The Internal Revenue Service performs criminal investigations into individuals suspected of tax evasion, money laundering, drug trafficking, and other crimes. These investigations are conducted primarily by special agents assigned to the Criminal Investigation Division (CID). However, several sources of criminal investigation data are used by CID investigators.

A Denver tax attorney has prepared the article below 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 specific questions.

IRS Auditors

Audit reports contain information about audits and assessments being performed by IRS auditors. This includes the audit date, assessment type, amount assessed, and amounts owed. Audit reports also include references to prior audit activity related to the same taxpayer.

Taxpayers

This source contains information about taxpayers whose returns were selected for examination or collection activities. Taxpayer records include basic identifying information, including name, address, social security number, and employer identification numbers. Other information includes income earned, deductions claimed, and payments made.

Public Records

Information contained in public record databases provides additional leads to investigate. Examples include motor vehicle registrations, property ownership records, birth certificates, marriage licenses, divorce decrees, etc. Public records are often referred to as “public access” because anyone can obtain copies without paying a fee.

Analysis, Review, and Investigation

A primary analysis of the facts and circumstances surrounding the case is performed. This includes reviewing the investigative file, interviewing witnesses, obtaining additional documents, etc., and analyzing those facts and circumstances to determine whether probable cause exists to believe that a violation of federal law has occurred or that there are grounds for opening a prosecution.

Relevant information is evaluated. This may include evaluating the credibility of witnesses, determining the reliability of documentary evidence, and assessing the soundness of the case against the defendant.

This preliminary process is called a “preliminary investigation.” A special agent’s front-line supervisors review the initial information and determine whether to approve or deny the further development of the case.

If the supervisor approves, approval must be obtained from the head of the office, the special agent-in-charge, to begin a “subject criminal investigation.” At least two layers of CI management must have approved initiating a subject criminal investigation. For example, the head of the office could authorize the initiation of a subject investigation based upon the recommendation of the special agent in charge.

The special agent in charge must obtain approval from their immediate supervisor to open a subject criminal investigation. In addition, the special agent in chief must sign off on the decision to open a subject investigation.

Beginning The Criminal Investigation

A criminal investigation begins once the special agent determines sufficient information to support probable cause that a crime has been committed. In some cases, the special agent must present the case to a federal prosecutor to confirm whether there is evidence to file charges against someone. If the case proceeds forward, it is referred to the IRS Office of Professional Responsibility (OPR), where a preliminary determination is made regarding whether the matter warrants further review by OPR.

In addition, the special agent submits a report to the Assistant Attorney General for the Criminal Division, recommending how the matter should proceed. At this stage, the decision about whether to prosecute rests solely with the United States Attorney’s office.

The investigation phase typically lasts several months, during which the special agent gathers evidence, conducts witness interviews, and prepares reports summarizing the findings. During this period, the special agent consults with counsel, such as the chief counsel for the Criminal Tax Division and the assistant US attorney assigned to the case.

Once the investigation concludes, the special agent presents to the grand jury, presenting the evidence gathered during the investigation. After the grand jury determines an indictment, the case moves into the pre-trial phase.

Prosecuting Tax Crimes

The IRS Criminal Investigation Division (CID), which investigates tax crimes such as filing false returns, money laundering, identity theft, and bribery, is one of several divisions within the DOJ. The division typically refers cases to federal prosecutors for possible prosecution when investigating criminal activity. The special agents assigned to investigate the case prepare a special agent report. This report includes information about the evidence collected during the investigation, witness interviews, and analysis of financial records.

If the DOJ chooses to prosecute the case, the special agent becomes part of the prosecution team. Prosecutors are in charge of preparing the case for trial. They decide what witnesses to call, how much evidence to present, and whether to offer plea deals. In addition to the prosecutor, the defense attorney represents the defendant in court. The judge presides over the proceedings and makes rulings regarding the admissibility of evidence.

Conviction Of Tax Crimes

The IRS Criminal Investigation Division recommends charges against individuals suspected of committing tax crimes. These recommendations are based on evidence obtained during an investigation. In the fiscal year 2018, approximately 3,000 criminal investigations resulted in a recommendation for prosecution. This number represents about 0.3 percent of the cases the IRS Criminal Investigations Division opened.

