The traditional means of developing a criminal tax case is the so-called administrative route.  This article describes administrative cases from four perspectives: (1) origin of the case; (2) investigation by CI; (3) moving the case from CI to DOJ; and (4) case processing by DOJ.

I. Origin of the Case **

Traditionally, the largest source for criminal tax investigations was IRS civil audits of tax returns.  The IRM contains detailed instructions for when to suspect that tax fraud has been committed.  It identifies various badges of fraud, organized categorically as to income, expenses or deductions, books and records, taxpayer conduct, and methods of concealment.

When the revenue agent observes affirmative acts of fraud, he typically discusses the matter with his superior: the Group Manager or equivalent.  They will then seek the aid of a fraud technical advisor, who is in the same division of the IRS and so is easily accessible to the agents.  These officials will formulate a plan, if needed, to resolve “holes” in the development.

Once they conclude that there are “firm indications necessary for a successful fraud case,” IRM 104.2.2.1(1), the case will be referred to CI.  Typically, the acceptance rate for such referrals is around 50%.

The volume of referrals from Examination to CI has fluctuated.  After traditionally being the main source of criminal cases, such referrals declined for several decades at the end of the twentieth century.  In the last few years, however, they appear to have rebounded somewhat.  In addition to referrals from other parts of the IRS, CI sometimes receives referrals from other federal or state agencies that have uncovered tax crimes.

Another source of case initiations is informants.  CI categorizes them into three classes: (1) anonymous informants; (2) confidential sources of information; and (3) confidential informants.  IRM 9.3.2.5.2.  The second and third classes are eligible for rewards, although reaching agreement with the IRS about eligibility for and the amount of a reward is not without its shortcomings.

Who becomes informants for the IRS?  If you’re thinking former or disgruntled spouses or former or disgruntled employees, you’ve successfully identified two of the leading categories.

CI also initiates criminal investigations on its own.  Special agents read newspapers and follow other media, searching for situations fraught with criminal tax potential.  In addition, CI reviews forms filed under the Internal Revenue Code and the Bank Secrecy Act.  Such forms include Forms 4789 and 8300 filed with the IRS or the Financial Crimes Enforcement Network (“FINCEN”).

Similarly, CI receives an inordinate number of Suspicious Activity Reports (“SARs”) filed by banks, brokerage houses, and other financial institutions.

II. Investigation by CI**

Special Agents assigned to the case conduct a thorough investigation.  They conduct interviews with the taxpayer, the taxpayer’s representative, and third parties.  They also attempt to gather pertinent documents.

III. Moving the Case from CI to DOJ**

• Recommending Criminal Prosecution**

On this topic, there is no better expert than Professor Jack Townsend. Very simply, I have not seen this topic covered in nearly as much detail — not to mention as thoroughly and meticulously — by any tax practitioner other than Professor Townsend. For this reason, I cite a passage from his casebook, “Tax Crimes”:

“When CI concludes the investigation, it has two choices.  First, and the best for the taxpayer, CI can decline criminal prosecution and refer the case back to Examination.   Second, CI can forward the case to DOJ Tax with a recommendation for criminal prosecution.  I focus on this second alternative.

CI recommends criminal prosecution when the case is otherwise within its priorities and “the evidence is sufficient to indicate guilt beyond a reasonable doubt; and a reasonable probability of conviction.”  [FN: IRM 31.4.2.3(1) (7/2/90)] Typically, of course, CI will not have devoted investigative resources to a matter not within the priorities.  But, if they have done so and have a substantial investment in the matter, CI may be inclined to recommend prosecution of a case only marginally within its priorities.  It then becomes the lawyer’s job to convince CI that it should not prosecute despite this investment of time.  Failing convincing CI of that, the advocate may have a better opportunity of focusing this type of argument at the later decision points (DOJ Tax and, conceivably, the United States Attorney) who will have neither a time nor an emotional commitment to the case and can take a broader view of the Government’s priorities.”

[As per John Townsend, the correct attribution is: Tax Crimes, Townsend, John, Adjunct Professor, University of Houston Law Center; Campagna, Larry, Adjunct Professor, University of Houston Law Center; Johnson, Steve, E.L. Wiegand Professor of Law, University of Nevada, Las Vegas, William S. Boyd School of Law; Schumacher, Scott, Assistant Professor of Law, Director, Federal Tax Clinic & Acting Director, Clinical Law Program, University of Washington School of Law; Lexis Nexis; 2008.]

** Regretfully, this author did not give attribution where it was due. This author wishes to cite Jack Townsend’s blog, “Federal Tax Crimes” and his book, “Tax Crimes” as being the source of the information contained in this blog. As such, this author owes him a debt of gratitude for all of the time and effort he has put into researching these novel issues.