The percentage of criminal charges filed against taxpayers in the United States in 2019 is generally lower than it has been in the previous years. The chances of undergoing a criminal investigation by the IRS are therefore minimal. However, you might still find yourself part of that small percentage with no idea how to address their tax issues and avoid a prison sentence. Tax issues are very complex and mistakes are bound to happen.
How does the IRS recognize tax fraud?
The IRS has become more understanding and lenient when it comes to errors in calculations and other honest mistakes, for instance, miscalculating the amount of Earned Income Tax Credit. This is a painful mistake with its consequences but it is not likely to trigger a criminal investigation. Purposely concealing records such as a bank account from an auditor, on the other hand, is a sure way to call for probe into your situation. What scenarios then, may lead to a criminal investigation by the IRS?
- A tip from the public. This is most common during a divorce where one spouse chooses to out the other for a number of reasons.
- Information revealed during an investigation by another law enforcement agency.
- When a revenue officer or agent suspects tax fraud during an IRS audit.
- Uncovering of unreported income or hidden accounts. This is the biggest issue that brings taxpayers under investigation when they exclude income from a side hustle or leave out specific transactions.
- Exaggerated deductions
- Understatement of substantial amounts of money
- Purposeful destruction of records
- Refusing to cooperate with an examiner or auditor
Remember, the IRS is not obliged to inform you of any criminal referrals taking place. This means that you may not know when the IRS has handed over your case to its Criminal Investigation Division for investigation. You will have to look out for these signs and get the most relevant help from professionals.
Signs You May be Subject to an Investigation
There are various signs that can tell if you are subject to an IRS investigation. These include;
- An IRS agent stops pursuing you abruptly. While you may think this is a reason to celebrate, the agent might be getting ready to refer your case to the Criminal Investigation Division for criminal investigations.
- Auditing is put on hold for days or weeks. After being referred to the Criminal Investigations Department, Special agents analyze information to determine if criminal tax fraud or some other financial crime may have occurred. Any relevant information is evaluated. At this point, you may need to hire a tax attorney or tax firm as soon as possible to represent you
- You are informed by your bank that the CID has summoned your records
- Your accountant is subpoenaed or summoned to appear before the grand jury with your tax records
- One of your previous tax returns has been selected for an audit by the IRS.
The investigation process begins with a collection of facts and evidence by the IRS special agents. The evidence is then analyzed and either one of two conclusions is made. If the evidence does not substantiate criminal activity, the case is discontinued. However, if the evidence is sufficient, the agents will recommend prosecution and the case handed over to either the Department of Justice or the United States Attorney. If accepted, the case will be carried to its ultimate goal, conviction.
This process of auditing, criminal investigations and filing charges is a lengthy and expensive one to both the taxpayer and the IRS. Experts advise taxpayers to follow these simple steps, to avoid cases with the IRS that could eventually land them in jail:
- File and Pay your Taxes on time
This obviously need not be emphasized. It is the easiest and most stress-free way of avoiding issues with the IRS. Failing to file or pay simply makes matters worse, especially when the investigation has begun. If you are unable to make the payments, set up an installment agreement to work out an easier way for you to complete payment of the taxes due. You may file for an extension if you are unable to file your returns by the deadline.
- Be calm during an audit or examination
The IRS special agents are trained to look out for suspicious acts that may most likely lead to criminal investigations. However much the auditing process is strenuous, be calm and cooperative during the entire process.
- Respond appropriately to the IRS
In the event that you are picked for an audit, and the IRS has asked for additional information regarding your returns, be sure to provide it. At this point, you are already under their scrutiny and it would be best to avoid anything that will raise suspicions.
- Keep your records for future reference
Once you are under investigation, special agents will search for evidence in their case against you. It could be by seizing and analyzing financial data such as bank records. When it comes to that, do not destroy any records. Those records may be evidence and doing so could as well be another crime on top of the criminal investigations.
- Be totally honest with your records
It is very easy to get caught in a lie. To top it all off, you would be lying to federal investigators and that would simply make matters worse. If you need to communicate with the IRS special agents, be sure to do so through your attorney to avoid mistakenly dishing out incriminating information.
- Hire a tax attorney
During an audit, you may find it most beneficial to employ the services of a tax attorney. Unlike CPAs and other tax professionals, the tax attorneys have the advantage of attorney-client privilege. After all the evidence is collected following a criminal investigation, the IRS special agents will choose whether to continue with the case or recommend prosecution. If we are talking about prosecution, then you will need a criminal defense attorney, preferably one experienced in tax crimes.