates. A revenue agent or revenue collection officer may also initiate a criminal tax investigation if something about your return seems fishy. A U.S. Attorney or even your local law enforcement department may also provide tips to the IRS about possible fraudulent or criminal tax activity. Social media is also another resource.
Of course, the IRS isn’t supposed to go off half-cocked based on an accusation made by someone with a long-standing grudge. Instead, any tips or information is subject to what the IRS calls a primary investigation. The agent makes an initial judgment on whether to proceed with further investigation. If the decision is in favor of pursing criminal charges, the tax agent’s supervisor has the opportunity to sign off on the investigation or stop it in its tracks. If the supervisor gives the go-ahead, then the case is brought to the special agent in charge – the head of the office. That person makes the determination of whether to go ahead with a “subject criminal investigation” based on one or more of the categories listed above.
Once the IRS has obtained the go-ahead, the actual criminal investigation proceeds much like you think it would. The IRS gathers documents and affidavits from third parties, including your family, friends and professional associates to support its case. Other forms of investigation include search warrants, subpoenas of bank records and other financial data and covert surveillance.
Recommendations for Prosecution
After the investigation phase of the process is complete, the IRS special agent and his or her supervisor review the evidence that has been gathered. A determination is made whether to “discontinue” the case or proceed with prosecution. If the decision is made to prosecute, the special agent prepares a report which is reviewed by each of the following four IRS officers, in order:
- The supervisory special agent, aka the front line supervisor for the special agent
- Centralized Case Review – a criminal investigation review team
- The Criminal Investigation (CI) assistant special agent in charge
- The CI special agent in charge
If the CI special agent in charge gives the go-ahead to prosecute, the recommendation is forwarded to either of two final levels of review. Just as with any of the earlier stages of investigation, the IRS may decide that there is insufficient evidence to proceed with an actual prosecution. But once an investigation clears one of the two stages listed below, you are destined to receive that ominous knock on your door.
- The Department of Justice, Tax Division (for tax investigations)
- The United States Attorney (for all other criminal financial investigations)
Guilty or Not Guilty
You might have gathered by now that the IRS is meticulous about pursuing criminal cases against alleged tax cheats, and you would be right. But that does not mean that mistakes never happen or that actual prosecution is inevitable. You have the right to seek a conference with IRS agents at each stage of the process — if you are actually aware that the IRS is pursuing prosecution against you. You also have the right to request dismissal of the case either before or after a grand jury indictment, or to appeal a conviction.
If the IRS Has You in Its Sights
If you know that the IRS will find tax fraud or tax evasion, your best bet is to come clean. If you do so before a prosecution is underway, you can often avoid the criminal process altogether. The IRS allows taxpayers to make voluntary disclosures of unreported income or other tax obligations. The procedures vary according to whether your unlawful tax conduct involves domestic or international maneuvers. Your attorney can provide the best advice on whether – and how to make a voluntary disclosure.
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