When Does the IRS Pursue Criminal Charges? A Comprehensive Guide

The IRS Criminal Investigation Division’s latest annual report reveals a sharp focus on enforcing tax laws, with over 2,600 investigations and $37.1 billion identified from tax and financial crimes in FY23. With a conviction rate exceeding 93%, the message is clear: the IRS takes tax violations seriously and pursues them with precision.

But what triggers the IRS to take the leap from audits to criminal charges?
And more importantly, how can you protect yourself from becoming part of these statistics?

This comprehensive guide answers the critical question: when does the IRS pursue criminal charges? From common red flags like underreporting income to the step-by-step investigation process, we’ll uncover what you need to know to stay compliant, avoid costly mistakes, and safeguard your financial future.

Common Triggers for IRS Criminal Charges

The IRS may press criminal charges when taxpayers deliberately break tax laws. Below are common triggers that answer when does the IRS pursue criminal charges and that can lead to serious legal consequences:

1. Significant Underreporting of Income
   Repeatedly failing to report significant income triggers IRS scrutiny. This often includes unreported cash transactions, unexplained large bank deposits, or income that doesn’t match a taxpayer’s lifestyle or assets.
2. False or Fraudulent Information
   Providing incorrect information on tax returns, such as fake deductions, inflated credits, or false exemptions, can lead to criminal charges for fraud.
3. Failure to File Tax Returns
   Not filing tax returns, particularly over multiple years or while earning significant income, is considered willful neglect and can lead to prosecution.
4. Use of False Documents
   Submitting fake documents, such as forged receipts, fabricated records, or falsified financial statements, to claim tax benefits can result in criminal charges.
5. Engaging in Tax Evasion Schemes
   Schemes to hide income or evade taxes—such as using offshore accounts, fake businesses, or hiding assets—are closely monitored by the IRS and can result in serious penalties.
6. Misrepresentation on an Offer in Compromise (OIC)
   Making false statements or misrepresenting assets when submitting an OIC to reduce tax liability can trigger federal tax evasion charges.
7. Suspicious Deductions or Credits
   Claiming unusually high deductions or credits that don’t match income or industry standards can raise red flags. For example, a small business reporting excessive travel or entertainment expenses might attract scrutiny.
8. History of Non-Compliance
   Taxpayers who repeatedly file late, underreport income, or skip returns increase their risk of criminal investigation.
9. High-Risk Occupations or Industries
   Certain industries, like cash-heavy businesses (e.g., restaurants, salons, construction), are often scrutinized more closely for underreporting income or hiding cash transactions.
10. Informant Tips
    Insiders, such as employees, ex-partners, or competitors, may provide tips about tax fraud. These tips can lead to detailed IRS tax fraud investigations and uncover hidden income or false claims.

By staying compliant and honest, taxpayers can avoid triggers that lead to criminal charges. Understanding when does the IRS pursue criminal charges can help prevent mistakes. Professional tax advice can ensure proper reporting and avoid legal issues.

Investigation Process

The IRS CI division (Criminal Investigation Division) investigates cases involving tax fraud, money laundering, and violations of the Bank Secrecy Act. If their findings show criminal activity, the case is referred to the Department of Justice (DOJ) for possible prosecution.

If the IRS suspects fraud, it initiates a multi-step investigation process. Understanding these steps can help taxpayers anticipate and respond appropriately.

1. Identifying Potential Fraud

Investigations begin when the IRS suspects illegal activity, such as tax fraud, money laundering, or violations of banking laws. These cases can come from:

• Tips from IRS employees like auditors or collectors.
• Whistleblowers or members of the public.
• Other law criminal tax enforcement agencies or U.S. Attorneys.

2. Initial Review

Once a case is flagged, special agents conduct a “primary investigation.” This step involves reviewing the evidence to see if a crime might have been committed.

• The agent’s supervisor reviews the findings.
• If approved, the case goes to the next stage.
• At least two levels of management must approve the investigation before it moves forward.

3. Conducting the Investigation

After approval, the investigation becomes more in-depth. Special agents collect evidence to prove whether a crime occurred. They might:

• Interview witnesses.
• Analyze financial records and bank statements.
• Use search warrants to gather documents or other evidence.
• Conduct forensic examinations of devices or data.
  IRS attorneys work alongside agents to make sure everything is legally sound.

4. Making a Decision

When the investigation is complete, the team decides what to do next:

• If there isn’t enough evidence, the case is closed.
• If the evidence is strong, agents write a detailed report summarizing the crime and recommending prosecution.

