When Does IRS Launch Criminal Tax Investigations? (10 Risks)

Bad Conduct That May Lead to Prosecution

There are many different types of criminal tax violations that a U.S. Person may commit and many different methods that taxpayers can use to try to avoid paying the full amount of tax due on their income – with the ultimate goal of reducing their tax liability. This in turn further increases the U.S. Tax Gap, which has become a major enforcement priority for the IRS. Depending on the specific facts and circumstances of the violation, a Taxpayer may become subject to a criminal tax investigation, which may lead to prosecution — which can result in an extremely high monetary fine and even incarceration. Of course, not all types of tax violations are considered criminal and not all criminal tax investigations lead to indictment and prosecution. Let’s take a look at 10 common examples of criminal tax investigations.

First, Criminal vs Civil Tax Investigations

Not all tax investigations are criminal. In fact, most tax violations are non-willful or innocent, civil mistakes that do not culminate in criminal tax violations. In other words, if you simply made a mistake and miscalculated your tax liability, you would not be subjected to a criminal tax investigation.

Failure to Report Cash Income

While it has become less common these days, there are still several types of business transactions that are conducted in cash or cash equivalent. And with this type of situation, the Taxpayer may not receive any sort of 1099 or equivalent and therefore believes that there is no way for the US government to track the cash income – unfortunately, this is rarely the case as the IRS/DOJ have many investigative tactics at their disposal.

Failure to Report Undocumented Income

Even if the income is not considered cash, when the payment is received as cryptocurrency, or something equivalent the taxpayer may falsely believe they can avoid reporting the income.

Failure to Report Foreign Income

In many foreign countries, income is generated tax-free whereas that same category of income would be taxable in the United States — such as interest or dividends. Understandably, some Taxpayers get very upset at the idea that they have to pay U.S. tax on foreign income that is otherwise not taxable in the foreign country, and this leads to underreporting.

Social Media Income or Benefits

Income is not always paid in dollars or currency. Nevertheless, other benefits the Taxpayer receives in exchange for services performed (depending on the specifics of the transaction) may be considered income which may be considered reportable. If the Taxpayer is aware that this is income equivalent that is supposed to be reportable but does not report it, then this can lead to a criminal tax investigation.

Cryptocurrency Income

It can get very confusing when it comes to cryptocurrency, income taxes, and reporting — because many people are under the impression that because the term currency is part of the term, it is treated the same as currency, but that is incorrect. In the past few years especially, the U.S. government has taken a hard stance against unreported cryptocurrency income — whether it is for services performed, exchanges, mining, sales, etc. This has led to an uptick in criminal tax investigations for cryptocurrency.

Fraudulent Transfers

If a person believes that the US government may try to seize their assets and/or issue a lien or levy, the taxpayer may intentionally try to move the assets into a third person’s name in order to avoid the US government from finding it. This can be considered criminal if it is with the intent to avoid paying a debt/liability to the US government. In this type of situation, all parties involved could potentially be subject to a criminal tax investigation.

FFI FATCA Reporting

In an all-too-common situation, a U.S. Taxpayer earns income in a foreign account but (knowingly) not reporting that income on their US tax returns. Likewise, the Foreign Financial Institutions (FFI) whether the Taxpayer generates passive income may be FATCA compliant — which means the FFIC actively reports U.S. account holders to the IRS. If the Taxpayer is audited, and during the audit the Taxpayer doubles down and further confirms that they do not have foreign income (a common misstep) when in fact they do, this could lead to criminal tax investigations for not only the income but for FBAR and FATCA purposes as well.

Hiding Money Overseas

When a person moves their money overseas for the purpose of avoiding having to pay debts on or claiming the income on their tax return, this can be considered a criminal violation and lead the taxpayer to become the subject of a possible indictment/prosecution.

Assigning Income to 3^rd Parties

Let’s say for example that a person owes $100,000 to the IRS. That same person has $100,000 due to them from a customer, and instead of receiving that money, they have it assigned to a third party who then turns around and gifts that money to the taxpayer. This is a type of income tax fraud that can lead to a criminal tax investigation.

Money Laundering

While money laundering is not necessarily considered a tax crime per se, it is usually entwined with other types of tax violations such as fraud and evasion. Money laundering is the idea of taking illegal money and then washing it in a legitimate business so that the proceeds from the legitimate business appear to be legitimate, when in fact the entire transaction is tainted. This could lead to a criminal tax investigation in addition to other related criminal investigations as well.

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