Each year hundreds of people in Arizona, particularly small business owners, learn that they are being investigated by the IRS, sometimes for criminal matters. Here are a few things you should know, right at the beginning.
Audit vs. Criminal Investigation
First, there is a huge difference between an IRS civil audit or collection action, and an IRS criminal investigation. The former are handled by revenue or collection agents, while the latter are handled by specially trained agents from the IRS Criminal Investigations Division. The goal of the former is to determine and collect unpaid taxes, while the goal of the IRS CI Special Agent is, bluntly, to put you in jail.
Tax Years & Form Types
Second, the IRS will almost always specify what tax years are being investigated and for which tax returns. For example, a small business owner might be subject to investigation for both his personal federal income taxes and also his business taxes. It’s important, at the very beginning, to know what tax years are at issue, and which taxes.
Nature of Taxpayer Malfeasance or Nonfeasance
Third, there’s a huge difference between an investigation for failure to file tax returns and tax fraud or evasion. The former is generally a misdemeanor, while the latter, tax fraud or evasion, are serious felonies.
Unreported Income vs. Improper Deductions
Fourth, in the case of filed returns, the criminal malfeasance often falls into two general categories: unreported gross income or improper deductions.
The former is usually income that should have been reported on the tax returns but was left out, often cash or “under the table” payments, commonly associated with service industries, including restaurants, entertainment, construction or landscaping. The latter might include large ticket consumer items that look immediately suspicious when deducted.
Most importantly, however, in criminal tax investigations, IRS CI Special Agents look for multi-year violations and patterns of “concealment.”
Managing an IRS Criminal Investigation
Fifth, it might sound surprising, but many IRS criminal tax cases can be settled before indictment. This means, before you are ever charged. Normally prosecutors initially charge people with a crime, then work out a plea with a defense attorney later. In stark contrast, criminal tax investigatory procedure allows adept attorneys to work early in the case with IRS, and DOJ prosecutors to sometimes avoid indictment altogether. This might sound too good to be true, but if handled early, aggressively, and well, is a possible outcome.
IRS CI Special Agents & Your Rights
Finally, in my experience, IRS CI Special Agents, almost all accountants, are not only highly trained and astute, but, as a rule, courteous, polite and professional. They will often come to your home or business and surprise you, politely asking you a few simple questions.
It is important to remember, however, that even though they are polite, that you may politely decline to speak with them without the presence of an attorney, and do so without offending them. Giving you the opportunity to retain counsel before giving a statement to federal law enforcement agents make good legal sense in nearly all cases, as they should recognize.
In sum, in these matters, it is important to early recognize the case as an IRS criminal investigation, understand the specific nature of the alleged misconduct, and consider declining to make uncounseled statements without first consulting or engaging experienced counsel.