From the Tax Law Offices of David W. Klasing - What Is a Federal Criminal Tax Administrative Investigation?

IRVINE, Calif., Jan. 27, 2025 /PRNewswire/ -- Realizing you may be under scrutiny by the Internal Revenue Service (IRS) for criminal tax violations will undoubtedly result in countless sleepless nights. These investigations can stem from a wide array of triggers—unintentional mistakes, accountant errors, unreported income, inaccuracies in one's books, or intentionally non-compliant federal accounting & reporting practices. Unlike standard federal civil tax audits, which aim to verify that you have correctly reported and paid your taxes, a Criminal Tax Administrative Investigation is infinitely more intense, often zeroing in on whether you have willfully violated tax laws. Comprehending how these investigations begin, escalate, and ultimately lead to possible prosecutions can be crucial to safeguarding your reputation and, in some cases, your very liberty.

Defining a Criminal Tax Administrative Investigation
In contrast to a routine civil audit, a Criminal Tax Administrative Investigation is a formal inquiry conducted by the IRS's Criminal Investigation Division (CID). Its objective is not simply the accurate calculation and payment of taxes but to determine whether a taxpayer or business has intentionally engaged in criminal tax offenses like tax evasion, money laundering, or fraudulent recordkeeping. The driving force behind such probes is the notion that to keep faith in the federal tax system, there must be regular federal criminal tax enforcement actions against those who choose to intentionally flout the rules. Consequently, these criminal tax investigations are downright frightening due to the severe negative public attention and potential prison time that may follow.

Categories and Initiation of Administrative Investigations
According to the Internal Revenue Manual (IRM) that IRS personnel follow, IRM 9.4.1 and IRM 9.9.1, administrative investigations are initiated in the Criminal Investigation Management Information System (CIMIS) under one of three designations:

1. General Investigations (GI): Launched when initial information suggests possible wrongdoing, but more data is needed before deeper scrutiny begins.
2. Primary Investigations (PI): Triggered when the IRS has sufficient reason—based on screening or prior leads—to believe criminal tax violations may have occurred. Agents clandestinely collect evidence to decide whether the case warrants a further upgrade.
3. Subject Criminal Investigations (SCI): Initiated if evidence of deliberate or fraudulent criminal tax acts is significant. At this phase, special agents center their inquiry on proving (or disproving) criminal culpability sufficient for criminal tax prosecution.

The Role of the Special Agent in Charge (SAC)
A Special Agent in Charge (SAC) or their designee has the authority to authorize criminal tax investigations of all incoming leads or evidence that, after thorough evaluation, merit additional inquiry. Following this decision, a summary outlining the justification for opening the matter is prepared and placed in the administrative file. This memorandum may take the form of a specialized template (e.g., from the Unified Checklist SharePoint site in CI), ensuring standardized documentation of the investigation's basis.

From First Indicators of Fraud to Firm Indicators
During a federal civil tax audit or through data from offices like the Office of Fraud Enforcement (OFE), the Lead Development Center (LDC), or Refund Fraud and Investigative Support (RFIS), the IRS may detect initial indicators of fraud—sometimes referred to as "badges of fraud." Examples include:

• Underreporting Income: Significant discrepancies between declared and actual earnings
• Cash-Based Transactions: Large or repeated use of cash, concealing the true nature of financial activities
• Destruction of Records: Missing or tampered documentation hampering the verification process
• Complex Schemes: Offshore accounts, illegal tax shelters, nominee entities, or shell companies indicating potential tax evasion

These first indicators, while suspicious, do not by themselves suffice to warrant felony charges. They merely prompt deeper criminal tax investigations. Once a special agent suspects the taxpayer's actions go beyond innocent mistakes, they work to establish firm indicators of fraud. This entails expanded data-gathering (e.g., forensic accounting, witness interviews) to convert preliminary suspicions into concrete evidence. If firm indicators emerge, the case typically transitions from a primary to a subject criminal investigation (SCI)—or, in severe scenarios, to a grand jury investigation.

The Administrative Investigation Lifecycle
1. Information Gathering and Verification

Special Agents in Charge (SAC) and Fraud Referral Specialists (FRS) compile and review bank records, interview witnesses, and utilize forensic accounting techniques to determine whether an error is merely careless or a calculated attempt to evade taxes. They watch for repeated shortfalls in deposits, mismatches in reported transactions, and any attempts at obfuscation (e.g., using third parties to conceal ownership or income).

2. Completing the Special Agent's Report (SAR)

After completing enough investigative work, the SAC prepares a Special Agent's Report (SAR). This detailed document:

• Outlines the findings of the administrative investigation
• Summarizes witness statements and other evidence supporting a criminal referral
• Provides the special agent's recommendation for or against criminal tax prosecution

The Chief Counsel of the Criminal Tax Division will further review this report. If they concur, a Criminal Enforcement Memorandum is drafted to discuss:

• The specific crimes for which criminal tax prosecution is recommended
• The evidence forming the basis for those charges
• Anticipated legal or technical issues
• The recommended strategy for proceeding (e.g., felony referral under IRC §§ 7202, 7206, etc.)

