Everyday Scenarios That Are Likely To Lead To An IRS Criminal Tax Evasion Investigation

On February 7, Bill Melot, a New Mexico farmer, was sentenced to 14 years in prison and ordered to pay restitution in the amount of almost $18.5 million to the IRS and $226,526 to the USDA for domestic tax fraud and other crimes. Melot concealed his assets, including 250 acres of land, from the IRS by using false social security and employer identification numbers, notarizing forged deeds, and placing title to his property in the names of nominees. Melot also collected $225,000 in farm subsidies that he was not entitled to by reporting false information to the USDA.
In cases such as this, you may wonder what event(s) triggered an IRS criminal investigation for domestic tax evasion that lead to criminal prosecution. While I do not know what lead to an IRS criminal investigationfor Melot, here are a few of the most common ways I have seen a person’s tax filing history quickly turn into an IRS criminal investigation:

Note: The only reason the IRS criminal investigation department exits is to make an example out of tax cheats by criminally prosecuting them to scare the rest of taxpayers into voluntarily complying with tax law. If they visit you – contact our office immediately and do not say a word as they often seek to obtain incriminating statements from you to be used in a subsequent prosecution when you least expect it. All you have to say is “I refuse to speak with you without the presence of an attorney.” Do not forget that lying to a federal agent is a felony in and of itself!

I.       “He’s a Tax Cheat!

Appearing in divorce court is one means by which you may be criminally investigated for tax fraud. Generally, a person’s spouse knows that person better than anyone else and emotions run wild in divorce proceedings either for revenge or in the hope of receiving more money than the ex-spouse with the division of the marital estate. Thus, it is not uncommon for an ex-spouse to expose the other spouse’s dirty laundry in open court. If your ex-spouse calls you a “tax cheat” in open court, the trial judge must report the incident to the IRS and the IRS will likely criminally investigate you as a result.

II.       “My Ex-Spouse filed an Innocent Spouse Claim

Alternatively, your ex-spouse could make an innocent spouse claim to seek protection during the divorce proceedings if the ex-spouse knew you omitted income or overstated deductions on one or multiple jointly filed federal income tax returns. Once an innocent spouse claim is filed, it is highly likely the IRS will criminally investigate you.

III.       “Would You Like to Buy My Business?

Common business transactions can trigger an IRS criminal investigation as well. Suppose you want to sell a business you own and you know there is a difference between the income reported on the books and the actual income earned by the business. By showing the potential buyer your spreadsheets and disclosing the actual income earned by the business rather than the reported income, you have essentially self reported your part in a tax evasion scheme to the potential buyer. The IRS has created a monetary incentive for people like the potential buyer in this story to report what they learned about your past tax fraud to the IRS under a whistleblower law. This can also create unexpected leverage by the potential buyer against you where they can essentially blackmail you into a lower purchase price.

Whistle blowing can come from inside your business too. Employees, such as an accountant or CFO have an incentive to collect the cash reward as well; especially if he or she does not see a future with your business.

In addition, watch out for situations where embezzlement has occurred and you’re going after the embezzler civilly. Quite often cash based businesses create intentional holes in their internal control to facilitate their own tax fraud. They also quite often get key employees to aid in this goal, which creates the opportunity to embezzle in the first place.

Embezzlers are not in the habit of reporting embezzlement income and, for that reason, are prime targets for criminal investigation and prosecution for tax fraud. The IRS criminal investigation for that reason monitors civil litigation for tax evasion for potential targets.  Since the embezzler’s tax fraud is often smaller in scale than the businesses they serve they often strike a deal as part of a plea bargain to turn on their employers as government witnesses as to the business’s tax fraud.

IV.       “My Business Partner Recently Made a Domestic Voluntary Disclosure

Lastly, the IRS will likely criminally investigate you if someone makes a domestic voluntary disclosure in a partnership, corporation, or LLC in which you are a partner, shareholder, or member of and you do not join in that domestic voluntary disclosure.

Conclusion

If you are currently faced with any of the above scenarios and do not wish to be criminally prosecuted, you are essentially in a race to beat the judge, spouse, whistle blower, or coworker to the IRS Criminal Investigation Division’s door with the aid of experienced criminal defense counsel. If you get to the IRS first, your best course of action to avoid criminal prosecution and serving jail time is to reach out to the IRS and make a voluntary disclosure before they criminally investigate you.

If you are currently being criminally investigated or under audit and know you have cheated on your federal income taxes, a voluntary disclosure is not an option. However, we can help you develop the best possible defense against tax crimes.

Either way, you should not weigh the risks on your own. The Tax Law Office of David W. Klasing can help you get back into compliance and avoid the impending wrath of the IRS in the proper circumstances where we get to them before they get to you.  The only thing we cannot protect you from is paying the correct amount of income taxes you should have paid in the first place and the penalties and interests for intentionally getting it wrong in the first place.