Tax Crimes are investigated by the Criminal Investigation Division (CID) of the Internal Revenue Service. CID uses a variety of criteria in selecting cases for investigation, the heaviest weight placed on how likely a prosecution is to result in a conviction. Any recommendations by CID to prosecute an alleged tax crime are reviewed by the District Counsel of the IRS. If the IRS District Counsel approves the recommendation, the case is referred to the Tax Division of the Department of Justice. If after reviewing the case the Tax Division makes a recommendation to prosecute, the case is finally referred to the U.S. Attorney for possible prosecution if accepted by the U.S. Attorney’s office. If factors such as poor health or other factors that would tend to create sympathy for the taxpayer making it unlikely that the taxpayer would be convicted are present, prosecution may be declined at any point in this process.
A federal grand jury must vote to move forward with an indictment for a taxpayer to be charged with a tax felony. After a grand jury investigation, the U.S. Attorney makes a written recommendation either for or against prosecution of a grand jury target. This report is then reviewed by the Regional Counsel for the IRS for final approval.
CID Special agents have broad powers to conduct investigations, but their most important limitation is that they are usually required to inform taxpayers of their Fifth Amendment rights against self incrimination (including the right to remain silent) where they suspect a Taxpayer of a Tax Crime. A special agent most often begins an investigation by gathering background information concerning the taxpayer, interviewing the taxpayer, examining the taxpayer’s books and records and returns from prior years, investigating the taxpayer’s education and employment history, and locating the taxpayer’s bank accounts.
CID identifies and investigates violations of the criminal statutes of the Internal Revenue Code, together with other crimes against the internal revenue laws such as conspiracy to defraud, false claims, false statements, presenting false documents at an audit, perjury, and failure to report currency transactions. Because CID has only limited resources, selection of cases for full criminal investigation reflects not only the potential for a conviction but also CID’s priorities and the availability of agents to investigate the case. Most CI investigations center on attempts to violate a known legal duty that continue over several years and involve substantial tax deficiencies. Although cases involving evasion of income tax involve most of CID’s focus, CID also takes cases involving estate, gift, employment, and excise taxes.