IRS Criminal Investigation Process

Awards & Recognition

When the government suspects that a taxpayer has willfully attempted to evade reporting taxable income or paying taxes that they owe, they may follow up with an audit or even skip right to the criminal investigation stage. Criminal tax investigations are thorough and vigorous, but you may not even be aware that they are going on.

If you are facing an IRS criminal investigation, there are certain steps that you should (and should not) take to establish sound defenses and limit the potential fallout. Of course, it is always better to act sooner than later, so you should be aware of certain telltale signs that the IRS has commenced a criminal investigatory action.

If you know or suspect that you are the target of an IRS criminal tax investigation, contact the dual licensed Criminal Tax Defense Attorneys & CPAs at the Tax Law Offices of David W. Klasing. We can provide you with a reduced rate assessment for your first call to our offices at (800) 681-1295.

What is the IRS Criminal Investigation Process?

For whatever reason, you have found yourself facing an IRS criminal investigation or in a civil investigation or audit that, in time, may turn into a criminal investigation. It is surprisingly easy for a person to find oneself involved with this sort of IRS tax problem. Maybe you have been accused of tax evasion, or some other form of tax fraud. Some of my clients were not even aware that anything had gone wrong until the IRS came looking for them.

A simple mistake, oversight, or your accountant’s malpractice may trigger an IRS criminal investigation. Specifically, unreported income, a false statement, the use of an impermissible accounting or banking service, or declaring too many deductions are things that could initiate an audit, which could then rise to the level of an IRS criminal investigation process.

Our Office has developed a special criminal tax defense practice as to federal, criminal income tax issues prosecuted by the IRS. It is sometimes said that while the focus of an accountant is accuracy, the focus of an attorney is advocacy. Because I am both a tax attorney and CPA, I place a premium on both accuracy and client advocacy.

The IRS is the world’s most powerful collection agency, with tremendous resources, and its Criminal Investigation Division (CID) is ruthless. Its goal is singular: to conduct a thorough investigation of the taxpayer who has engaged in tax fraud so that he can be criminally prosecuted.

A criminal investigation differs from an audit. With an audit, the IRS attempts to determine whether you have calculated your tax liability correctly. With a criminal investigation, the IRS seeks to mount a case against you so that the U.S. Attorney’s Office can prosecute you. The taxing system is based on fear. To maintain a proper level of fear the government needs to prosecute tax cheats on an ongoing basis.

How Can IRS Audits Lead to Criminal Tax Investigations?

Audits are conducted in several different ways depending on the type of audit. They all involve your providing records and documents to back up the information on your tax returns. Sometimes this will be done entirely through correspondence, while other times agents might ask you to come to a field office or even come to your home or business to look through your books and records in person. No matter which type of audit you are facing, you should reach out as soon as you find out you are being audited to a skilled dual licensed Tax Lawyer & CPA like those at the Tax Law Offices of David W. Klasing. We have a great track record of successfully dealing with Egg Shell Audits where you ultimately wind up paying the amount of income taxes you should have originally and avoid the more serious potential civil penalties without a criminal tax investigation being opened.

During the audit, the auditor may be assisted by someone known as a fraud technical advisor (FTA). If the FTA notices what are called “badges of fraud,” things that indicate fraud might have occurred, they will typically refer the matter to the criminal investigation unit for a closer look. If the CI unit chooses to refer your matter for prosecution, they have a 90% conviction rate, so the sooner you get in touch with an experienced dual licensed Tax Attorney & CPA like those at the Tax Law Offices of David W. Klasing, the better chance utilizing a defense strategy in the hopes that criminal charges will not ultimately be sought if you work honestly and diligently to get back into compliance.

How Long Do Criminal Tax Investigations Take?

Every action that the IRS takes can last a long time, so it should come as no surprise that criminal tax investigations can go on for a while. The IRS provides its criminal investigation agents with a wide berth and plenty of resources so that the agents can take the time to get personally invested in the outcome of the case.

The goal of a criminal tax investigation is to build enough evidence to bring the case to court and secure a conviction. Proceeding to criminal tax charges without all of the necessary evidence to convict is a disaster for the IRS, so the agents running the case will spend a significant amount of time combing through the available information to obtain as much evidence as they can find for prosecutors to use against the target of the investigation.

