How Things Progress: Tips to Investigation to Arrest and Prosecution in an IRS Criminal Investigation

Violation of federal tax law is investigated by the Criminal Investigation Division of the Internal Revenue Service (“IRS CI”) and both business entities as well as individuals here in Texas may come involved with the Division’s Special Agents in several ways.  Sometimes, paths cross as the IRS CI is gathering facts and data and the involvement consists of providing testimony or documents as a witness.  Then again, there are those that come into the IRS CI sights as potential suspects, targets, or persons of interests in ongoing criminal violations.

Either way, from a criminal defense perspective, it is very important that these people, proprietors, partnerships, or corporations understand the IRS CI process.  It’s never too soon to gather the support and advocacy of an experienced federal criminal defense attorney in these situations.

For more, read our earlier discussions in: IRS Summons Form 2039: Federal Criminal Defense in IRS Criminal Investigations; and Why You May Need a Federal Criminal Defense Lawyer in Texas.

The Coordinated Focus of the IRS Criminal Investigation Division

Obviously, the IRS CI is dedicated to the investigation and prosecution of tax-related crimes as efforts undertaken for a greater purpose.  Their raison d’être is defined as thwarting attempts to undermine the financial stability of the nation itself.

As IRS CI Chief Jim Lee explains:

“Financial crime continues to evolve at a rate that challenges law enforcement daily. We will never investigate our way out of any one particular type of crime, so where we spend our time and resources must be methodical in an effort to protect the integrity of the financial system. Our relevance within the enterprise is significant, and the deterrent effect provided by showing the consequences for being willfully noncompliant is real and impactful.”

Read, 2023 Annual Report of the Internal Revenue Service Criminal Investigation Division, U.S. Department of the Treasury Publication 3583 (Rev. 1-2024) Catalog No. 29201R (“Annual Report”) page 3.

The IRS CI is the only federal agency empowered to investigate federal tax crimes.  Accordingly, most of its’ activities relate to investigation of tax-related crimes.  However, the IRS CI does not work alone.

1. Public-Private Partnerships (PPPs)

There are established “partnerships with the private sector” regarding crypto-currency, for instance.  Report, page 3.  These are called “public-private partnerships” (“PPP”) and include various financial service providers as well as tech companies.  It is a growing sector of the IRS CI Division.  Read, “IRS: CI – The Value of Effective Federal Law Enforcement,” written by Elliot Berman and published by AML Rightsource on May 21, 2024; and “Fincrime executive Lauren Kohr joins IRS-Criminal Investigations to build out PPPs,” published by AML Intelligence on October 25, 2023.

2. International Efforts

Their Special Agents also work with international organizations such as the Joint Chiefs of Global Tax Enforcement (J5) which coordinates efforts with tax crime investigators in the United States; Canada; the Netherlands; and the United Kingdom.

3. Joint Task Forces

IRS CI Special Agents are also active members in powerful Texas joint task forces such as the OCDETF; HIDTA; FCTF; and JTTF.  Report, pages 3, 17, 55, and 57.  Their efforts work with these federal agencies who are seeking indictments involving serious federal felonies involving money laundering; racketeering (RICO violations); drug trafficking; and organized crime operations.

The IRS CI Process

Their efforts are not a scattershot approach, even if the Special Agents are working with such a variety of organizations and entities.  The IRS CI has announced its specific focus areas.  For details, read our earlier discussion in Tax Crimes:  Known Focus Areas for IRS Taxpayer Criminal Investigations.

From a federal criminal defense perspective, both individuals and businesses need to know that the procedure followed by the IRS CI is standardized and can be considered as a process.  Understanding where you are entering into that process should you be contacted by a Special Agent, or if you are suspicious that someone from the IRS CI is looking into something in your life sphere, is vital.

It is never too early to gain the support and guidance of a criminal defense attorney to help you in these situations.  Things can be fluid here:  someone can float from being a tangential witness or provider of documents to someone who is a primary suspect (and vice versa) in a federal criminal prosecution.

For details regarding the following, please refer to the (1) United States Department of Justice Criminal Tax Manual; (2) the Justice Manual of the U.S. Department of Justice; as well as (3) the IRS Fraud Handbook (Criminal Investigation)(Criminal Referrals).

