Tax Crimes: Known Focus Areas for IRS Taxpayer Criminal Investigations

Posted on July 10, 2024 by Michael Lowe.

An increase in federal criminal prosecutions involving alleged federal tax crimes and corresponding violations of federal criminal statutes is expected by many here in Texas, including experienced federal criminal defense lawyers. For details, read our discussion of the May 2024 Internal Revenue Service (IRS) Strategic Operating Plan in IRS Summons Form 2039: Federal Criminal Defense In IRS Criminal Investigations.

Especially for wealthy individuals and various business entities such as various forms of partnership and corporate enterprises, it is vital to be aware of these upcoming IRS investigations. The agency is already hard at work here.

It is also important for everyone to understand several things regarding audits and criminal investigations undertaken by the IRS. This includes the following:

1. IRS Tax Audits are Different From IRS Criminal Investigations

Technically, an audit is an investigation; however, civil tax investigations are known as “audits” while criminal investigations are entirely different.

When the IRS reviews a tax return and finds a problem of some kind, then an investigation begins. The result will be a determination into whether or not the taxpayer will be faced with an additional tax bill accompanied by penalties and interest. These types of investigations can also happen if the taxpayer fails to meet a deadline, either in paying taxes or in filing a return.

These are all civil matters. They are focused upon making sure that each taxpayer pays the proper amount of federal tax. The burden of proof is placed upon the federal government here; however, in IRS civil investigations, all that must be done is to provide proof of taxpayer failures by a preponderance of the evidence.

Audits can be stressful and scary and overwhelming. However, they pale in comparison to the criminal investigations.

IRS criminal investigations mean that different things are at stake for the taxpayer. They involve agents employed as IRS Criminal Investigators, who are tasked with ferreting out evidence to support allegations of criminal activity.

These investigators look for violations of criminal laws involving things like tax fraud or tax evasion, where the accused upon conviction can face substantial fines as well as felony imprisonment. This comes with the higher criminal evidentiary standard, that of proof “beyond a reasonable doubt.”

Their work can result in formal charges being filed by federal prosecutors where the taxpayer faces arrest, not just an unfavorable audit.

For more on IRS Criminal Investigators in Texas: Special Agents Investigating Federal Financial Felony Crimes.

Of course, an audit can invite a criminal investigation. If auditors find there has been an intentional failure to report income, for instance, then the file may be labelled as tax evasion and sent over to the IRS Criminal Investigation Division.

IRS Criminal Investigators can also begin looking into businesses, partnerships, and wealthy individuals who are suspected of doing other illegal activities like money laundering, drug trafficking, or various kinds of fraud, such as health care fraud. Here, other federal agencies may invite IRS scrutiny into a taxpayer’s actions as a part of their own investigations.

For instance, the Dallas IRS CID office is known for working in tandem with agents from other agencies in coordinated task forces such as the OCDETF (Organized Crime Drug Enforcement Task Force); HIDTA (High Intensity Drug Trafficking Areas); the FCTF (Financial Crimes Task Force); and the JTTF (Joint Terrorism Task Force).

2. The Focus Areas for IRS Criminal Investigators

From the perspective of the IRS CID, their work is organized into specific categories (“programs”) and targets (“emphasis areas”). As delineated on the IRS website, there are sixteen (16) focus areas for their efforts.

The IRS Criminal Investigators are targeting the following crimes (quoting from the IRS website):

Abusive Return Preparer Enforcement

Return preparer fraud generally involves the orchestrated preparation and filing of false income tax returns (in either paper or electronic form) by unscrupulous preparers who may claim, for example: inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Abusive Tax Schemes

Abusive tax scheme originally took the structure of abusive domestic and foreign trust arrangements. However, these schemes have evolved into sophisticated arrangements that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

Bankruptcy Fraud

One of Criminal Investigation’s goals in bankruptcy fraud investigations is to increase voluntary compliance with federal tax laws through the prosecution of those committing significant crimes in the bankruptcy arena. Since the IRS is often a major creditor in many bankruptcy proceedings, it is important that we protect the interests of the IRS.

Corporate Fraud

Corporate fraud frequently involves violations of the Internal Revenue Code (IRC) through falsification of corporate and individual tax returns and CI has exclusive investigatory jurisdiction over criminal violations of the IRC.

Employment Tax Enforcement

Employment tax evasion schemes can take a variety of forms. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns. Evading employment taxes can have serious consequences for employers and the employees.

Financial Institution Fraud

Criminal Investigation focuses on tax and money laundering violations involving fraud against banks, savings and loan associations, credit unions, check cashers, money remitters, and other financial institutions. Currency Transaction Reports and Suspicious Activity Reports continue to be effective investigative tools in the financial world.

Gaming

Illegal gaming operations, including bookmaking, numbers, Internet and some charitable gaming operations, continue to be areas of compliance concern. Criminal Investigation continues to play an enforcement role in the illegal gaming industry and to support regulatory and legislative initiatives aimed at eliminating an environment conducive to illegal gambling.

