Role of IRS Special Agents and Decision to File Criminal Tax Cases

IRS Special Agents Role: Who makes the decision to file IRS Criminal tax cases?
The Internal Revenue Service (IRS) Criminal Investigation (CI) Division plays a critical role in enforcing tax compliance by investigating potential criminal or tax fraud violations of the U.S. Internal Revenue Code and related financial crimes. Unlike civil tax audits, which focus on correcting tax liabilities, criminal tax investigations target willful tax evasion, fraud, or other financial crimes with the goal of prosecution. IRS special agents play a pivotal role in the process for determining whether to file a criminal complaint against a taxpayer.

How an IRS Criminal Tax Investigation Starts
IRS criminal investigations are complex, multi-layered processes initiated when there is evidence or suspicion of intentional tax law violations. The IRS CI Division, staffed by approximately 2,100 special agents, focuses on crimes such as tax evasion, filing false returns, failure to file, money laundering, and other financial misconduct. Investigations typically arise from several sources, and the process is highly structured to ensure only cases with sufficient evidence proceed.

Sources of Criminal Investigations

Civil Tax Audits or Examinations:
During a civil tax audit, a revenue agent may identify “badges of fraud” (e.g., unreported income, falsified records, or concealed assets). If high level of tax fraud factors are detected, the agent may suspend the tax audit and prepare a Form 2797 (Referral Report for Potential Fraud Cases) to refer the tax case to the CI Division.
Whistleblower Tips:
Information from the public, such as ex-spouses, business partners, or whistleblowers, can prompt an investigation. The IRS encourages tips through programs like the Whistleblower Office.
Other Law Enforcement Agencies:
Criminal tax case referrals from agencies like the FBI, DEA, or U.S. Attorney’s Office often involve tax violations linked to broader crimes (e.g., narcotics trafficking or money laundering).
IRS Data Analysis:
The IRS uses automated systems to detect anomalies in tax filings, such as unreported income or suspicious deductions.
Voluntary Disclosures:
Taxpayers attempting to correct other tax problems or noncompliance may accidentally disclose or reveal information that prompts a criminal investigation due to unfamiliarity with the IRS procedures.

Preliminary Investigation
Once information is received, the CI Division conducts a primary investigation to assess whether a full investigation is warranted. This step involves:
Initial Evidence Review: A special agent evaluates the information to determine if criminal tax fraud or another financial crime may have occurred. This may include reviewing tax returns, financial records, or third-party data.
Supervisory Approval: The special agent’s front-line supervisor, known as the Supervisory Special Agent (SSA), reviews the preliminary findings. If the SSA approves, the case advances to the Special Agent in Charge (SAC), the head of the CI field office, for further approval to initiate a subject criminal investigation.


Subject of Criminal Investigation Record Review
If approved, the case becomes a subject criminal investigation, where the special agent begins a comprehensive probe to establish the elements of criminal activity as it relates to the taxpayer. At this stage, at least two layers of CI management (SSA and SAC) have reviewed and approved the case, ensuring a solid evidentiary basis.

The Role of IRS Special Agents
IRS special agents are highly trained federal law enforcement officers who combine accounting expertise with investigative skills. They are the backbone of CI investigations, tasked with gathering evidence, conducting interviews, and building cases for potential prosecution. Special agents carry badges, firearms, and have authority to execute search warrants and subpoenas.

Key Responsibilities of IRS Special Agents
Evidence Collection:
Special agents gather financial records, bank statements, and other documents to trace unreported income or fraudulent transactions. They use forensic technology to recover encrypted or hidden data, such as digital financial records.
Three primary methods of proof are employed to establish unreported income:
Specific Item Method: Identifies specific unreported or falsified items on tax returns.
Net Worth Method: Compares a taxpayer’s assets and liabilities to reported income to detect discrepancies.
Expenditures Method: Analyzes spending patterns to identify income not reported.

Interviews and Surveillance:
Agents interview taxpayers, third parties (e.g., bankers, employees), and witnesses to corroborate evidence.
They may conduct surveillance or collaborate with other agencies to monitor financial activities.