1. Detection and Referral

How does a case investigation begin with the IRS CI?  This is the step of “detection,” where the IRS CI learns of possible criminal activity in violation of tax laws from a variety of sources.  Sometimes there is a tip from an informant.  Maybe there is a red flag in a civil tax audit.  Perhaps there is a discovered failure to file a tax return.  If there is a potential criminal violation of a federal tax law, then the IRS CI becomes involved in what is termed a “referral.”

A well-known example of detection and referral here involves the famous conviction of Reality TV personalities Todd and Julie Chrisley, who “…failed to file tax returns or pay any taxes for the 2013, 2014, 2015, or 2016 tax years” as well as being found by a jury to have committed both tax fraud / tax evasion as well as bank fraud involving over $36 Million in personal bank loans.  Read, “Television personalities sentenced to years in federal prison for fraud and tax evasion,” published by the IRS on November 21, 2022.

2. Special Agent Review

Within the division itself, each new referral will be assigned to a Special Agent (“SA”) to check things out.  This is the “assignment.”  The SA’s job will be to undertake a review of the matter and decide if things look like a crime may have been (or is being) committed.  If so, the SA will forward the matter for a full IRS CI investigation.

An example of an SA’s review turning into a full investigation followed by a conviction involved several Special Agents using their “financial investigative expertise,” to uncover “…a years-long scam by Francis Burns, who filed five false tax returns asking for refunds totaling more than $80 million. He claimed to be filing returns on behalf of an estate or a trust that did not exist. The returns contained fake Forms 1099s that falsely claimed significant sums of income were withheld for federal taxes by third parties, such as banks. In reality, Burns was unemployed, and there was no estate, no trust, and no income. While he did not receive the entire attempted refund amount, he spent the refunds he did receive on expenses including a lavish luxury home and a vehicle.”  Report, page 14.

Also read: IRS Criminal Investigators in Texas: Special Agents Investigating Federal Financial Felony Crimes.

3. IRS CI Investigation

At the referral juncture, things heat up.  There will be several employees of the IRS CI involved now.  And they will be able to use all sorts of things in the government’s bag of tricks to track down information that may turn into admissible and authenticated evidence meeting the requirements of the Federal Rules of Evidence.

This includes subpoena power to get documents and digital information.  Search and seizures may take place at this juncture.  See, e.g., IRS Fraud Handbook, Chapter 9.3.1; Chapter 9.4.9.

It also involves going out and talking to people to get formal witness statements.  And there may be undercover operations, including surveillance and non-consensual monitoring.  See, e.g., IRS Fraud Handbook, Chapter 9.4.2.

From a criminal defense standpoint, it is critical for anyone involved in this investigative process to have an experienced federal defense attorney at their side.  Constitutional protections will be involved in all these endeavors, and most private citizens as well as entity representatives are not usually well-versed in the complexities of proper due process and other longstanding privacy rights and privileges.

For more, read: Do Police Need Search Warrants to Access Digital Information?  The Importance of Carpenter v. United States; Cryptocurrency and Money Laundering: Digital Money Felony Arrests; Electronic Surveillance Under Federal Law: Criminal Defense Considerations in 2021; Illegal Search Warrants: Challenging the Underlying Affidavit; and When Police Enter Your Home (Or the FBI and ICE) Here in Texas.

4. Investigation Alliance with Other Agencies

As discussed above, the IRS CI may be involved in investigations into the activities of individuals or entities that have also garnered the curiosity of other governments, agencies, or task forces.  Even local law enforcement (think Dallas Police Department or the Texas Rangers) may be involved here.

Depending upon the case, the IRS CI may send an invitation to the investigation.  In other instances, the IRS CI is invited into the matter by other players already involved in investigative efforts specifically for the IRS CI’s tax crime jurisdiction and authority to investigate tax crimes.

For instance, the IRS CI was a participant in the investigation, prosecution, and conviction on tax evasion as well as money laundering charges involving a third-party money laundering scheme.  This was a coordinated effort between IRS CI; the FBI; and the United States Postal Inspection Service, as well as the National Cryptocurrency Enforcement Team, and the DOJ Tax Division.

