The Different Types of IRS Investigations Explained

The Different Types of IRS Investigations Explained

Dealing with the IRS can be intimidating, especially if you find yourself the subject of an investigation. While any interaction with the tax authorities can feel daunting, it helps to understand the different types of investigations the IRS conducts, your rights and responsibilities, and potential outcomes.

The IRS Criminal Investigation division (IRS CI) handles suspected violations of tax law, money laundering, and other financial crimes. If you receive a letter from IRS CI or an IRS special agent visits your home or business, it means you are under criminal investigation – uh oh! Don’t panic, but do take it seriously and consult a tax attorney asap.

How Criminal Tax Investigations Get Started

IRS agents can’t just randomly decide to criminally investigate someone. There has to be a valid reason to open a case. Some common triggers include:

• Tips from informants
• Referrals from other government agencies
• Data mining that identifies suspicious activity patterns
• Related investigations that uncover potential wrongdoing

IRS special agents have to get approval from higher-level officials before launching a criminal probe. This ensures tax fraud and other serious crimes are the focus, not minor errors or oversight.

Criminal Tax Investigation Techniques

Once a criminal case is open, IRS agents have broad authority to gather evidence. Tactics may include:

• Interviewing you, your employees, business partners, accountants, family members
• Obtaining personal and business records via summons
• Reviewing tax returns from multiple years
• Surveillance or site visits to your home/business
• Working with other agencies – FBI, Homeland Security, etc

IRS special agents are federal law enforcement so they can carry firearms, make arrests, and execute search warrants. Hopefully it won’t come to that though!

Areas of Focus for Criminal Tax Investigations

IRS CI directs resources toward these key issues:

• Tax crimes – tax evasion, failure to file, filing false returns
• Money laundering – disguising illegal funds to appear legitimate
• Identity theft – using someone else’s identity to commit fraud
• Terrorist financing – funding terrorist organizations or activities
• Public corruption – bribery, extortion, embezzlement by public officials

If you’re contacted by IRS CI, think back on any questionable tax positions you may have taken in recent years. Even if you believe something was an honest mistake, the IRS could view it as intentional deception.

Stages of a Criminal Tax Investigation

A criminal tax probe typically follows these steps:

1. Preliminary investigation – IRS gathers basic facts to see if a full investigation is warranted.
2. Grand jury – Prosecutors present evidence to obtain subpoenas or compel testimony.
3. Charges filed – IRS formally accuses you of tax crimes via criminal complaint or indictment.
4. Plea bargaining – Negotiations to settle the case vs. going to trial.
5. Trial – The case goes before a judge and jury who determine guilt or innocence.
6. Sentencing – If found guilty, the court imposes penalties like fines, restitution, or jail time.

Don’t wait until charges are filed to address the situation. The earlier you involve a tax defense attorney, the better.

Potential Outcomes of a Criminal Tax Investigation

Not all investigations lead to criminal prosecution. Some possibilities include:

• No action – IRS finds insufficient evidence of intentional wrongdoing.
• Settlement – You agree to pay back taxes, interest, and penalties.
• Tax fraud charges – Prosecution for evasion, false returns, etc.
• Non-tax charges – If financial crimes like money laundering surfaced.
• Jail time – Up to 5 years per tax offense, more for other charges.

The IRS may also assess civil fines and penalties on top of any criminal sanctions. Don’t go it alone – get experienced legal counsel right away if you’re under criminal investigation.

Civil Tax Investigations

While less severe than criminal probes, civil tax investigations are still serious business. Here’s an overview of how they work and your responsibilities.

Reasons for a Civil Tax Investigation

Some common triggers for civil investigations include:

• Discrepancies between your return and income reported to IRS
• Large, unusual deductions or business losses
• Tips from informants
• Random audits intended to promote compliance

Civil cases are primarily about determining the correct tax liability, not building a fraud case. But criminal charges are still possible if examiners uncover intentional evasion.

Your Rights in a Civil Tax Audit

You have important rights if the IRS selects your return for examination:

• Right to professional representation – hire a CPA or tax attorney.
• Right to appeal – challenge audit findings you disagree with.
• Right to recording – request to audio record in-person interviews.
• Right to privacy – IRS must protect sensitive information.

Don’t let auditors bully you into accepting unfair assessments. But also don’t obstruct the process – cooperate fully and provide requested documentation.

The Civil Audit Process Step-By-Step

A civil tax investigation typically follows these key steps:

1. Notice – IRS sends a letter explaining they will audit your return.
2. Information request – IRS asks for supporting documents to verify return items.
3. Interview – Audit examiner will ask you questions in person or by phone.
4. Findings – IRS presents audit adjustments and you can agree or appeal.
5. Assessment – If adjustments stand, IRS will bill you for additional tax, interest, and penalties.

Getting prompt tax audit help improves your chances of a favorable outcome. Don’t go it alone.

Possible Outcomes of a Civil Tax Investigation

Civil audits conclude with one of these main scenarios:

• No changes – IRS accepts your return as filed, no additional tax due.
• Agreed assessment – You don’t dispute the IRS proposed adjustments.
• Negotiated settlement – You successfully appeal audit findings.
• Unagreed assessment – You exhaust appeals but dispute still remains.

Even with “no change”, the civil audit process can be lengthy, stressful and disruptive. Don’t go it alone – get professional guidance.

Bottom Line

IRS investigations, whether civil or criminal, shouldn’t be taken lightly. Understanding the process and your rights is critical. But the single most important thing is getting experienced tax representation right away. Don’t wait to get help – the sooner you involve a tax pro, the better your chances of a smooth process with the best possible outcome.

Sources:

• IRS Criminal Investigation
• IRS Audits
• Taxpayer Rights