Common Ways in Which Federal Criminal Tax Investigations Begin

By Phillip A. Turner, Esq.

When an individual learns that he or she is the subject of an investigation for the alleged violation of the federal statutes relating to tax matters, the common question is what triggered the investigation. Often times knowing what provoked the investigation will be extremely helpful in preparing a successful defense to future criminal charges. Although there may be many causes, some are very common. In order to understand some of the common situations which trigger investigations, one must understand the basic statutes involved. The most common statutes involved are Title 26 United States Code Sections 7201, 7203 and 7206. Many detailed articles have been written regarding the these statutes, but in summary the statutes prohibit tax evasion, knowingly failing to file a tax return and knowingly filing a false tax return. It is not the purpose of this short article to give a detailed explanation of the law regarding these statutes, but merely to provide some knowledge as to how these matters and related investigations begin.

A common scenario is that a civil audit by the Internal Revenue Service of one taxpayer will cause the civil auditor to check a taxpayer's filing history. This may lead to the detection of the fact that for several years no returns have been filed by the taxpayer or a spouse. A fraud referral may then be made by the civil auditor to the Criminal Investigation Division of the Internal Revenue Service (hereinafter "CID"). A second common scenario is that during a civil audit of a company or corporation, the civil audit may reveal that individuals associated with the company or corporation have not filed tax returns or that monies paid to these individuals have not been reported on the respective tax returns. A third common scenario is that an individual may inform CID that a neighbor, co-worker or former spouse has allegedly violated the statutes. The act of informing may be caused by emotions such as vengeance or jealously or simply by the fact that under certain circumstanced defined by law, the government will give the informant a monetary reward. A fourth common scenario is that on occasion the government may monitor debit cards. The debit card may reveal that it is connected to an unreported foreign bank account or a bank account in the name of the third party. A fifth scenario is that individual may be the subject of an investigation by another law enforcement agency. The other law enforcement agent will alert CID to the possibility of violations. A sixth scenario is that income amounts reported to the Internal Revenue Service by one entity do not appear on an individual's tax return. The internal Revenue Service has methods for matching various income statements to corresponding tax returns.

When information is received by the CID, the information will be evaluated and a determination made whether an initial inquiry should be made. An investigator assigned to the CID will check the individuals filing history and depending on the nature of the matter, request the original tax returns from an Internal Revenue Service Center. Several investigative background inquiries will be made without knowledge of the subject of the inquiry. As an example, an inquiry will be made to see if the individual is the subject of an investigation by another federal law enforcement agency or whether the individual has a prior criminal record. If CID decides to proceed with the investigation, the matter may be pursued by CID itself or a decision may be made to involve the local United States Attorney's Office at early stage. At some point, the CID agents either alone or in conjunction with other federal law enforcement agents will approach the subject of the investigation. As stated in my prior article, if this interview is in a noncustodial setting, the agents are generally not required to give "Miranda" warnings. Individuals who are aware of their right not to speak will often times refuse to speak to the agents; refuse to sign any consent forms allowing the agents to search a home or other area; will politely tell the agents that an attorney will contact the agents and will close the door to the home or office or simply walk away.

If you have any additional questions about these types of matters, please do not hesitate to contact Phillip A. Turner.