A conviction is a finding of guilt beyond a reasonable doubt by a jury or judge following trial. A guilty plea is a formal admission of guilt where there is no contesting of the facts.

Need Help?

Suppose you have been contacted by an IRS Criminal Investigator or know of an ongoing investigation in which you are a witness or target. In that case, contacting a tax or criminal tax attorney is highly recommended. Call The McGuire Law Firm at 720-833-7705.

You may have heard of a program or tax 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 will likely use financial instruments such as a trust or pass-through entities such as a limited liability company or limited partnership. When these programs and schemes are misused to facilitate tax evasion, IRS may criminally investigate the scheme and prosecute the promoters and investors. You should discuss any potential tax scheme or program with a tax attorney. You should remember that if something sounds too good to be true, it could lead to an investigation by the Internal Revenue Service and potential criminal tax charges. A Denver Tax Attorney drafted the article below to provide more information regarding abusive tax schemes. However, this article is for informational purposes only; please discuss your specific issues with a tax attorney.

Basic Trust Law

A trust is created when someone transfers property to another party with the understanding that the transferee will hold the property as trustee for the benefit of a third party. In return, the transferee receives legal authority over the property. This arrangement is called a trust because the transferee becomes a “trustee,” or caretaker, for the property.

The term “trust” is often used interchangeably with “fiduciary.” However, there are essential differences between a trust and a fiduciary relationship. For example, a fiduciary must act solely in their client’s interests, while a trust does not require such loyalty. Instead, a trust allows a person to delegate property management to another person.

Abusive Tax Avoidance Transaction (ATAT)

An abusive tax avoidance transaction (ATAT) occurs when taxpayers use legal and illegal methods to reduce or avoid paying taxes. ATATs are often referred to as “tax planning schemes.” In addition to being unlawful, ATATs are also unethical because they deprive the government of revenue it otherwise could collect.

The Internal Revenue Service defines a listed transaction as one where the taxpayer uses a method of avoiding or reducing tax liability that involves either the evasion or concealment of taxable items or the creation of false or fraudulent deductions. Examples include:

• Using foreign trusts or corporations;

• Offering gifts to family members that qualify as charitable contributions;

• Hiding assets in offshore accounts;

• Filing false information on returns;

• Making false statements about ownership interests in a partnership;

Tax Schemes

Over time 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. 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 in the tax scheme. 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.

When initially looking at these issues, the biggest question 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, the violations of the federal tax law and related statutes would use domestic or foreign trusts and 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 for 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, or individuals. The income goes unreported to the federal government without reporting on applicable tax returns.

Common Tax Scheme Variations

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 exact 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 the US business takes a deduction, but the income of the foreign business is not claimed.  The business is commonly owned, and US citizens are not claiming the income of the foreign business.  Again, we have unreported income into a foreign account and likely interest or dividends in a foreign account that would not be reported.  The above examples could go many more layers but provide good examples of how an illegal tax shelter or abusive tax scheme could be established.

Abusive Tax Shelter

An abusive tax shelter is a transaction structured to avoid taxes without violating the law. These transactions include offshore trusts, foreign corporations, partnerships, limited liability companies, etc. They often involve complex structures such as shell entities, nominee owners, or multiple layers of ownership.

The IRS defines tax shelters as “transactions designed to reduce income subject to taxation or increase deductions or credits against income subject to taxation.” This includes real estate investment trusts, like REITs, and certain types of charitable contributions. However, it does NOT include ordinary businesses.

A tax shelter differs from an ATAT because the latter involves illegal activity or fraud. For example, an individual could claim a deduction for personal expenses paid out of his trust account, even though he did not pay those expenses. In addition, the taxpayer is not required to report the interest earned on the money deposited into the trust. All of these actions constitute fraud.

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 Denver tax attorney representing individuals and businesses before the Internal Revenue Service and can be contacted directly through the McGuire Law Firm.