IRS Criminal Investigation

If you engage in tax evasion or tax fraud, you could find yourself facing serious consequences. In addition to hefty fines, you could face time in jail. Criminal investigations are more common than you think, and naturally, they can be extremely intimidating for taxpayers.

The IRS Criminal Investigation unit is comprised of more than 3,500 employees, each with specialized training. Criminal investigations are generally only opened in serious cases of suspected fraud and tax evasion.

If you are facing an investigation, it’s important to understand the process and potential reasons for the IRS opening criminal investigations.

Reasons for IRS Criminal Investigations

Criminal investigations are generally reserved for the most serious of tax and fraud crimes. However, taxpayers can find themselves being the focus of investigations for a number of reasons.

The IRS may open a criminal investigation against a taxpayer for several reasons, including but not limited to:

Bankruptcy Fraud

An estimated 80% of bankruptcy fraud cases involve asset concealment. Only the assets listed by the debtor can be liquidated by creditors. Therefore, if debtors knowingly conceal assets to avoid liquidation or forfeit, this is fraud.

Other examples of bankruptcy fraud include:

  • Filing multiple times using fraudulent or real information in multiple jurisdictions.
  • Intentionally filing incomplete or false forms.
  • Bribing a court-appointed trustee

Bankruptcy fraud can have significant consequences that include several years in jail and fines of up to $250,000.

General Fraud

An IRS Special Agent may also investigate tax law violations and other financial crimes. General fraud cases may include taxpayers who willfully and knowingly avoid filing their tax returns or paying the taxes they owe.

Tax evasion is always a crime, and the IRS will come after you for not paying what is owed. It is only a matter of time before they catch up to you.

Other common examples of general fraud include:

  • Overstating deductions
  • Intentionally underreporting or not reporting income
  • Creating false entries in books
  • Hiding assets or income
  • Claiming personal expenses as business-related expenses
  • Maintaining two sets of books

Healthcare Fraud

Healthcare fraud cases may focus on both tax and money laundering claims. Activities that may fall under this category include:

  • False billings
  • Nursing home fraud
  • Durable medical equipment fraud
  • Patient referral schemes
  • Pharmaceutical diversion
  • Staged accidents
  • Chiropractor fraud

Corporate Fraud

Many corporate fraud cases are focused on violations of the IRC (Internal Revenue Code). Those under investigation may be suspected of falsifying corporate and individual tax returns.

Other examples of corporate fraud can include:

  • Putting fake employees on the payroll to divert money to personal accounts
  • Tax evasion
  • Using business expenses for personal expenses
  • Falsifying financial statements

Employment Tax Evasion

Employment tax evasion can have significant consequences for both employees and the employer. There are many types of evasion schemes that fall into this category, including:

  • Paying employees in cash (under the table)
  • Employee leasing
  • Pyramiding
  • Filing fraudulent payroll tax returns
  • Failure to file payroll tax returns
  • Misclassifying employees as independent contractors

Failure to pay employment taxes is a serious problem and one that the IRS does not take lightly.

Financial Institution Fraud

Criminal investigations may also focus on money laundering and tax violations, fraud against banks and other financial institutions.

Examples of financial institution fraud can include:

  • Commercial loan fraud
  • Check kiting
  • Check fraud
  • Mortgage fraud
  • Falsifying applications

The penalties for financial institution fraud are serious. Individuals can face up to $1 million in fines and 30 years in prison.

Money Laundering

Money laundering cases are complex and come with very serious consequences. Often, multiple financial institutions are involved, and transactions may be scattered across the world.

Special financial investigators are typically put on these cases.

Non-Filer Enforcement

Criminal investigations may also be opened against non-filers. These are individuals who believe that taxes are illegal or voluntary.

The IRS is cracking down on non-filer enforcement to get more taxpayers into compliance.

Public Corruption Crimes

Investigations into suspected public corruption crimes can include a wide variety of criminal offenses, including:

  • Extortion
  • Bribery
  • Embezzlement
  • Subsidy and entitlement fraud
  • Illegal kickbacks
  • Tax fraud
  • Bank fraud
  • Money laundering

The Investigation Process for IRS Fraud and Tax Crimes

An IRS criminal investigation may be opened if an IRS agent detects possible fraud, but information may also come from the public or ongoing investigations by law enforcement agencies. There are multiple steps in the investigation process, which include:

Preliminary Investigation and Approvals

First, special agents will analyze the information presented to determine whether there is evidence of tax fraud or another financial crime. During this primary investigation, the agent’s supervisor will also review the information and determine whether a further investigation should be approved.

So, before an investigation can proceed, it must be approved by two layers of criminal investigation management to determine that there is sufficient evidence of a violation.

Criminal Investigation

Once the investigation has been approved, the agent will gather facts and evidence to establish criminal activity. Evidence may be obtained from:

  • Third party-witnesses
  • Search warrants
  • Surveillance
  • Bank records
  • Financial data reviews

Throughout the investigation process, special agents work alongside IRS Chief Counsel Criminal Tax Attorneys.

Prosecution Recommendations

Once evidence has been gathered and reviewed, the special agent will determine whether there is enough evidence to support prosecution. If they believe there is enough evidence, the special agent will prepare a detailed report outlining the violations and the recommendation for prosecution.

The report is reviewed by a number of individuals, including:

  • The agent’s supervisor
  • A review team, known as Centralized Case Review
  • The assistant special agent in charge
  • The special agent in charge

If the case moves forward, it will be sent to either the US Attorney or the Department of Justice, Tax Division.

About 3,000 criminal prosecutions result from an IRS criminal investigation each year. These prosecutions act as deterrents and send a message that fraud will not be tolerated.

For those facing criminal investigations, it is important to work with an experienced tax attorney who understands what you’re up against and can help you navigate this complicated process. A conviction can have serious consequences, impacting your life both now and in the future.


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