General Fraud Investigations

Criminal Investigation special agents investigate violations of the tax laws and related financial crimes. Taxpayers who chose to willfully and intentionally not comply with their legal responsibility to file required tax returns and/or pay taxes pose a serious threat to tax administration and the American economy.

Healthcare Fraud

Multi-agency healthcare fraud investigations and prosecutions show that perpetrators of these schemes financially benefited from their fraudulent activities in false billings, mental health, nursing home fraud, chiropractic fraud, durable medical equipment fraud, staged accidents, pharmaceutical diversion, and patient referral (kickbacks) schemes. In these investigations, Criminal Investigation follows the money trail and considers both tax and money laundering perspectives.

Identity Theft Schemes

IRS Criminal Investigation (CI) detects and investigates tax fraud and other financial fraud, including fraud related to identity theft.

International Investigations

International tax compliance is a top priority of the IRS. Complex international tax avoidance schemes and cross-border transactions have heightened the IRS’ concern about tax compliance. Individuals may attempt to use foreign accounts, trusts, and other entities to commit criminal violations of U.S. tax laws as well as narcotics, money laundering and Bank Secrecy Act (BSA) violations.

Money Laundering & Bank Secrecy Act (BSA)

Money laundering is a very complex crime involving intricate details, often involving numerous financial transactions and financial outlets throughout the world. Criminal Investigation has the financial investigators and expertise that is critical to “follow the money trail.”

Narcotics-Related Investigations

Criminal Investigation’s contribution to the war on narcotics is vital but sometimes difficult to recognize, because the work of IRS special agents usually doesn’t make the headlines. The long hours of tracking down and documenting financial leads allows an investigation to go right to the door of the leader of the narcotics organization, which contributes to the disrupting and dismantling the country’s major drug and money laundering organizations.

Non-filer Enforcement

There have always been individuals who, for a variety of reasons, argue taxes are voluntary or illegal. The courts have repeatedly rejected their arguments as frivolous and routinely impose financial penalties for raising such frivolous arguments. Take the time to learn the truth about frivolous tax arguments.

Public Corruption Crimes

Public corruption investigations encompass a wide variety of criminal offenses including bribery, extortion, embezzlement, illegal kickbacks, entitlement and subsidy fraud, bank fraud, tax fraud, and money laundering. Criminal Investigation concentrates its resources on the tax and money laundering aspects of these investigations in cooperation with other federal, state, and local law enforcement agencies. The expertise used in investigations has established our reputation as one of the leaders in the fight against corrupt public officials.

Questionable Refund Program (QRP)

QRP is a nationwide, multifunctional program designed to identify fraudulent returns, to stop the payment of fraudulent refunds and to refer identified fraudulent refund schemes to be investigated and prosecuted criminally.

Criminal Defense for Those Targeted in IRS Criminal Investigations

From the May 2024 Internal Revenue Service (IRS) Strategic Operating Plan, we know that the IRS auditors are focusing their efforts on three groups:

large corporations with assets over $250 million with an expected “nearly triple audit rates” to 22.6% in tax year 2026, up from 8.8% in tax year 2019;
large, complex partnerships with assets over $10 million, with an “increase audit rates by nearly ten-fold” on going from 0.1% in 2019 to 1% in tax year 2026; and
wealthy individual taxpayers with total positive income over $10 million, with an increase in audit rates by more than 50%, going from an 11% coverage rate in 2019 to 16.5% in tax year 2026.

Point: It is not difficult to envision that some of these audits will result in the auditors involving the IRS Criminal Investigation Division to find grounds for federal criminal prosecution of these targeted groups.

Moreover, we are also aware of very active criminal investigations by other federal agencies here in Texas whose primary concern are federal felonies other than tax crimes. If the other agency’s work jives with the announced IRS CID focus areas, then criminal defense work must be ready to deal with allegations of federal tax crimes alongside these federal felony allegations.

1. Money Laundering Example: DOJ and IRS Focus Area

One example are those detailed in the May 2024 National Strategy for Combating Terrorist and Other Illicit Financing Report published by the United States Department of the Treasury, which speaks to the crimes of money laundering, a stated IRS Focus Area, as follows:

Illicit finance threatens U.S. national security, prosperity, and the viability of democracy. Protecting these tenets of American life requires monitoring and evaluating the evolving threats and vulnerabilities to the U.S. financial system. The U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) regime continues to adapt to detect and prevent illicit proceeds from getting into the hands of those that would harm our citizens and our national security.

Point: Criminal defense lawyers are predicting that IRS Criminal Investigations will also dovetail with these agents looking for money laundering as part of “illicit financing” activities.

For more on money laundering, read:

2. Drug Trafficking Example: OCDETF and IRS Focus Area

The OCDETF is very active here in the Lone Star State. The local AUSAs, working with federal investigators as well as state and local law enforcement, are concentrating upon felony drug charges involving serious drug trafficking crimes, such as conspiracy to possess with intent to distribute a controlled substance in violation of federal law (21 U.S.C. §841) — where sentencing can essentially become a life sentence. These cases may well involve those alleged to be affiliated with illegal enterprises or known drug cartels.

