The majority of audits that the IRS conducts are resolved as civil matters. Some, however, may transform into criminal investigations that can potentially lead to criminal charges and prosecution. If a taxpayer is convicted, they can face significant federal penalties, up to and including jail time.

A civil audit becomes a criminal audit for any number of reasons, although they often relate to errors or inconsistencies on a tax return. When civil auditors suspect a tax return indicates criminal activity, they'll refer the return to the IRS's Criminal Investigation Division (CI).

A special agent with the CI division will investigate flagged tax returns for evidence of potential underreported income or assets, fraud, or other financial crimes. Each flagged return will undergo a preliminary investigation. Two levels of CI management-level staff will review the initial information to determine whether a case should become a subject criminal investigation.

How the IRS Conducts Criminal Investigations

During the criminal investigation, special agents will seek to find evidence of criminal activity. The goal is to find sufficient evidence to move a case to prosecution. Some ways that special agents may investigate suspected criminal activity:

• Interviewing third-party witnesses
• Conducting surveillance
• Executing search warrants
• Forensic examinations of evidence
• Subpoenaing bank and financial records
• Reviewing other financial data

After gathering information, the next step is to determine if sufficient evidence exists to file criminal charges against the taxpayer. If the evidence is insufficient to establish criminal activity, the case will be discontinued.

For cases that the special agent or their supervisor believes have sufficient evidence to prosecute the taxpayer, the agent will compile a special agent report. Multiple CI officials will review the report to determine next steps.

When CI staff decides that an investigation warrants a criminal prosecution, they'll forward the case to either the U.S. Department of Justice for tax investigations or the U.S. Attorney for all other cases.

If you have questions about crimes related to taxes, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.