IRS Criminal Investigation Division

Internal Revenue Service, Criminal Investigation (IRS-CI) investigates potential criminal violations of the U.S. Internal Revenue Code and related financial crimes in a manner intended to foster confidence in the tax system and deter violations of tax law. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, the Internal Revenue Service (IRS) is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.

Chief Richard Weber oversees a worldwide staff of approximately 3,500 CI employees, including approximately 2,200 special agents who investigate and assist in the prosecution of criminal tax, money laundering, and Bank Secrecy Act related crime cases.^[1]

According to statistical data on the IRS web site, Criminal Investigation initiated 4,297 investigations in fiscal year 2014. In addition, the IRS-CI conviction rate (which is the percentage of convictions compared to the total number of convictions, acquittals, and dismissals) was 93.4% in fiscal year 2014.

History

On July 1, 1919, the Commissioner of Internal Revenue Daniel C. Roper^[2] created the Intelligence Unit to investigate widespread allegations of tax fraud. To establish the Intelligence Unit, six United States Post Office Inspectors were transferred to the Bureau of Internal Revenue to become the first special agents in charge of the organization that would one day become Criminal Investigation. Among the first six Elmer L. Irey was designated the Chief, and William H. Woolf the Assistant Chief.^[3] They formed the nucleus that became the Intelligence Unit.

The Intelligence Unit quickly became renowned for the financial investigative skill of its special agents. It attained national prominence in the 1930s for the conviction of public enemy number one, Al Capone, for income tax evasion, and its role in solving the Lindbergh kidnapping. From these promising beginnings the Intelligence Unit expanded over the intervening decades, investigating tax evasion by ordinary citizens, prominent businesspersons, government officials, and notorious criminals.

In July 1978, the Intelligence Unit changed its name to Criminal Investigation (CI). Over the years CI’s statutory jurisdiction expanded to include money laundering and currency violations in addition to its traditional role in investigating tax violations. However, Criminal Investigation’s core mission remains unchanged. It continues to fulfill the important role of helping to ensure the integrity and fairness of the United States tax system.

Since CI’s inception in 1919 to the present, the conviction rate for Federal tax prosecutions has never fallen below 90 percent. This is a record of success that is unmatched in Federal law enforcement.^[4]

Recent press

Over the years, IRS-CI has continued to maintain a reputation for high levels of expertise in financial investigation and has been involved in a number of high-profile cases in recent years.

2015 FIFA corruption case: In May 2015, fourteen current and former leaders of soccer’s international governing body, FIFA, were indicted on charges of widespread corruption, ultimately leading to the arrest of seven top executives. FIFA leaders were accused of accepting bribes from country representatives in exchange for support in their countries’ bids to host the World Cup. The 47 count indictment charged defendants with racketeering, wire fraud, and money laundering conspiracies.^[5] IRS-CI played an integral role in exposing the scandal, as IRS-CI opened the initial criminal investigation into former CONCACAF General Secretary Chuck Blazer in 2011 for not filing personal income tax returns. IRS-CI put together a tax case against Blazer that was ultimately used to convince Blazer to supply information to, and cooperate with, the government to build a case against other FIFA officials. In cooperation with the FBI’s own investigations into FIFA corruption, multiple police agencies, and diplomats in 33 countries, IRS-CI helped to crack what has been described as “one of the most complicated international white-collar cases in recent memory.”^[6]

Dennis Hastert Scandal: IRS-CI was instrumental in the 2015 indictment of Dennis Hastert, the longest-serving Republican Speaker of the House, on charges of violating banking laws. Hastert served in Congress between 1987 and 2007, and became a high-paid lobbyist after his retirement from Congress.^[7] Prior to his career as a politician, Hastert worked as a High School teacher and wrestling coach at Yorkville High School in Illinois for 16 years.^[8] Hastert violated banking laws by structuring cash withdrawals to avoid reporting requirements. Specifically, he made cash withdrawals of less than $10,000 to hide his efforts to pay $3.5 million to an unnamed person to compensate for and conceal prior “misconduct.” At the time of the indictment, Hastert had paid the person $1.7 million.^[9]

Credit Suisse Guilty Plea: In May 2014, Swiss financial giant Credit Suisse pleaded guilty to conspiring to help U.S. taxpayers file false and misleading income tax returns with the IRS. Eight Credit Suisse executives were also charged with defrauding the United States. The agreement forced Credit Suisse to pay a total of $2.6 billion as a penalty for its tax code violations.^[10] Credit Suisse admitted that for several decades prior to 2009, it had operated an illegal cross-border banking business that helped U.S. clients conceal offshore assets from the IRS to avoid paying taxes. IRS-CI special agents were directly involved in unmasking these tax violations. A Senate investigative report revealed that Credit Suisse had held more than 22,000 accounts for U.S. clients with assets between $10 billion and $12 billion—95% of these accounts were not reported for tax purposes.^[11]

Investigation categories

The Criminal Investigation strategic plan is composed of four interdependent programs: Legal Source Tax Crimes; Illegal Source Financial Crimes; Narcotics Related Financial Crimes; and Counterterrorism Financing. These four programs are mutually supportive, and encourage utilization of all statutes within CI’s jurisdiction, the grand jury process, and enforcement techniques to combat tax, money laundering and currency crime violations. Criminal Investigation must investigate and assist in the prosecution of those significant financial investigations that will generate the maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax system.^[1]

