I attended the 34th Annual National Institute on Criminal Tax Fraud in Las Vegas during first week of December, 2017. Don Fort, the IRS's Chief of IRS Criminal Investigation, presented as part of a roundtable. Fort recently became the Chief and he used the roundtable as an opportunity to explain the IRS's criminal division's approach under his leadership. Fort explained that we should expect to see a renewed focus on traditional tax crimes, and data driven initiations of investigations to ensure nationwide coverage across all income levels.
Renewed Focus on Tax Crimes
The IRS's Criminal Investigation division is the only agency with jurisdiction over Title 26 (Tax Code) violations. The division has approximately 3,100 employees worldwide to help it combat tax fraud and evasion. In 2017, the percentage of its investigations that resulted in prison time was 80.1%, with an average sentence of 42 months (another post will explain why this is likely to increase). The IRS's Criminal Investigation division is focused on the following areas:
- International Tax Fraud
- Abusive Tax Schemes
- Employment Tax
- Refund Crimes
- Cyber Crimes (including use of virtual currency, like Bitcoin)
- Frivolous Arguments Program – non-filers
- Political/Public Corruption
- Fraud Referral Program
- Money Laundering/Bank Secrecy Act (BSA)
- Organized Crime Drug Enforcement Tax Force
The number of identity theft investigations that the IRS has initiated over the years has continued to drop. The IRS initiated 1,063 investigations in 2014 and sentenced over 748 individuals that year. In 2017, however, it only initiated 374 investigations and sentenced 550 individuals. Although the IRS's criminal tax efforts have been reduced by a shrinking budget, the reduction in identity theft crimes will allow the IRS to refocus on traditional tax crimes.
Data Driven Criminal Investigation Initiations
The IRS's Criminal Investigation division intends to use data to identify and develop areas of non-compliance. Rather than haphazardly identifying investigations, they will ensure that criminal tax enforcement occurs throughout the country at all income levels, with the ultimate goal of ensuring nationwide coverage in all program areas.
The IRS intends to implement its data driven approach with international tax enforcement, employment tax, and SEC Microcap Fraud. This means that we should expect to see more of these types of cases as the Criminal Investigation division fills the gaps that it left when it focused its resources on combatting identity theft. If, based on data, the IRS determined that it has not initiated a sufficient number of employment tax, and fraud investigations in Phoenix and Scottsdale, we should expect it to seek out those cases to fill gaps.
The employment tax cases will include the more prevalent methods of employment tax evasion, including:
- employee leasing,
- paying employees in cash, and/or
- filing false payroll tax returns or failing to file payroll tax returns.
The fraud cases will include traditional overstating deductions, and underreporting income schemes. The IRS's Criminal Investigation division's fraud referral program is a common source of traditional tax crimes. This program is only successful if the IRS's civil examination divisions refer the fraud cases that they find during their civil audits. In the past, the Criminal Investigation division has not acted on these fraud referrals because they were more focused on identity theft and drug related crimes, but they intend to promote fraud awareness and facilitate fraud training to ensure that the civil examination divisions refer these cases since they now how the resources to address them.
Expect More Tax Crime Investigations in Phoenix
With the IRS increasing its focus on traditional tax crimes to ensure nationwide coverage, we should expect to see more of these investigations in Phoenix and its surrounding cities (Scottsdale, Tempe, Gilbert, Mesa, Glendale). This means that if you are undergoing an IRS audit, you will need to be more cognizant about your potential criminal exposure. Taxpayers must carefully consider criminal exposure during an IRS audit, and be sure that they do not communicate harmful information to their accountants. Accountants cannot adequately represent a taxpayer during an IRS audit with potential criminal exposure because the attorney-client privilege does not apply to accountants (unless there is a Kovel arrangement with an attorney), and the accountant privilege does not protected communications in criminal proceedings. Taxpayers need to consider whether it is appropriate to the claim the Fifth Amendment during a summons interview. Because there are ramifications to asserting the Fifth Amendment during an IRS interview, taxpayers should consult with an attorney any time they believe they may have criminal exposure during an IRS audit.