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When Does the IRS Pursue Criminal Charges?

When Does the IRS Pursue Criminal Charges?

Statistically, your chances of being charged with criminal tax fraud or tax evasion by the IRS are minimal. The IRS initiates criminal investigations against fewer than 2% of all American taxpayers. Of that number, only about 20% face criminal tax charges or fines.

Related Article: The IRS Criminal Investigation Process

Unofficially, the minimum amount of unpaid taxes required to trigger an IRS criminal investigation is $70,000. And since the majority of Americans don’t even earn that much money, it’s easy to see why ordinary taxpayers need never worry about facing tax evasion or tax fraud charges.

While honest mistakes or even negligence generally won’t trigger a tax investigation, perpetrating fraud very well might. IRS agents are trained to recognize signs of criminal tax fraud and evasion. Exhibiting behaviors the IRS calls “affirmative acts” could eventually result in that fateful knock on the door from the IRS.

Negligence versus Tax Fraud

Back in the day, it seemed like the IRS was lying in wait, prepared to strike unsuspecting taxpayers at the slightest sign of tax error. These days the IRS is more tolerant of mistakes made by honest taxpayers.

When the circumstances are not clear cut, the IRS frequently errs on the side of giving the taxpayer the benefit of the doubt. Miscalculating the amount of your Earned Income Tax Credit is a mistake that could cost you a significant sum of money, but it isn’t usually considered to be tax fraud. Artificially concealing $800,000 of income by keeping two sets of books? Tax fraud. (Nolo)

Evidence of Tax Fraud

Four so-called elements of tax fraud are recognized by the IRS: deception, misrepresenting material facts, submitting false or deliberately altered documents and failing to submit critical documents, such as tax returns. Several elements of fraud must occur together to trigger IRS tax fraud charges. But a single element that occurs in an especially blatant fashion may generate IRS tax fraud charges.

For instance, failure to submit a tax return for a single year is not usually considered to be an element of tax fraud. On the other hand, unless your income is extremely low, failing to file any tax returns ever could very well cause the IRS to initiate a criminal investigation against you.

Badges of Tax Fraud

The list below, taken from the IRS.gov website, represents several “badges of fraud” the IRS looks for when determining whether to file criminal charges.

Badges of tax fraud fall into four general categories: improper reporting of income, unjustified deductions or tax credits, inadequate record keeping and outright illegal behavior. As with elements of fraud, IRS agents are inclined to give taxpayers the benefit of the doubt. They’ll impose penalties for taxpayers in arrears rather than bringing criminal charges against them.

  • Understatement or omission of substantial sums of money
  • Fictitious deductions
  • Maintaining “shadow” sets of accounting records
  • Deliberate destruction of records
  • Evidence of consistent underreporting of income
  • Obviously nonsensical explanations for behavior
  • Refusing to cooperate with an auditor or examiner·
  • Deliberately concealing assets, as in overseas tax shelters
  • Illegal activities
  • Dealing exclusively in cash
  • Maintaining obviously inadequate records
  • Indicators of Fraud

The IRS categorizes indicators of tax fraud into six broad categories: income, expenses and deductions, books and records, income allocation, methods of concealment and taxpayer conduct.

Just as with elements of tax fraud and badges of tax fraud, the difference between negligence and criminal conduct is often a matter of extent.

Indicators of fraud usually include an element of deliberate conduct as well. An extensive list of actions that constitute indicators of fraud are available on the IRS website, but the examples below should provide a general idea of how the IRS views indicators of fraud.

Example #1:

Forgetting to include income from a W-2 form is not considered an indicator of income fraud. Insisting on being paid cash wages for a job and refusing to list any income from that job on your federal income tax return would be considered to be an indicator of income fraud.

Example #2:

Miscalculating the percentage of business versus personal use for your computer is not considered an indicator of fraud for expenses and deductions. Attempting to deduct the entire cost of your vacation to the Bahamas because you answered a single work-related email from your hotel room WOULD be.

Don’t Be Evasive

In general, if you suspect that a particular type of conduct is disallowed by the IRS, you shouldn’t do it. If you go ahead and do it anyway, you run the risk of being cited for tax evasion or tax fraud. And if you do receive that dreaded knock on the door from the IRS, you should not be surprised.

