Whistleblower FAQ: Tax Fraud Investigations

The Internal Revenue Service (IRS) is responsible for investigating claims relating to the Internal Revenue Code (IRC). Within the IRS there are multiple divisions focused on either civil or criminal tax fraud.

Per Internal Revenue Manual (IRM) 25.1.6.1 (11-05-2014): 
Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, sincerely held difference of opinion, negligence or carelessness.

Where a claim for civil tax fraud is investigated, it will first be seen by a Fraud Technical Advisor (FTA) and the Examination Group Manager to determine that civil fraud has occurred. Where the FTA and Examination Group Manager agree, the proceeding will move forward. The FTA will then work with an examiner to confirm that the penalty narrative does “substantiate the assertion of the civil fraud or fraudulent failure to file penalties.” The affirmative acts must be described in detail as to clearly show the indicators of fraud.

The FTA will make a recommendation on which actions to take regarding the civil fraud case, however, the ultimate decision to proceed is made by the Examination group manager.

Criminal tax fraud, frequently known as tax evasion, is investigated by the IRS Criminal Investigation Division.

Under IRC §7201 tax fraud exists where there has been (1) the willful attempt to evade or defeat the assessment of a tax; or (2) the willful attempt to evade or defeat the payment of a tax.

Findings are then referred to the Department of Justice (DOJ) for recommended prosecution. Criminal investigations can be initiated from information obtained within the IRS when a revenue agent (auditor) or revenue officer (collection) detects fraud. This information is routinely received through the public, law enforcement officials, and the various United States Attorneys’ offices across the country.

A primary investigation, once opened, will be analyzed by a special agent to determine if criminal tax fraud has occurred. The front-line supervisor then reviews the preliminary information and decides whether to approve or decline for further investigation. If the supervisor approves for an investigation, the head of the office will initiate a Subject Criminal Investigation. By this time, a minimum of two lawyers of CI management will have reviewed the primary investigation material and determined if there is enough evidence to begin a subject CI.

Special agents are responsible for obtaining facts and evidence needed to establish the elements of criminal activity. These agents use techniques such as interviewing third party witnesses, conducting surveillance, executing search warrants, subpoenaing bank records, and reviewing financial data. The agents work closely with the CI lawyers throughout the investigation.

After all the evidence is collected, the special agent or supervisor will decide whether the evidence substantiates criminal activity, otherwise the case is discontinued. If the determination is made that there is enough evidence, a recommendation for prosecution will be made.

A ‘special agent report’ is drafted including the details of laws and violations committed and recommendation for prosecution. The ‘special agent report’ is reviewed by:
1. The agent’s front line supervisor (supervisory special agent);
2. A CI quality review team, (Centralized Case Review); 
3. CI assistant special agent in charge; and 
4. CI special agent in charge.

After review, the prosecution recommendation is forwarded to:
1. The Department of Justice, Tax Division (assuming it’s a tax investigation), or
2. The United States Attorney for all other investigations.