Tax Fraud Cases

At any point during a civil examination by the Internal Revenue service, a Revenue Agent might find information that leads them to believe that the case has the potential to be a criminal tax fraud case. If a Revenue Agent believes that there is an indication of tax fraud, they will prepare Form 2797, Referral Report for Potential Tax Fraud Case.

The IRS instruction manual dictates how the IRS Revenue Agent must proceed even after filing a Form 2797.  The Revenue Agent will work on the civil examination until they have enough information for Criminal Investigation (CI) to be well informed on the matter.  The Revenue Agent has to be careful because the civil examination process cannot be used to further the criminal case. Also, the Revenue Agent cannot request any information once they have referred a case to CI. It is the job of the Revenue Agent to collect enough evidence to justify the indications of tax fraud in filing Form 2797 with CI.

There are multiple reasons for an IRS Revenue Agent to believe that there is a potential for fraud.  Revenue agents will look for patterns over multiple years specifically for; improper deductions, claiming too many tax credits, understatement of income, deducting personal items as business expenses or omitting income.  The Revenue Agent will also look for concealment of assets, if the taxpayer engages in illegal activities, or if the taxpayer willfully attempted to evade tax.  For taxpayers who own businesses, Revenue Agents will look for accounting regularities, two sets of books, inadequate records, false records, or employers who deal solely in cash.  A Revenue Agent could believe that there is potential for fraud if a taxpayer does not cooperate with the examining agent.

Once completed, Form 2797 is forwarded to a fraud specialist in the civil examination department or a case can be directly referred to the IRS Criminal Investigation unit.  After the Revenue Agent refers a case the civil audit is suspended, and the criminal aspect of the case supersedes the civil aspect of the tax fraud case.  Revenue Agents usually do not inform the taxpayer that the civil case is suspended for tax fraud crime, but instead no longer contact the taxpayer and make it difficult for the taxpayer to contact them.

There are warning signs that an IRS Revenue Agent is preparing a civil examination into a tax fraud case that can occur even before the Revenue Agent makes communication near impossible.  Some steps taken by the Revenue Agent might be copying basic financial documents, carefully examining bank deposits and records, or by asking questions that focus on income that might not have been reported.  The Revenue Agent can also prolong the examination by issuing summonses to third party individuals, or asking questions to family members or work contacts. Other warning signs of a tax fraud case would be if the taxpayer has been investigated for any other criminal activity or if the taxpayer is a high profile individual.

The IRS can also be direct in the examination approach.  An IRS Special Agent can go to the home or workplace of a taxpayer whose case is under criminal investigation with the Revenue Agent for a surprise visit.  The taxpayer does not have to let the Special Agent in, but should call an experienced New York tax attorney for assistance.  It is crucial that the first contact between a taxpayer and a Special Agent has an experienced New York tax attorney representing the taxpayer.  Taxpayers may think that they can handle the situation, but run the risk of misrepresenting the situation or providing the agents with incorrect information.

Tax Fraud cases are not always investigated by IRS agents.  It is somewhat common for criminal tax fraud cases to be investigated by a grand jury. A taxpayer under criminal investigation can be served a grand jury subpoena.  Since taxpayers are not aware if they are under criminal examination, grand jury subpoenas create uncertainty in that a taxpayer can be served one without knowing if they are the target of investigation or a witness.  Typically a taxpayer under investigation will not be summoned to a grand jury until very late into the investigation, and even at this point, they are asked to voluntarily appear.  Subpoenas normally are reserved for witnesses.

Therefore, tax fraud case investigations can occur either by a CI or a grand jury.  Most of these cases start as civil examinations that were referred by a Revenue Agent after they find indications of potential fraud.  Criminal examinations can also stem from reports made to the service in the form of formal IRS documents or newspaper and media reports about individuals who commit fraud and/or embezzlement.  Investigations into criminal tax fraud crimes can also be initiated from referrals to CIs or a grand jury from other law enforcement agencies which can occur since CIs partner with other agencies in special task forces regularly already. There is also the possibility of a “whistleblower,” an individual who informs the IRS of a potential criminal tax fraud case.  Whistleblowers are often a hostile former spouse, employee or business partner.  Whistleblowers are rewarded for the information they provide to the IRS that leads to additional taxes, interest and penalties on a taxpayer.

If you believe that a civil examination could potentially turn criminal investigation of a tax fraud case, you will want to contact a New York Tax Attorney for legal representation and to prepare for a potentially oncoming criminal matter.

By: Timothy S. Hart