4 common triggers for criminal tax investigations
Getting investigated by the IRS is every taxpayer’s – and tax preparer’s – nightmare. When the Criminal Investigation Division (CID) of the IRS gets involved, you know it’s serious. An investigation could lead to federal criminal charges for fraud, tax evasion, or other crimes.
How do these investigations happen? Put another way, what are the common scenarios that put taxpayers on the CID’s radar? Here are four.
1. Audits
What starts out as a random or routine audit can result in referrals to the CID if fraud or other criminal behavior is detected. Agents conducting audits may seek guidance from fraud technical advisors (FTA) if they notice indicators or “badges of fraud” such as:
- Sources of income that weren’t disclosed
- Unexplained deposits in bank accounts
- Exaggerated or mischaracterized expenses
- Lack of financial records (or inconsistent records)
- Altered invoices or other financial documents
- Unusual transactions
- Discrepancies between various financial records
- Destruction or loss of financial records
FTAs are highly trained to detect evidence of fraud. Once they get involved – or, ideally, sooner – the taxpayer or preparer should enlist their own legal counsel to represent them in the audit as well as any subsequent criminal investigation or proceedings.
2. Referrals from other agencies
If state taxation authorities uncover suspicious behavior with regard to state taxes, they may refer the taxpayer to the CID. Referrals may also come from law enforcement agencies such as the Federal Bureau of Investigation (FBI) when investigating the taxpayer for federal white-collar crimes such as loan fraud, mail or wire fraud, or money laundering. Those kinds of crimes frequently involve tax implications that can be grounds for criminal tax proceedings.
3. Tips from the public
This is one of the more rare ways that criminal tax investigations get started, but it does happen from time to time. Members of the public other than the taxpayer may raise concerns to the IRS, often anonymously.
4. Voluntary disclosure
Taxpayers themselves may disclose tax violations through the IRS’s voluntary disclosure program. The program offers a way to reduce or minimize the potentially harsh consequences of a criminal conviction. However, there are strict eligibility requirements for this program, so seek legal guidance before moving forward.