For instance, the United State Attorney General’s Office for the Northern District of Texas recently announced “…[t]welve drug traffickers tied to the Jalisco New Generation Cartel have been sentenced to between four and a half and 40 years in federal prison….” Read, “Twelve CJNG Cartel Members Sentenced for Drug Trafficking,” published by the Department of Justice on April 23, 2024.

Both the Dallas and Houston field offices of the IRS Criminal Investigations Division are actively involved with OCDETF operations. A known IRS CID Focus Area is “Narcotics-Related Investigations.”

Point: From a criminal defense perspective, it is to be expected that drug-related federal felony cases must include readiness in defending not only against federal drug charges, but those involving tax crimes based upon alleged evidence produced by IRS Criminal Investigators.

For more on drug trafficking charges as well as prosecutions of cartel members in Texas, see:

Prosecution by the Office of the Attorney General and Criminal Defense of Tax Crimes

Experience in practicing criminal defense in the federal criminal justice system is important in these cases. Not every lawyer works in the federal courts, and not every lawyer licensed to practice before the federal bar is dedicated to criminal defense.

For details, read Why You May Need a Federal Criminal Defense Lawyer in Texas.

Some may have heard of federal tax courts. There is the United States Tax Court, created by Congress pursuant to Article 1 of the United States Constitution, to resolve disputes with determinations made by the IRS regarding tax calculations. It is located in Washington, D.C., and was formally known as the U.S. Board of Tax Appeals. It is not the forum for the prosecution of federal felony charges for tax crimes like tax fraud or tax evasion especially when tied to other alleged criminal statutory violations, such as money laundering, drug trafficking, or racketeering.

For Texas criminal defense lawyers, the serious tax crime allegations will probably involve an AUSA at the local Office for the United States Attorney General. The Justice Manual for the United States Department of Justice instructs federal prosecutors specifically regarding criminal tax case matters in its 6-4.000 (JM 6-4.200).

From the perspective of the Justice Department:

The Government helps to preserve the integrity of this Nation’s self-assessment tax system through vigorous and uniform criminal enforcement of the internal revenue laws. Criminal prosecutions punish tax law violators and deter other persons who would violate those laws. To achieve maximum deterrence, the Government must pursue broad, balanced, and uniform criminal tax enforcement. Uniformity in tax cases is necessary because tax enforcement potentially affects more individuals than any other area of criminal enforcement. Broad and balanced enforcement is essential to effectively deter persons of varying economic and vocational status, violators in different geographic areas, and different types of tax law violations.

Accordingly, there is a special group of federal attorneys employed as prosecutors in the Attorney General’s Tax Division Criminal Enforcement Section. After the IRS Criminal Investigation is complete, and the Special Agent’s Report results in a recommendation for prosecution, the case may be referred to either the Tax Division or the United States Attorney’s Office. JM 6-4.243. Sometimes, a federal grand jury is involved. JM 6-4.242.

These matters can involve crimes like tax fraud or tax evasion, as well as things like tax-related mail, wire, or bank fraud, RICO, or money laundering charges. See, JM 6-4.210; JM 9-110.101; and JM 9-105.300.

For those who suspect they have come into the sights of the IRS Criminal Investigators, or those that have received a formal notice of a tax investigation, it is imperative that they be proactive in taking steps to defend their interests.

These cases threaten not only the loss of property and the social stigma that comes with being involved in the federal criminal justice system, but the chance of a loss of freedom with a sentence of imprisonment. These matters can end up with significant years of incarceration pursuant to the United States Sentencing Guidelines.

The DOJ Tax Division is home to experienced prosecutors who are working with tax crimes, specifically. Other AUSAs involved in money laundering or drug trafficking matters, for instance, can be particularly zealous in their efforts here In Texas. Some have a particular passion in pursuing charges against suspected cartel members or those suspected of dealing notoriously dangerous drugs like fentanyl.

Having a federal criminal defense lawyer on board as soon as possible can be very advantageous. It may be possible, with early involvement, to negotiate against the filing of formal criminal charges in some cases, for instance.

For more, read:

_____________________________________

For more information, check out our web resources, read Michael Lowe’s Case Results, and read his in-depth articles, “Pre-Arrest Criminal Investigations” and “WHITE COLLAR CRIME: INDICTMENTS OF TEXAS PROFESSIONALS.”

Posted on July 10, 2024 by Michael Lowe , on Arrest and Indictment, Drug Crimes, Federal Government Watch, InDepth Articles, Mail Fraud, Money Laundering Charges, Tax Crimes, Trafficking Charges

View More Case Results

Comments are welcomed here and I will respond to you -- but please, no requests for personal legal advice here and nothing that's promoting your business or product. Comments are moderated and these will not be published.