What is the IRS Criminal Investigation Process and Procedures?

Dealing with the IRS can be intimidating enough during a routine tax audit. But when your case escalates into a full-blown criminal investigation, the stakes get much higher. While only a small percentage of IRS audits lead to criminal charges, if you find yourself under criminal investigation it’s critical to understand the process and know your rights.

How Criminal Tax Investigations Get Started

There are a few common triggers that prompt the IRS to open a criminal investigation:

• Your audit uncovers clear evidence of intentional tax evasion, like unreported income or falsified deductions.
• You fail to file returns or pay taxes for multiple years in a row.
• The IRS receives a tip from an informant alleging criminal tax fraud.
• Your bank files a report about suspicious financial transactions that may indicate tax evasion.

In most cases, a civil IRS audit occurs first to determine if criminal activity may have taken place. But in some situations, the IRS will skip the audit and go directly to a criminal investigation if they feel the evidence of tax evasion is clear.

The Criminal Investigation Process Step-By-Step

If the IRS believes they have a valid basis for a criminal case, they will assign special agents from the IRS Criminal Investigation division to delve deeper. Here’s an overview of the typical process:

1. Case Initiation – IRS managers must review the evidence and approve opening a criminal case. Agents are assigned and the investigation begins.
2. Information Gathering – Agents use various techniques to uncover evidence, including interviews, surveillance, search warrants, summons of financial records, etc.
3. Voluntary Disclosure – Until an investigation becomes public, taxpayers can avoid criminal prosecution by self-reporting unpaid taxes through the IRS Voluntary Disclosure Program.
4. Criminal Referral – If the investigation uncovers willful tax evasion, the IRS formally refers the case to the Department of Justice for prosecution.
5. Prosecution – The DOJ reviews the case and may choose to prosecute based on the strength of the evidence.
6. Sentencing – If found guilty, the taxpayer will face criminal penalties including fines and possibly imprisonment.

The Role of the IRS Special Agent

The IRS special agents leading criminal investigations have law enforcement authority. Their role includes:

• Gathering evidence through interviews, surveillance, search warrants, etc.
• Advising taxpayers of their constitutional rights if interviewed.
• Recommending whether prosecution is warranted based on the evidence.
• Working with prosecutors if charges are filed.

It’s important to note that the special agents do not actually determine guilt or innocence – they simply uncover evidence and recommend whether prosecution is justified.

Types of Criminal Tax Violations

Here are some of the most common criminal violations pursued by IRS investigators:

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• Tax Evasion – Intentionally underpaying taxes through unreported income, overstated deductions, false expenses, etc.
• Failure to File – Willfully neglecting to file tax returns despite having clear duty to file.
• False Returns – Filing returns containing falsehoods or fabricated information to lower tax liability.
• Employment Tax Evasion – Intentional failure to pay payroll taxes withheld from employees.
• Identity Theft – Using a stolen Social Security number or IRS PTIN to file fraudulent returns.

Prosecution is only sought for intentional or willful violations, not honest mistakes.

Penalties for Criminal Tax Convictions

If convicted on criminal tax charges, penalties may include:

• Fines up to $100,000 for individuals ($500,000 for corporations)
• Imprisonment for up to 5 years
• Paying the costs of prosecution
• Repaying taxes owed with penalties and interest
• Forfeiting property obtained through tax evasion

The specific penalties depend on the nature of the violation and amount of taxes evaded.

Stages When a Lawyer Can Help

The key stages when an experienced criminal tax defense attorney can make a big difference include:

1. Audit Stage – Negotiating with IRS auditors and preventing escalation to a criminal case.
2. Investigation Stage – Asserting your rights during questioning and advocating for case dismissal.
3. Prosecution Stage – Mounting a vigorous defense against the charges.
4. Sentencing Stage – Advocating for reduced penalties if charges stick.

Involving a lawyer immediately if you suspect criminal exposure is highly recommended.

Avoiding Criminal Tax Charges

Here are some tips to steer clear of criminal tax violations in the first place:

• Always report all income, no matter the source.
• Keep thorough records to validate deductions and expenses.
• Be conservative when taking ambiguous deductions.
• Always file on time, even if you owe money.
• Stay compliant with payroll and employment taxes.
• Address unpaid taxes quickly through payment plans or offers in compromise.

While ending up in IRS crosshairs for criminal tax fraud is rare, understanding their investigation process can help you exercise your rights and seek the best outcome if you ever find yourself under the microscope.