Additional Tax Tips:What to do during an IRS Audit
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How to Know if the IRS Is Auditing You

How to Know if the IRS Is Auditing You

You may be under the impression that if you’re being audited, you’ll find out by a strong knock at your front door. Unless you’re in serious trouble, this won’t be the case.

How will you know if you’re being audited?
Short Answer: The IRS will let you know directly.

The only way you’ll know for certain if the IRS is auditing you is if the IRS tells you – either by phone or mail. If your initial contact is by email, it’s likely a scam and you should report it.

Who is most likely to be audited?
According to Bloomberg News, only 1% of all tax returns each year are audited. But there are factors that increase your chances of being targeted for an IRS audit.

  • Being rich. 12.5% of all tax returns for those who make over a million dollars a year.
  • Mistakes on your tax return. This could be anything from not reporting all of your income, your numbers not matching with your employer-provided W2s, or even math errors on your tax return. Don’t round your numbers.
  • Self-employed. The IRS will look at your deductions to see if they are the typical amount for someone in your industry. Travel/entertainment and automobile deductions are watched especially closely. While a home office is no longer an immediate reason to suspect an audit, taking the deduction needs to be backed up with detailed records.
  • Large charitable donations. If you only make $20,000 a year and yet donated a substantial amount of money, watch out.
  • Your associates. If your business partner in a firm or a close relative is being audited, you could be too.

Types of IRS Audits
There are three types of IRS audits, depending on the complexity of your return, the number of questions the IRS has and the dollar amount involved.

  • Correspondence Audit – An IRS tax audit conducted entirely by mail. The IRS likely has a short checklist of questions to ask you about your income, expenses, or itemized deductions.
  • Field Audit – The IRS will send an agent to visit you in person in your home or business. They will want to inspect the records you’ve kept.
  • Office Audit – You are requested to meet with an agent at their nearest office and bring your paperwork with you to the meeting.

If you are audited there are four things to remember:

  • Respond to their letters within the deadline given on the notice. If you need more time, you’re far more likely to get an extension if you ask for it before the deadline’s passed.
  • Gather all the documentation you need to answer their questions and provide copies to the IRS. (Never give them your original documents, they aren’t responsible if anything is lost.)
  • Bring the right representation. Not your Uncle Bill but a CPA or tax attorney. This is not the time for amateur help or to go it alone.
  • Be polite and respectful. But don’t volunteer anything. If the agent wants to expand the audit, you are entitled to more time to answer any new questions that may arise.

An IRS tax audit can be a painful experience but you will get through it with thorough preparation, and if needed, expert help from Optima Tax Relief.

Additional Tax Tips:

The IRS Criminal Investigation Process
What to do during an IRS Audit
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What Is The IRS Criminal Investigation Process?

What Is The IRS Criminal Investigation Process?

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.

Primary Investigation

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.

Criminal Investigation

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:

  1. The supervisory special agent, aka the front line supervisor for the special agent
  2. Centralized Case Review – a criminal investigation review team
  3. The Criminal Investigation (CI) assistant special agent in charge
  4. 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.

  1. The Department of Justice, Tax Division (for tax investigations)
  2. 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. 

Additional Tax Topics:

IRS Penalty and Interest Rates
What to do during an IRS Audit

10 Tips To Avoid A Tax Levy

10 Tips To Avoid A Tax Levy

The Treasury Department has a well-earned reputation for being serious about collecting its due. The mere mention of its taxation arm – the IRS, is sufficient to invoke fear into the most honest of taxpayers. One reason for the trepidation generated by the IRS is that it has a potent arsenal of weapons at its disposal to pursue taxpayers who are in arrears, including tax liens and tax levies.

Many people confuse tax liens and tax levies. While neither is desirable, a tax lien poses much less financial danger to taxpayers than a tax levy does. A tax lien represents an initial attempt by the IRS to collect revenues from taxpayers who have failed to either pay their taxes in full or to contact the agency to discuss viable repayment options. By contrast, by the time the IRS gets around to filing a Final Notice of Intent to Levy and Notice of Your Right to A Hearing, otherwise known as a tax levy, taxpayers are in imminent danger of losing valuable assets such as cars or homes to seizure.