Legal Source Tax Crimes Investigating Legal Source Tax Crimes is IRS-CI’s primary resource commitment. Legal Source Tax investigations involve taxpayers in legal industries and occupations who earned income legally but chose to evade taxes by violating tax laws.^[12]

Illegal Source Financial Crimes The Illegal Source Financial Crimes Program attempts to detect all tax and tax-related violations, as well as money laundering and currency violations. This program recognizes that money gained through illegal sources is part of the “untaxed underground economy” that threatens the voluntary tax compliance system and undermines public confidence in the tax system.^[13]

Narcotics-Related Financial Crimes The Narcotics-Related Financial Crimes Program was established in 1919 and is one of IRS-CI’s oldest initiatives. Its goal is to utilize the financial investigative expertise of its special agents to disrupt and dismantle major drug and money laundering organizations.^[14] IRS-CI’s role in supporting narcotics related investigations was highlighted in the 1996 book, “The Phoenix Solution: Getting Serious About Winning America’s Drug War,” by Vincent T. Bugliosi.^[15]

Counterterrorism Financing Following the events of September 11, 2001, the IRS-CI has committed resources to helping other federal law enforcement agencies in counterterrorism investigations. Examples include, but are not limited to, providing financial investigative assistance in terrorism matters and providing computer specialist assistance to terror investigations.^[16] IRS CI’s support on investigations related to counterterrorism was highlighted in the 2013 book “Treasury’s War: The Unleashing of a New Era of Financial Warfare,” by Juan Zarate^[17]

Investigative process

Part 9, Chapter 5 of the Internal Revenue Manual comprises the bulk of the material taught to IRS-CI Agents during their six-month sojourn at the Federal Law Enforcement Training Centers (FLETC) in Glynco, Georgia. IRS-CI Agents in training focus heavily on three primary “Methods of Proof” to help produce conviction in the minds of a judge or jury. These methods include: Specific Items, Net Worth, and Expenditures, and relate primarily to evidence gathering based on how an individual has acquired wealth.^[18] Each method seeks to compare a suspect’s standard of living and sources of income to that income reported for tax purposes.

Direct – Specific Item Method

Using the Direct-Specific Item Method, the government seeks to substantiate specific items that were not reported completely or accurately for tax purposes. The government must also show that the items of omission were made willfully to understate the subject’s tax liability.

There are three broad categories of schemes suited to the Specific Item Method of proof:

• Understatement of income;
• Overstatement of expenses;
• Fraudulent claims for credits or exemptions.

Indirect – NetWorth Method

The IRS considers the Net Worth Method to be an effective way of proving taxable income in criminal tax investigations. The formula for calculating the subject’s correct taxable income can be broken down into four steps:

• The special agent must first calculate the change in a subject’s net worth (assets less liabilities). This is done by determining the subject’s net worth at the beginning and end of a period of time (a taxable year or years) and then subtracting the beginning period’s net worth figure from the ending period’s net worth figure. This computation will yield a change in net worth (either an increase or decrease in net worth).
• The amount of this change in net worth is then adjusted for personal living expenses, nondeductible losses, and nontaxable items to arrive at a corrected adjusted gross income figure.
• The corrected adjusted gross income figure is then adjusted for itemized deductions or the standard deduction amount, and then for exemptions, to arrive at a corrected taxable income figure.
• Finally, by comparing the corrected taxable income figure with the taxable income reported on the tax return, the special agent can determine whether the subject failed to report any taxable income.^[19]

Indirect – Expenditures Method

The Expenditures Method starts with an appraisal of the subject’s net worth situation at the beginning of a period. If the expenditures have exceeded the amount reported as income and if the net worth at the end of the period is the same as it was at the beginning (or any difference accounted for), then it may be concluded that income has been underreported. It may be necessary to consider nontaxable receipts during the period in question.^[20]

Sources of evidence

Agents rely heavily on third party testimony. Many tips originate from an inside source, such as a perturbed business partner or ex-wife. Other valuable sources of information include tax returns, trash (legally acquired from outside of the home’s curtilage), purchases, SARs – Suspicious activity report, subpoenaed cell phones records, computer files, insider testimony, telephone tapping, subpoena‘s, etc.

Investigation priorities

CI’s highest priority is to enforce U.S. tax laws and support the tax administration. CI identified 10 investigation priorities for fiscal year 2014: -Identity Theft Fraud -Return Preparer and Questionable Refund Fraud -International Tax Fraud -Fraud Referral Program -Political/Public Corruption -Organized Crime Drug Enforcement Task Force (OCDETF) -Bank Secrecy Act and Suspicious Activity Report (SAR) Review Teams -Asset Forfeiture -Voluntary Disclosure Program -Counterterrorism and Sovereign Citizens^[21]

IRS-CI has also focused on addressing cyber-crime in recent years. The unit played an instrumental role in helping to bring down Silk Road founder Ross William Ulbricht in 2013 on charges of money laundering, computer hacking and conspiracy to traffic narcotics.^[22] In 2014, IRS-CI created a Cyber Crimes Unit to address the increase in tax crimes that contain virtual components—especially those related to internet fraud, identity theft, and other virtual financial crimes.^[23]

Firearms

The CID is the only unit within the IRS authorized to carry firearms. Special Agents are trained in the use of, and issued, the Glock handguns, specifically the Glock 22, 23, or 27 as sidearms. Remington 870 shotguns or AR-15-type rifles are also equipped depending on the situation.^[24]

Courtesy: Wikipedia