This evidence comes from more sources than just financial documents, records, bank statements, and other written materials. To collect all of the necessary evidence, IRS agents typically conduct interviews with key witnesses and third parties. This may include co-workers, employees, business associates, friends, and even family members. If the IRS discovers more information that they didn’t have for the initial interview, they may reach out to these potential witnesses multiple times for repeat interviews. Identifying and tracking down these individuals and paralleling the investigation is one of the more time-consuming aspects of an IRS criminal tax investigation.

Another factor that may influence the time frame of a criminal tax investigation is when the suspected noncompliance occurred, and for how long. While statutes of limitations may apply to some charges, IRS agents will typically go as far back into a target’s records as possible, particularly if they suspect a pattern of tax evasion over multiple years. The farther back the government looks, the harder it is to collect the evidence. Therefore, suspected tax evasion that occurred many years ago may cause the investigation to drag on longer.

Ultimately, it is difficult to predict how long an IRS criminal investigation will take, as each case, agent, and defendant is different. To get a better idea of what the government is after and how long it will take for them to resolve their investigation, seek out the advice of a dual licensed Criminal Tax Defense Attorney & CPA.

How Does an Appeal to Tax Court Work?

If you are unsatisfied with the results of your audit, you can file an appeal of your tax bill with the IRS, and if your appeal is not granted, you can then take your case to Tax Court. At the Tax Law Offices of David W. Klasing, our skilled dual licensed Tax Lawyers & CPAs have years of experience representing our clients in proceedings before the Tax Court, and we can work to bring your case to the best possible resolution, whether that be through a settlement negotiation or an actual tax trial. In order to begin the process, your lawyer will work to prepare and file a petition with the Tax Court for relief within 90 days of receiving a notice of deficiency letter from the IRS.

At this point, a seasoned dual licensed Tax Court Lawyer & CPA like those at the Tax Law Offices of David W. Klasing will work with the IRS attorney to try come to some sort of settlement where your tax bill is reduced or eliminated, ordinarily because the facts and law are on your side, in exchange for your dropping the matter and helping them reduce the burden on the court system. The overwhelming majority of these types of cases are settled without a trial. If you do not wish to settle your matter, we can make the best possible case before the court that your bill was unfair and that it should be reduced or eliminated by calling on witnesses and introducing evidence, as well as countering the witnesses and evidence produced by the IRS.

The IRS Criminal Investigation Process

The IRS criminal investigation process is serious business. The Criminal Investigation Division “CID” is composed of federal agents (called “Special Agents”), who are highly trained financial investigators that carry a gun and wear a badge. Unlike your typical police department, CID conducts a very thorough investigation, and which may last years while they interview your family, friends, co-workers, employees, and business associates, and bankers, among others, to acquire evidence as to the extent of the tax evasion or tax fraud that may have occurred.

A criminal tax violation conviction results in severe consequences, and in addition to monstrous fines, including the cost of prosecution and jail time, (Up to 5 years in jail for each count and ordinarily the government will not prosecute without being able to establish at least 3 counts) it could spell financial, personal, and social ruin. Compounding the situation is that often a taxpayer will not know when he is subject to an IRS criminal investigation until it is in its late stages at which time, they surely have made incriminating admissions if they were not represented by competent counsel.

Signs that You May Be Subject to an IRS Investigation:

(1) An IRS agent abruptly stops pursuing you after he has been requesting you to pay your IRS tax debt, and now does not return your calls. The agent might be getting ready to refer your case to the CID to investigate previous or current tax evasion or crimes you may have committed within the collection process. (ie. making false statements, hiding income or assets).

(2) An IRS agent has been auditing you and now disappears for days or even weeks at a time. After a case is referred to the CID, both the Collection and Examination Divisions put things on “pause” because they do not want to jeopardize a successful criminal prosecution. The IRS’s CID is incredibly resourceful and tactful. To better position yourself against them, it is best to obtain an experienced IRS tax attorney as early as possible where criminal tax exposure is apparent in your fact pattern (like where you know you cheated on the return that is under audit). This is true even if your case is only at the civil investigation stage.

(3) Your bank informs you that your records have been summoned by the CID or subpoenaed by the U.S. Attorney’s Office. This is a sure sign you need an attorney.

(4) Your accountant is contacted by CID special agents, or has been subpoenaed to appear before a grand jury and told to bring your tax records. The case against you is mounting; you need an attorney!!!