Access to the SAR and accompanying exhibits is seldom available to the taxpayer or tax counsel before charges are filed. Requests for the special agent's investigation materials under the Freedom of Information Act (commonly called a FOIA request) have been consistently denied under the investigatory record exemption and the exemption for material exempt by statute. Courts have occasionally required the government to supply an index of material contained in the SAR. The complex interaction between the Freedom of Information Act, the Privacy Act of 1974, and the disclosure provisions of the Code have left many questions unresolved. The SAR should become available to the taxpayer's tax counsel at any trial in which the agent testifies. For this reason, the IRS usually has two agents present for every interview so that the government can present its case at trial without calling the special agent to testify who wrote the SAR. In such cases, the SAR is never disclosed.

3. Referral to DOJ or U.S. Attorney

If the Criminal Enforcement Memorandum endorses prosecution, the case is forwarded to the Tax Division of the Department of Justice or directly to the United States Attorney. In some instances involving legal source income—and where the taxpayer's counsel indicates a willingness to plead guilty—the IRS may expedite the matter by sending it simultaneously to both the Tax Division and the U.S. Attorney. This approach can abbreviate the timeline between the detection of wrongdoing and a guilty plea.

Alternative Initiation: Grand Jury Investigation

In especially difficult or time-sensitive situations, the IRS Criminal Investigation Division may initiate a grand jury investigation from the outset, effectively bypassing certain administrative phases typically involved in a Criminal Tax Administrative Investigation. A federal grand jury, composed of 16 to 23 citizens, must vote at least 12 jurors in favor of issuing an indictment for a taxpayer to be charged with a tax felony. Grand juries possess substantial investigatory powers, including the authority to compel testimony and require the production of physical evidence, and their proceedings are conducted in strict secrecy, attended only by grand jurors, government attorneys, court reporters, and witnesses. This method is often chosen when the IRS is informed that an existing non-tax-motivated criminal tax investigation has uncovered evidence of tax crimes or when there is an urgent need to investigate quickly and grant immunity to reluctant witnesses. Additionally, grand jury investigations are preferred when the IRS aims to consolidate multiple criminal tax charges into a single indictment, enhancing the effectiveness and efficiency of legal proceedings. By leveraging the robust investigatory capabilities of a grand jury, the IRS ensures a thorough and expedited examination of the evidence, maintaining the deterrent effect of holding willful violators accountable under the full weight of federal law.

Potential Consequences of a Criminal Tax Administrative Investigation

An administrative investigation targeting criminal tax violations can yield outcomes far more dire than any typical civil tax audit:

• Lengthy Incarceration: Felony convictions often come with months to years in federal prison.
• Hefty Fines: Penalties can exceed the understated taxes, punishing willful deception.
• Restitution Orders: Courts may demand repayment of owed taxes, interest, and penalties in full that are non-dischargeable in bankruptcy.
• Reputational Damage: A criminal conviction is part of the public record, potentially hindering future employment or business ventures.
• Professional Consequences: Individuals in licensed professions—attorneys, accountants, financial advisors—may lose licensure or endure suspension.

Avoiding Criminal Tax Investigation and Prosecution Where You Have a History of Committing Tax Fraud and are not Currently Under Audit or Criminal Tax Investigation.

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

Call The Tax Law Offices of David W. Klasing Today If You Are Worried About a Criminal Tax Administrative Investigation

Facing criminal tax charges would surely be a horrific nightmare for anyone so unfortunate to be accused. Once an administrative investigation commences, the IRS may swiftly gather evidence that solidifies initial indicators of fraud into "firm" and prosecutable wrongdoing. If you even suspect your situation meets this threshold—or if you have reason to believe your federal civil tax audit is at risk of transitioning into an exponentially severe criminal tax investigation—securing competent legal counsel immediately can mitigate devastating life altering outcomes.

Obtaining an experienced dual-licensed criminal tax defense attorney & CPA is imperative when faced with strategic decisions such as whether to speak freely and candidly with a civil tax examiner or Criminal Investigation Division (CID). At the Tax Law Offices of David W. Klasing, our unique blend of legal acumen and advanced tax knowledge enables us to mount effective defenses for high-stakes civil and criminal tax matters. Our role will include becoming involved in the paralleling the investigation as soon as possible. Initially, we will strive to protect you, where possible, by not immediately furnishing information to the special agents or at least limiting the amount of information that may be voluntarily given to the Service. This is because we would need time to discern the nature of every representation and to review relevant records.

The subject of a completed CID investigation has a 90% probability of being criminally charged and, if charged, a similar likelihood of being convicted. The fallout of tax investigation and conviction extends beyond the punishment metered out in the criminal case. Adverse collateral consequences typically result merely from being the subject of a CID criminal investigation, and significant legal disabilities always result from criminal conviction—whether by plea or after trial. The stigma of being under an IRS criminal tax investigation is challenging to discount. When you contact the Dual Licensed Criminal Tax Defense Attorneys and CPAs at the Tax Law Offices of David W. Klasing, you get a dedicated, resourceful partner in your pursuit of vindication for the tax crimes you've been accused of committing. To learn more about our services, call us today at (888) 904-4096 or schedule a reduced-rate initial consultation online here.

See our Audit Representation Q and A Library

See our Criminal Tax Law Q and A Library

See our FBAR Compliance and Disclosure Q and A Library 

See our Foreign Audit Q and A Library

See our Civil and Criminal Divorce Tax Law Q and A Library

Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC