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How and When Does the IRS Begin a Criminal Investigation?

How and when do criminal tax investigations begin?  Many people have heard of persons being criminally indicted or charged with tax-based claims for failing to pay tax or failing to file tax returns, but how does the government begin or initiate the criminal tax process?  The article below has been prepared by a tax attorney to provide additional information regarding these questions and issues.  Please remember this article is for informational purposes and you should consult your tax attorney or a criminal attorney with your specific questions.

The Internal Revenue Service has a Criminal Investigation Division that conducts criminal investigations relating to alleged violations of not only the Internal Revenue Code, but also the Bank Secrecy Act (BSA) and certain money laundering statutes.  The investigators will then provide their findings to the Department of Justice for recommended prosecution.

The information that will lead to a criminal investigation can be obtained by the Internal Revenue Service in many ways.  Perhaps an individual owed tax to the IRS or was being audited by the IRS and the IRS revenue officer or revenue agent noticed issues that appeared illegal, fraudulent or felt the matter needed further review.  The revenue officer or revenue officer could refer the case or issues to the Criminal Investigation Division.  Oftentimes, information could be received by the public such a disgruntled employee, ex-spouse or other whistleblower.  Furthermore, the IRS may obtain information from other law enforcement agencies whether federal, state or local that could inevitably lead to the initial criminal investigation.

Once the criminal investigation has begun, Special Agents will analyze the information to determine if criminal tax fraud or some other financial crime may have occurred.  The preliminary investigation is often referred to as the “Primary Investigation.”  A supervisor of the Special Agents will review the initial information and make a determination as to approve the case for further review and development.  If the supervisor approves, approval can be obtained from the head office and the Special Agent in charge will initiate a Subject Criminal Investigation.  At this point, the investigation would be considered open and ongoing as the Special Agent will work to further obtain facts and evidence needed to establish the necessary elements for criminal activity.  The information, facts and evidence can be obtained in various ways from various sources such as third-party interviews, search warrants, surveillance, subpoenaing bank records, related financial records & tax returns and reviewing any other financial or asset related documentation.  Generally, the Special Agent will work with a criminal tax attorney within the IRS Chief Counsel in an attempt to ensure certain legalities are maintained during the course of the investigation.

At what point is there a charge or prosecution?  Once all evidence has been gathered and analyzed, the Special Agent and their supervisor will make a determination that the evidence does or does not equate to criminal activity.  If the evidence does not substantiate criminal activity and charges, the investigation is discontinued.  If the determination is that the evidence would substantiate a criminal charge and thus prosecution recommended, the Special Agent would move forward with preparing a special agent report.  The special agent report would thereafter be reviewed by multiple parties such as supervisors, review teams etc.

Upon this “final review” if the Criminal Investigation Division determines a criminal prosecution is warranted, the division will recommend prosecution to the Department of Justice (Tax Division) or United States Attorney.  Generally, the Tax Division of the Department of Justice will prosecute the matter if it is a tax investigation, and the United States Attorney would prosecute for other investigations.

If you have been contacted by an IRS Criminal Investigator or know of an ongoing investigation of which you are a witness or target, it is highly recommended you contact a tax attorney or criminal tax attorney.

What is an Abusive or Illegal Tax Scheme

What is an abusive tax scheme?  You may have heard of a program or scheme that promises to eliminate or substantially lessen your tax burden and taxes due to the Internal Revenue Service.  A promoter of such a scheme is likely to use financial instruments such as a trust and/or pass through entities such as a limited liability company or limited partnership.  When these programs and schemes are used improperly and to facilitate tax evasion, IRS may criminally investigate the scheme and prosecute the promoters as well as investors.  You should remember that if something sounds too good to be true, it could be, and could lead investigation by the Internal Revenue Service and potential criminal tax charges.  It is recommended that you discuss any potential tax scheme or program with a tax attorney.  The article below will provide more information regarding abusive tax schemes, but this article is for informational purposes only, and please always discuss your specific issues with a tax attorney.

Overtime tax schemes have developed from relatively simple single structure arrangements into more complex and sophisticated overall schemes and strategies that take advantage of foreign jurisdictions and financial secrecy laws.  The Internal Revenue Service Criminal Investigation has a national program to fight these illegal tax schemes and programs and prosecute violators with criminal tax charges.  Our government has and will continue to criminally prosecute the promoters of illegal tax schemes and those who play substantial roles in aiding or assisting the tax scheme, which could include investors into the tax scheme.  The biggest question when initially looking at these issues is, what constitutes an abusive or illegal tax scheme and could lead to criminal tax evasion and criminal tax charges?  In short, an abusive tax scheme that could lead to criminal matters would violate the Internal Revenue Code and related federal statutes.  Furthermore, generally the violations of the federal tax law and related statutes would use domestic or foreign trusts as well as pass through entities such as partnerships as vehicles in violating the federal tax laws.  In recent years, foreign bank accounts and other financial accounts have been used more frequently to accomplish tax evasion because of reporting issues (one may refer to FATCA for further information).  Many foreign banks and financial institutions do not report income such as interest and dividends, and thus there is no record of the income to the trust, entity and individuals.  With no reporting to the federal government, and no reporting on applicable tax returns, the income goes unreported.

As stated above, foreign accounts or trusts may be used frequently in illegal tax schemes.  A common scheme that may have many variations may flow as follows.  A United States citizen has a business in the United States and also forms a foreign corporation and foreign bank account in the same name of their US business.  When checks are received, the checks are processed through the foreign business and foreign bank account.  The foreign account will likely be in a foreign jurisdiction that does not report income and related items to the US government.  Thus, the income goes unreported on the taxpayer’s tax return and there are no 1099s issued to the US government to have any knowledge of the account and thus income going into the account.  Some schemes will involve a foreign business that issues invoices to a United States business.  The invoices are paid to the foreign business and a deduction taken by the US business, but the income of the foreign business is not claimed.  The business are commonly owned and the US citizens involved are not claiming the income of the foreign business.  Again, we have unreported income into a foreign account, and likely interest and/or dividends in a foreign account that would not be reported.  The above examples could go many more layers deep, but provide good examples as to how an illegal tax shelter or abusive tax scheme could be established.

The above article has been prepared by John McGuire of the McGuire Law Firm for informational purposes, and should not be relied on as legal advice.  Mr. McGuire is a tax attorney, representing individuals and businesses before the Internal Revenue Service and can be contacted directly through the McGuire Law Firm.