Generally, one should always file their tax returns regardless of their current ability to pay their taxes. That being said, failure to file will not automatically result in an IRS criminal investigation. According to the IRS, most criminal investigations initiate when a late filer has failed to file for three years or more and owes approximately $70,000.
Criminal Tax Matters & The IRS Criminal Investigation Division
With the increasing attention that the United States government is devoting to the prevention and prosecution of white-collar crime, the IRS is similarly renewing its commitment to prosecuting tax criminals. The Criminal Investigation Division (CID) of the IRS is charged with investigating people who have committed federal tax crimes. The CID gathers evidence and refers individuals to the Department of Justice Tax Division for prosecution. Although the CID is one of the smallest divisions of the IRS, it focuses intensely on the 3,000 criminal prosecutions it recommends each year. Currently, CID secures convictions in approximately 85% of cases it recommends for prosecution.
The recent rise in the number and notoriety of tax crimes has led revenue agents and officers to screen routine civil matters with increasing scrutiny. The CID receives tips from a variety of sources including referrals from revenue officers or agents who detect fraud, whistleblowers, local newspaper articles, and other law enforcement agencies.
Types of Tax Crimes
There are four different types of tax crimes that commonly occur. Unlike a simple mistake, these crimes involve an intentional wrongdoing.
1) Tax Evasion | Internal Revenue Code Section 7201
Tax evasion is the most serious charge in the Internal Revenue Code, carrying a maximum sentence of 5 years in prison and a $250,000 fine per count. Tax evasion involves the voluntary and intentional violation of a person’s known legal duty, such as a person who tries to conceal the nature, extent or ownership of income or who inflates/fabricates tax deductions. In most cases, the IRS will investigate multiple years and try and prosecute individuals for multiple counts of tax evasion. For example, if the IRS finds an individual guilty of tax evasion based on 3 years of misstated returns, the individual may be sentenced to a maximum of 15 years in prison and fined up to $750,000.
2) Failure to File a Return, Supply Information, or Pay Tax | Internal Revenue Code Section 7203
This crime occurs when a taxpayer fails to file a return, pay a tax or estimated tax, keep legally-required tax records (such as business receipts), or supply legally required tax related information. Violation of the statute is a misdemeanor punishable by a fine of up to $25,000 for an individual ($100,000 for a corporation), imprisonment of not more than one year, or both. To obtain a conviction, the government must prove that the taxpayer was required to file a tax return for a specific tax period and did not timely do so. However, it is possible for a taxpayer to be convicted, even if they do not owe any tax.
- Courts look at several factors when determining a taxpayer’s willfulness in failing to file a return, including: Has the taxpayer filed a tax return before?
- What was the taxpayer’s education level?
- What type of job does the taxpayer have?
- Did the taxpayer receive a warning letter from the IRS?
3) Failure to collect or pay payroll taxes | Internal Revenue Code Section 7202
Any person required to collect, account for, and pay over any tax imposed by this statute, or who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be imprisoned not more than five (5) years, fined not more than ten thousand dollars ($10,000 USD), or both.
4) Attempts to Interfere with Administration of the Internal Revenue Laws/Preventing IRS Agents and Employees from Fulfilling Their Duties | Internal Revenue Code Section 7212
There are two categories of forcible interference: (1) corrupt or forcible interference and (2) forcible rescue of seized property. Both forms of forcible interference can have rather severe penalties.
Corrupt or Forcible Interference: Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of the Internal Revenue Code, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both.
Forcible Rescue of Seized Property: Any person who forcibly rescues or causes to be rescued any property after it shall have been seized under this title, or shall attempt or endeavor so to do, shall, excepting in cases otherwise provided for, for every such offense, be fined not more than $500, or not more than double the value of the property so rescued, whichever is the greater, or be imprisoned not more than 2 years.
In addition to the tax crimes listed above, the government can also charge individuals with the following related crimes:
- Mail Fraud
- Wire Fraud
- Bank Fraud
- Computer Fraud
- Bankruptcy Fraud
- Insurance Fraud
- Mortgage Fraud
- Money Laundering
IRS Criminal Investigations
Under IRS guidelines, IRS special agents must follow strict procedures to initiate an investigation and recommend prosecution to the Department of Justice. Among such procedures is a requirement that special agents seeking to initiate an investigation provide several high-level IRS officials with evidence and documentation supporting the theory that a financial crime or fraud has occurred, however this requirement is preceded by a “primary investigation.” During the “primary investigation,” special agents analyze relevant financial information to determine if a financial fraud or crime is occurring.
Ultimately, the information uncovered goes through two levels of approval before the criminal investigation is initiated. During an investigation, agents will typically use a few standard tactics to obtain information, including:
- Examining public records, including Department of Motor Vehicles’ registrations, asset searches, and real estate title changes
- Contacting credit bureaus and examining your credit report
- Picking up and going through the trash at your residence or business
- Having the post office provide a list of every piece of mail you or your business receives (mail covers)
- Putting you under surveillance
- Conducting undercover operations
- Interviewing third party witnesses, usually starting with those not likely to contact you
- Issuing third party summons
- Issuing search warrants
- Conducting personal interviews; often special agents will surprise you at home or other unexpected places early in the morning or late at night.
IRS criminal investigations typically fall into one of four categories: (1) legal source tax crimes, (2) illegal source financial crimes, (3) narcotics-related financial crimes, and (4) counterterrorism financing. Once the criminal investigation is initiated, a variety of techniques are employed by IRS special agents including interviews of third-party witnesses, conducting surveillance, executing search warrants, subpoenaing bank records, and reviewing financial data.
The special agent or agents, aided by the IRS Chief Counsel, eventually come to a determination as to whether the evidence obtained substantiates a criminal investigation. If so, a “special agent report” is compiled and reviewed by several different higher officials in the IRS. If it passes these levels of review, the case will be referred to the Department of Justice Tax division for prosecution, and in some cases the U.S. Attorney’s Office for non-tax matters.
Prosecution can end in a conviction, plea or acquittal, but it should be noted that the IRS is amenable to pleas, depending upon the seriousness of the crime.
How RJS Law Can Help
Even before an indictment, a mismanaged IRS criminal investigation can lead to a loss of business opportunities, raids on your home or business, threats of asset seizures, and friends and family members being pulled into grand jury. The critical component in handling an IRS criminal investigation is speed. It is crucial to have an attorney that will quickly assess the situation, interview the agent in charge of the investigation to find out the information they know, and work to steer the matter in a more positive direction.
The tax attorneys at RJS Law will work quickly and diligently to ensure the best possible resolution is achieved. If you are under IRS criminal investigation, potentially facing an investigation, or have done something criminal, it is highly recommended you speak to a knowledgeable tax attorney as soon as possible. Call or fill out an online contact form to receive a complementary case evaluation.
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