It goes without saying that avoiding the dire consequences of a tax levy is desirable whenever possible. Fortunately, taxpayers who take expedient measures can frequently avoid the hammer of the IRS tax levy. Depending on the personal circumstances involved, it may be possible to dodge a tax levy long enough to contact the IRS with alternative arrangements – or even long term.

1. Request a 120-Day Extension

One of the few absolutely guaranteed ways to avoid a tax levy is to repay what you owe to the IRS in full. If you have a reasonable expectation of being able to repay your tax arrears within 120 days, request an extension from the IRS. Once you have made payment, the lien should be released within 30 days, which will automatically cancel the tax levy.

2. Negotiate an Installment Agreement

Back in the day, the IRS was much less flexible about allowing taxpayers to extend payments over time. In recent years, however, the IRS has changed its stance and actively encourages collaboration between agents and taxpayers. So, if you can pay what you owe within a reasonable time frame, generally six years or less, depending on your total balance in arrears, you may be able to avoid a tax levy by negotiating an installment agreement. If so, act quickly to prevent the actual levy from going through.

3. Extend an Offer in Compromise

An Offer in Compromise is a formal arrangement that allows taxpayers to settle their tax obligations by paying less than the full amount due. The Offer in Compromise process requires taxpayers to demonstrate that attempts to collect the full amount owed would present an undue financial burden or would otherwise be unjust. As might be expected, the standard for qualifying for an Offer in Compromise are strict, and taxpayers would be well advised to seek professional advice before pursuing this path.

4. Demonstrate Non-collectible Status

If paying your back taxes – or the execution of a tax levy – would create severe financial hardship, you can seek what the IRS categorizes as “non-collectible status.” Once your tax debt has been designated as non-collectible, all attempts to process tax levies cease. But the tax lien remains on your record, and you must re-apply for “noncollectable status” on an annual basis.

5. File Chapter 7 or 13 Bankruptcy

Under most circumstances, filing either Chapter 7 or Chapter 13 bankruptcy places an immediate halt on all creditor collection actions, including tax levies. But filing a bankruptcy petition only stops a tax levy for as long as the petition is active. And especially if you file Chapter 7 bankruptcy, you may be required to relinquish personal assets anyway to obtain a discharge.

6. Petition for Innocent Spouse Relief

If you filed a joint tax return with your spouse, you are generally jointly liable for any and all tax obligations. But under limited circumstances, it may be possible to escape a tax levy if you can demonstrate that your spouse is individually responsible for being in arrears with the IRS. Qualifying for Innocent Spouse Relief is tough, with strict requirements in place. If you believe you qualify, you would be well advised to seek the services of a professional in preparing your petition.

7. Appeal the Notice of Levy

If you legitimately believe that the IRS has mistakenly imposed a tax levy against you, it is imperative to contact the agency by phone immediately to request an appeal. You must also follow up the phone call with a written petition to appeal the tax levy. It is your legal right to appeal a tax levy, and doing so will stop the process while your appeal is being processed.

8. Allow the Statute of Limitations to Run

The IRS is limited by statute on the amount of time that a tax lien is allowed to stand. If the statute of limitations expires before the IRS imposes a tax levy, you are officially off the hook. But this is a very risky strategy, especially since the IRS may simply impose a new tax lien against your account. On the other hand, if you can demonstrate that the statute of limitations has ALREADY expired, your odds of escaping a tax levy improve significantly. Do not attempt this approach without expert legal advice.

9. Claim IRS Procedural Error

In most cases, taxpayers receive multiple warnings before the IRS executes a tax levy. But sometimes mistakes are made. If you can demonstrate that you did not receive sufficient notice of a tax levy, or that the IRS committed some other procedural error in assessing your account, you can request a Collection Due Process hearing, which will halt a tax levy for 30 days after the date of the hearing.

10. File a Request through the Collection Appeals Program

If you are not satisfied by the results of an appeal or a Collection Due Process hearing, you may file a petition for under the Collection Appeals Program before a tax levy has been executed. You may also file a petition to recover assets such as bank accounts or wages that were wrongfully seized by tax liens under the Collection Appeals Program. But if seized assets such as a home or a car have already been sold, you are pretty much out of luck.