After a ten-day trial, Ian Freeman was convicted for laundering over $10 Million in trading dollars for bitcoin in an online romance scam.  Read, “Ian Freeman convicted on all counts relating to bitcoin money laundering scheme,” published by IRS on December 22, 2022; and “Libertarian activist sentenced to 8 years in prison for role in cryptocurrency money laundering scheme,” written by Todd Bookman and published by New Hampshire Public Radio on October 2, 2023.

5.  Prosecution Decision: Tax Division, AUSA, and Grand Jury

After the documents and data have been compiled and organized, and the witnesses have been questioned and their statements obtained, the time comes for a decision to be made on which road to take.  If there is sufficient basis as determined by the IRS CI, then there will be a formal recommendation of prosecution sent over to those whose job is to prosecute federal tax crimes in court.

This prosecution may be with the trial attorneys of Tax Division of the Office of the Attorney General (“AG Tax Division”).  See, Justice Manual 6-1.110.  In other cases, it may be the AUSA within the appropriate Judicial District, as for example the Northern District of Texas, which covers Dallas, Fort Worth, Lubbock, Amarillo, Abilene, Wichita Falls, and San Angelo.

Here, the Justice Manual directs the AUSA to the Tax Division’s Criminal Tax Manual for things like “comprehensive discussions of statutes, methods of proof, various specialized areas, and policies and procedures pertaining to criminal tax prosecutions. The Manual also contains indictment and information forms and jury instructions.” See, Justice Manual 6-4.011.

All federal criminal tax prosecutorial enforcement decisions route through the AG Tax Division.  The Tax Division may authorize a grand jury to investigate the matter, and it has the power to identify a person or an entity as a “target.”  It is after the Tax Division acts that the AUSA may become involved.

Target is a special label given by the Justice Department:

A “target” is a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant. An officer or employee of an organization which is a target is not automatically considered a target even if such officer’s or employee’s conduct contributed to the commission of the crime by the target organization. The same lack of automatic target status holds true for organizations which employ, or employed, an officer or employee who is a target.

For more information on when a person or a business becomes a “target,” read: Federal Investigations:  Target Letters, Proffers, And Plea Deals.

The Tax Division may assist the AUSA in prosecuting the criminal matter from formal criminal charges to plea negotiations or trial, conviction, and sentencing.  This is general rule; there is a question of resources here.  These can be complex representations; for instance, the AUSA may look to the Tax Division co-counsel to help with things like gathering admissible evidence from a foreign source.  See, Justice Manual 6-1.110.

Criminal Defense in IRS Criminal Investigation Matters

Once someone comes within the scope of any activity by the IRS CI, they need to realize they are involved in a serious and substantial governmental probe and respond accordingly.  These are intricate projects undertaken by agencies with a fierce determination.  It is never wise to dismiss or disregard even the most peripheral contact with the IRS Criminal Investigation Division.

There is no law prohibiting your right to have an advocate with you during this time.  And having the advice and counsel of an experienced federal criminal defense attorney in any dealings with the IRS CI can be invaluable to individuals and their loved ones, as well as business entities and their principals, partners, shareholders, or owners.

For more, read:

• Encounters with Law Enforcement: A Criminal Defense Perspective
• Racketeering in Texas: Criminal Defense Against RICO Charges
• When Businesses are Charged with Crimes: Organizational Offenders
• How To Get Out Of Jail On A Federal Charge: Federal Arrest, Bail, And Pretrial Detention
• The Early Part Of A Texas Criminal Case In State Or Federal Court.

It is vital to recognize that federal criminal charges are usually felony arrests.  Upon conviction and sentencing, there can be substantial years imprisonment as well as orders of restitution.  Any form of contact with a federal investigator must be viewed as important (no matter how trivial it may seem).

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For more information, check out our web resources, read Michael Lowe’s Case Results, and read his in-depth article,” Pre-Arrest Criminal Investigations” and “How Arrests Happen: From Investigation to Arraignment, Being Charged for a Federal Crime.”