Preparing the Special Agent Report (SAR):
At the conclusion of an investigation, the special agent compiles a detailed Special Agent Report (SAR) summarizing findings, evidence, and recommendations for prosecution (or discontinuation if evidence is insufficient). The SAR is a critical document that influences whether the case proceeds to prosecution.

Assisting Prosecutors:
If a case is referred for prosecution, special agents assist the Department of Justice (DOJ) or U.S. Attorney’s Office in preparing for trial, providing testimony or additional evidence as needed.
Scope and Authority of Special Agents
Document Requests
Request financial records, tax returns, or third-party data.
Subpoenas, Compel banks or businesses to provide records.
Search Warrants
Authorize searches of homes or businesses for evidence.
Surveillance
Monitor taxpayer activities (may include wiretapping) to gather evidence of financial crimes.
Forensic Technology
Recover encrypted or hidden digital financial data.
Interviews
Question taxpayers, witnesses, or associates to build a case.
Training and Expertise
Special agents undergo rigorous training, including:
Special Agent Investigative Techniques (SAIT): A 14-week program focusing on tax law, criminal violations, and investigative methods.


Who Makes the Determination on Filing a Criminal Tax Complaint
The IRS does not have the authority to file criminal charges directly; this responsibility lies with the DOJ or U.S. Attorney’s Office. The process is designed to balance thorough investigation with procedural fairness.
Steps in the Determination Process
Special Agent Report (SAR) Review:
After completing the investigation, the special agent submits the SAR to their Supervisory Special Agent (SSA) for initial review. The SAR is then evaluated by the Centralized Case Review (CCR) team, which assesses the quality and sufficiency of evidence. The Assistant Special Agent in Charge (ASAC) and Special Agent in Charge (SAC) provide additional scrutiny.

Recommendation to DOJ or U.S. Attorney’s Office:
If CI management approves the SAR, the case is referred to:
DOJ Tax Division for tax-related crimes.
U.S. Attorney’s Office for non-tax crimes (e.g., money laundering).
The referral includes the SAR and a Criminal Enforcement Memorandum (CEM) prepared by IRS Chief Counsel, detailing the legal basis for prosecution.

Optional Pre-Criminal Referral Conference may be available before the file is sent to DOJ.

DOJ/U.S. Attorney Review:
Prosecutors review the evidence to determine if it meets the threshold for criminal charges. They consider factors such as:
Strength of evidence (e.g., proof of willful intent).
Severity of the violation.
Potential deterrent effect of prosecution.
Prosecutors may request a grand jury investigation to gather additional evidence if the administrative process is insufficient.

Taxpayer Conference (Optional):
Before a final decision, the taxpayer may request a conference with the DOJ Tax Division to present their case. If the case has already been referred to the U.S. Attorney’s Office, the conference may occur there instead.
Final Decision:
The DOJ Tax Division or U.S. Attorney’s Office makes the final determination on whether to file a criminal complaint. If approved, the case proceeds to prosecution, with special agents assisting in trial preparation. If declined, the investigation may be discontinued or revert to a civil matter.

Voluntary Disclosure: Taxpayers who come forward before an investigation begins may avoid prosecution through IRS voluntary disclosure programs, though this does not apply once CI is involved.

Practical Considerations for Taxpayers
If contacted by an IRS special agent, taxpayers should exercise extreme caution:
1)Right to Remain Silent: Do not provide statements without an attorney, as any statement may be used against you.
2)Avoid common mistakes like speaking with a tax auditor during a civil audit which can be used as a basis to conduct a criminal case.
3) IRS criminal tax cases have high conviction rate (over 90%). Early legal involvement by a tax lawyer can manage risk and avoid potential exposure to criminal tax prosecution.

Contact Us
IRS criminal tax investigations are initiated through a variety of sources, including civil audits, whistleblower tips, and inter-agency referrals, with a structured process to ensure only credible cases proceed. Understanding the audit and investigation process is critical for taxpayers facing potential criminal exposure and will influence the outcome of the case. For further assistance, please contact us to consult with a qualified criminal tax attorney.