IRS Criminal Investigation Process

The most frightening thing the IRS can do to you is open up a criminal investigation. The Internal Revenue Service Criminal Investigation Division (CID) conducts criminal investigations of individuals and firms under suspicion of committing tax fraud or other serious financial crimes. The CID looks for violations of the Internal Revenue Code, the Bank Secrecy Act, or for significant discrepancies in tax returns that constitute tax fraud. Examples such as deliberately under reporting income or intentionally failing to file a tax return can spark an IRS investigation.

Although only a handful of the millions of taxpayers undergo investigation, those who do are usually convicted and face devastating consequences. According to the IRS website, 3,853 criminal investigations were initiated in 2015 with 2,879 convictions and 80.8% of those investigated sent to prison. Alongside incarceration, a criminal investigation can result in huge fines, the loss of licenses, and the closure of businesses.

It’s important to understand that an investigation by the CID is very different and much more dangerous than an audit. Whereas the IRS during an audit seeks to find errors in a return in order to collect funds for the agency, the CID seeks not to collect money but only to prosecute you.

Warning Signs

More often than not, you will not be notified immediately when the investigation begins. If you are being audited, warning signs that the audit has turned into a criminal investigation include:

  • The IRS auditor who has been conducting your audit suddenly stops contacting you and will not return your calls for days or weeks at a time. This is not luck and no, they did not decide to just let you off easy. Your case may have been referred to a Special Agent in the CID. The auditor reviewing your return is no longer is in control of your case and ceases contact with you in order to prevent any obstruction to prosecution.
  • Your bank informs you that the CID using a summons or the local U.S Attorney’s Office using a grand jury subpoena are collecting copies of your bank records. Hiring representation will allow you to follow the IRS investigation and acquire the same records the IRS collects.
  • Your accountant is contacted by the CID or is subpoenaed to appear before a grand jury and hand over your tax records. Unfortunately, you are not given the same confidentiality guarantees with your accountant that you are with your lawyer. Not only does the accountant have to bring forward your records but they may also be called to testify, using any conversations you’ve had with them against you. While there is such a thing as accountant-client privilege, it does not apply in criminal investigations.
  • You are in the middle of an audit and the IRS informs you that a different year’s return has also been selected for examination.

How it’s Initiated

Criminal investigations usually begin when the auditor finds suspicious or significant errors in your tax return and refer your case to the CID. Investigations can also be based off of information given by other law enforcement agencies such as the FBI or the United States Attorney’s office. It is important to note that if the auditor finds indications of fraud, they are required to suspend your audit without telling you. It is illegal for the IRS to conduct a criminal investigation while you think it is an audit, but they will not tell you that your case has been given to the Criminal Investigation Division.

When your case is referred to the CID, it is given to a Special Agent. Like other agencies, IRS Special Agents are highly trained and armed  federal law enforcement officers conducting the investigation. The investigation begins with what is called the “primary investigation” which is a preliminary evaluation of your financial records, tax return, etc. The special agent analyzes your information to determine if fraud or other financial crimes are present. The agent has to acquire approvals before he can contact your bank/employer and needs special authorization before they can ask the grand jury to use its subpoena power to collect certain documentation. Once the special agent concludes his preliminary examination, they hand it to their front line supervisor who will then determine if there is significant evidence to approve investigation. Upon approval, the special agent is given permission to conduct a “subject criminal investigation.”

The special agent may appear at your home unannounced. If you didn’t know you were under criminal investigation by now, this is your wake up call. The agent is required to identify themselves and give a warning. The purpose of this visit is to catch you off guard without representation in order to interrogate you. Without counsel, it is very likely you will incriminate yourself in attempt to explain your mistake. Absolutely do not speak with the Special Agent without representation. You are not required to and it is in your best interest that you wait until you have professional help.

Once the criminal investigation has officially begun, the special agent will begin collecting evidence against you through a variety of means such as conducting surveillance, acquiring search warrants, collecting bank records and other financial documentation, and interviewing third parties such as employers, coworkers, and landlords.

The Investigation Process

To summarize, the IRS criminal investigation proceeds as follows:

  1. The IRS agent auditing your return finds evidence of fraud and refers your case to the Criminal Investigation Division.
  2. The special agent in the CID reviews your case and begins the primary investigation, reviewing your case for potential fraud.
  3. The special agent obtains authorization to collect information, issue a summons for records, ask the grand jury to subpoena documents, and to interview third parties.
  4. Once the special agent has collected sufficient evidence to bring the criminal case to court, they will document their findings in a Special Agent Report (SAR). This report features the agent’s conclusions of the criminal investigation and possible federal charges you can face. The agent then refers this report to the Department of Justice in order to prosecute and indict you. The referral, prosecution, and indictment must first be approved by a higher-up in the IRS.
  5. Once the IRS collectively approves the special agent’s referral, the IRS must seek approval from the local United States Attorney and from the Tax Division of the Department of Justice. You have the right to meet with anyone involved in the approval process to potentially stop the prosecution before it even begins.
  6. Once the IRS, United States Attorney, and the Tax Division of the Department of Justice all approve the referral, they must finally seek authorization from the grand jury to indict you.
  7. When the grand jury decides to indict you, your case has officially been brought to court. You must appear in court for a bail hearing and an arraignment where you will either plea guilty or not guilty. It is absolutely crucial that you have legal counsel by this time.
  8. It is your right to meet with your district federal judge and convince them to have the indictment dismissed before it goes to court. If they do not dismiss it, your case will appear before a jury.
  9. The jury will then determine whether you are guilty and not guilty. You have the right to appeal, but if your appeal does not succeed, jail time and other harsh penalties will follow.

Conviction

The goal of the CID is not to collect money owed to the federal government but to put tax evaders behind bars. Penalties can be severe, generally resulting in fines up to $250,000 for individuals, $500,000 for businesses, and up to 5 years in prison. If you find that you are being criminally investigated by the IRS, contact an attorney immediately. Alone, you won’t stand a chance against the IRS. With professional help from the experienced attorneys at the Law Offices of Jef Henninger, we’ll keep you out of jail and assure you the best possible outcome from a criminal investigation.

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