One should always file their tax returns regardless of that person’s ability to pay their taxes. Failure to file will not automatically result in a criminal investigation. According to the IRS, the average late filer has failed to file for three or more years and owes approximately $70,000. Additionally, the IRS tends to prioritize public figures, athletes, movie stars, and similar late filers before going after late filers of a lower profile.
According to the IRS, 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. This is preceded by a “primary investigation,” which 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.
Investigations typically fall into one of four categories: legal source tax crimes, illegal source financial crimes, narcotics-related financial crimes, and counterterrorism financing. IRS special agents employ a variety of techniques to gather information such as “interviews of third party witnesses, conducting surveillance, executing search warrants, subpoenaing bank records, and reviewing financial data.” Id. The special agent, aided by the IRS Chief Counsel Criminal Tax Attorneys, 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-ups 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. Attorneys Office for non-tax matters.
Prosecution can end in a conviction, plea or acquittal. However, the IRS is amenable to pleas depending upon the seriousness of the crime. One should always do their best to file on time, regardless of whether or not they can pay their taxes despite the lengthy time between failure to file a return and initiation of a criminal investigation.