My clients are often surprised to learn that any statements made to their accountant can be used against him in a criminal investigation, either through the “discovery” process leading to trial or where the accountant is called as a witness during criminal tax trial. The “accountant-client privilege” simply does not protect you in a criminal case.

By contrast, conversations with one’s attorney are protected, and insulated by the attorney-client privilege. For this reason, once you discover you are under investigation, say nothing further to your accountant, because that will just give the IRS further evidence against you. Again, when your accountant has been contacted by the special agents, you need an IRS tax attorney—and quick. Additionally you have a conflict of interest with your accountant in this situation. Your accountant’s perception that his or her livelihood could be at risk makes his or her self interest in preserving his or her reputation in conflict with your desire not to be criminally prosecuted.

(5) The IRS informs you that one of your previous tax returns has been selected for audit. If your return contains an under- or over-statement of income or deductions, stop speaking with your accountant. As just mentioned, your conversations with him can be used against you if/when your investigation transforms from “civil: to “criminal”. IRS agents are experts at spotting tax fraud, and they swiftly refer likely criminal cases to the Criminal Investigation Division.

(6) An agent is overly interested in certain sensitive transactions, or has requested copies significant amount of documents (not just asking to review your records).

(7) An agent asks questions about the intent of your transaction, rather than its form.

(8) A CID special agent contacts you by phone or shows up unannounced at your business and tries to elicit as much incriminating information from you as possible without the protection of counsel being present. This is a sure sign that you are under criminal investigation. Do not speak with CID special agents–even if you are convinced of your innocence. You have the right to say nothing and you should do so! This is an ambush technique employed by the IRS, where they try to secure as much information as possible before you “wise up” and get an attorney. Tell the special agent that you wish to say nothing further to him without legal representation, and that you would like to speak with your IRS tax lawyer.

While there are other signs indicating a criminal investigation is under way, if any of the above apply in your case, immediately seek competent legal representation from an IRS criminal tax defense attorney. Building a strong defense early in the investigation could be the determining factor whether your case will result in a conviction and time behind bars or merely be about money (additional tax, penalties and interest).

Because of the specialized nature of criminal tax law, very few attorneys are truly competent to handle this sort of tax controversy. The Tax Law Offices of David W. Klasing can help you navigate through your legal options if under an IRS criminal investigation.

Can an IRS Agent Lie to You About a Criminal Tax Investigation?

As discussed above, IRS audit agents do not have to let you know if they have referred your case to the criminal investigations department for suspected tax fraud. Even if you were to ask the IRS agent-in-charge whether you were being criminally investigated, they do not have to answer you. However, according to the IRS’ own Fraud Handbook, IRS agents cannot provide a response that would deceive the subject of a criminal tax investigation.

We do not recommend that you come right out and ask your auditing agent whether you are the subject of a criminal tax investigation. They will likely only tell you the standard line, which is that in instances where there is a firm indication of fraud, a referral of the case to the criminal investigations division is required.

However, if you were told by an IRS agent that you were not facing criminal tax investigation, only to find out later that you were in fact being reviewed by the IRS-CI, you should let your Criminal Tax Defense Lawyer know of the discussion immediately.

Evidence obtained by the IRS through fraud, trickery, and deceit is potentially inadmissible in a criminal tax prosecution. However, the government can still use statements from the target of an audit that are not connected to the deceit. In any case, you are better off having your dual licensed Criminal Tax Defense Lawyer & CPA do the talking with the IRS agents for you so that you can avoid any potential violation of your rights under the U.S. constitution.

Can You Prevent an IRS Criminal Tax Investigation Through Voluntary Disclosure?

The federal government’s voluntary disclosure programs provide an avenue for taxpayers who are aware of noncompliance in their filing history to come forward with additional information without being coerced into doing so through an audit or criminal tax investigation. By using the voluntary disclosure option, many taxpayers can avoid or reduce the penalties and fines that they might otherwise face if the government had to seek out the violations themselves.

However, voluntary disclosure may not be right in every situation. Firstly, if a criminal tax investigation or audit is already underway, your decision to voluntary disclose will likely have no effect on the consequences and may even end up doing more harm than good.

No matter what, you should never attempt to apply for voluntary disclosure with the IRS without first having your case assessed by a seasoned dual licensed Criminal Tax Defense Lawyer & CPA.