Skip to main content

The Criminal Investigation Process in Tax Crimes Cases

Criminal tax cases are primarily handled by special agents of the Criminal Investigation (CI) function of the Internal Revenue Service (IRS), the fraud referral and related divisions of the civil IRS divisions, the Tax Division of the Department of Justice, and the U.S. Attorney offices. Criminal tax cases are then referred for prosecution by the IRS to the Department of Justice Criminal Enforcement Section (CES).

The Initial Criminal Tax Process

The primary officers working in the IRS Criminal Investigation division are the special agents, which are line investigators who investigate and prosecute tax, financial, and other Federal crimes within the jurisdiction of the IRS. Special agents act as criminal investigators similar to other federal law enforcement agents and they have different powers and responsibilities than civil function IRS employees. The CI has the power to recommend criminal prosecution in a number of different cases, including tax cases and Title 18, including bankruptcy, white-collar fraud, identity theft, money laundering, obstruction, and perjury. Before the CI makes such a recommendation, it will fully investigate the legal sufficiency and policy reviews on the matter. When the recommendation is made, it is reviewed by a regional CES in the DOJ Criminal Tax Division which may authorized or declined at that point. If the DOJ authorizes a tax prosecution within its jurisdiction, that matter is handled by the U.S. Attorney and the criminal tax trial is typically handled by Tax Division trial attorneys or the local U.S. Attorney office.

How Does the Criminal Investigation Division Decide Which Cases to Pursue?

The decision to pursue a criminal investigation can derive from a number of different sources. A CI investigation for tax crimes may initially be referred by an operating division of the IRS. The decision to investigate may also come from sources outside the IRS, such as the media, a civilian informant, or a federal, state, or local nontax law enforcement agency. In many cases, the CI will formulate a decision to investigate based on information supplied by the Bank Secrecy Act (BSA). Investigations are conducted by Criminal Investigation Field Offices, which investigate living taxpayers who are conducting business or engaging in criminal activities within its jurisdiction. Special agents also conduct investigations and perform other activities for the Field Offices.

Another component of the Criminal Investigation division is the Scheme Development Center (SDC), an internal division of each local IRS Campus. The SDC uses human and artificial intelligence to identify tax and financial fraud schemes in high-impact areas.

How are Cases Developed Internally at the IRS?

Cases get referred up to the Criminal Investigation Division by IRS field officers. The IRS field officers working in the compliance functions such as examination and collection are trained to recognize potential civil tax fraud issues, as well as when to refer cases to the CI for criminal prosecution. When referring cases to the CI for potential criminal prosecution, these field officers look for evidence that the taxpayer engaged in deliberate tax evasion and has tax due and owing. They also look for evidence of false returns or other documents.

Compliance field officers are also specifically trained regarding the difference between legal tax avoidance and illegal tax evasion. Through the Internal Revenue Manual, IRS personnel are instructed to distinguish between the “badges” or indicators of fraud and other criminal activity and “affirmative acts” of fraud. “Badges” of fraud is defined as anything that may serve as a 
“sign or symptom, or signify that actions may have been done” for the purposes of deceit or concealment. “Affirmative acts” of fraud is defined as establish that a “particular action was deliberately done” with a tainted purpose such as deceit, subterfuge, concealment, or to knowingly misstate or mischaracterize events. The IRM also explains that a case for tax evasion against a taxpayer cannot be won without evidence of affirmative acts or firm indications of fraud.

As already noted, civil IRS compliance officers screen for potential criminal referral cases. When a field officer discovers indicators of fraud, he or she will document them and discuss the situation with his or her manager. If the manager agrees that indicators of fraud are present, a process will be started to then discover if actual “affirmative acts” of fraud are also present. At this point, the FTA and the compliance manager research the affirmative acts and often seek documents and evidence from the taxpayer to establish whether fraud exists. If they conclude that affirmative acts of fraud exist, a recommendation will be made to asses a civil fraud penalty or pursue criminal prosecution. When criminal prosecution is appropriate, the FTA and the manager make that recommendation to the Criminal Investigation Division. Once the referral to CI is made, a Primary Investigation is conducted, in which the field officer, manager, FTA, and CI officers discuss the merits of the fraud case against the taxpayer and determine whether it will be accepted or disposed of by the CI.

What Happens if the CID Accepts a Criminal Referral?

If the CID accepts a criminal referral, the case will be elevated to the Subject Criminal Investigation (SCI). At this phase, tax crimes IRS personnel will meet with the field officer who made the recommendation and thoroughly discuss all facets of the taxpayer’s situation, including all documented interactions between the IRS and the taxpayer.

If the CID declines a criminal referral, the case is returned back to the FTA manager and the field officer who recommended criminal prosecution. At that point, the field officer who was involved in the case will resume civil compliance proceedings. The matter can be referred back up to CI subsequently if additional badges of fraud are discovered throughout the ongoing investigation.

How a Tax Attorney Can Help with Criminal Investigations

If you are under investigation by the IRS for a potential criminal prosecution, then you must consult with a The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with criminal tax issues since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Share this post

Comments (0)

The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.