The report goes through several layers of review to ensure it is accurate and thorough.

5. Prosecution Recommendation

If the report is approved, the case is sent to either:

• The Department of Justice Tax Division (for tax-related crimes).
• A U.S. Attorney (for other financial crimes).

These prosecutors review the case and decide whether to take it to court.

6. Prosecution and Conviction

If the prosecutors move forward, they prepare the case for trial. IRS special agents assist by providing evidence and expertise. The goal is to secure a conviction, either through a guilty plea or a court trial.

Thousands of successful prosecutions each year send a clear message: tax fraud and financial crimes are taken seriously, and the penalties can be severe.

By understanding this process, taxpayers can see how thorough the IRS is in pursuing criminal activity, reinforcing the importance of compliance with tax laws.

Civil vs. Criminal Tax Investigations

While not every IRS investigation leads to criminal prosecution, understanding the distinction between civil and criminal tax fraud can help taxpayers assess their situation. Civil cases typically involve financial penalties, while criminal cases can lead to imprisonment. Here’s a comparison:

Knowing these differences can help taxpayers and their representatives prepare for potential consequences and build a stronger defense strategy.

Timeline of an IRS Criminal Investigation

An IRS criminal case follows a structured process, and while the timeline can vary depending on the complexity of the case and when does the IRS pursue criminal charges, here’s a general overview:

Most IRS criminal investigations are resolved within 2-3 years, though complex cases can take 5 years or more. Understanding how long does an IRS criminal investigation take emphasizes the importance of addressing concerns promptly to avoid prolonged investigations and penalties.

Warning Signs of an IRS Criminal Investigation

The IRS may turn a civil tax audit into a criminal investigation when fraud is suspected. Knowing when does the IRS pursue criminal charges can help you spot these early warning signs. Here are the common red flags to watch for.

Unexplained Silence After Active Investigation

A sudden lack of communication from a civil revenue agent or officer, especially after significant investigative activity, could indicate that they are consulting with CI for a possible criminal referral.

Requests for Extensive Bank Records

Agents summoning and photocopying detailed bank account information, including statements, deposit slips, canceled checks, and wire transfers, may suggest they are gathering evidence for unreported income. The discovery of a hidden or “side account” is a particularly strong red flag.

Focus on Lifestyle and Spending

Agents asking about large expenditures or unexplained wealth may be examining whether reported income matches the taxpayer’s financial reality. They may also request details about assets and liabilities at the start and end of the tax year, using indirect income verification methods like the net worth method or expenditures method.

Scrutiny of Business Records

Requests for supplier invoices, customer ledgers, price lists, and similar records could signal that the agent is trying to find circumstantial evidence of unreported gross receipts or other income discrepancies.

Probing Questions About Intent

If the agent asks the taxpayer to submit to interviews or provide written responses about their knowledge or intent behind discrepancies (e.g., unreported income or false deductions), this could suggest they are building a case to show willfulness, a key element in criminal tax fraud.

Refusal to Discuss Audit Closure

If the agent avoids discussing the status of the audit or provides vague answers about when it will be concluded, it may indicate that the case is being escalated for a criminal referral.

Defense Strategies and Legal Options

An IRS criminal investigation is a serious matter that requires a well-prepared strategy. With potential outcomes like fines, imprisonment, and a damaged reputation, it’s crucial to understand when does the IRS pursue criminal charges and takes the right steps to protect your rights.

Here’s how you can effectively respond:

1. Get Professional Legal Help Right Away

As soon as you learn about an IRS investigation, consult an experienced tax attorney. Early guidance can help you understand the investigation, protect your rights, and avoid critical mistakes.

2. Bring a Financial Expert on Board

Forensic accountants are invaluable in these cases. They can analyze your financial records, spot discrepancies, and provide expert insights to challenge the IRS’s claims. Working closely with your attorney, they strengthen your defense.

3. Review All Documents Thoroughly

Carefully go over your tax returns, bank statements, and other financial records. Preserve all documents—tampering with or destroying evidence can lead to additional charges. Identifying errors or inconsistencies in the IRS’s findings can help your case.

4. Question the Investigation’s Basis

Not all IRS investigations are built on strong evidence. Your legal team can evaluate whether the investigation followed proper procedures. If flaws are found, they may challenge the case or seek to dismiss charges.

5. Consider Resolving Before Trial

Negotiations with the IRS or DOJ may help you avoid a trial. This could involve reducing charges, agreeing to pay outstanding taxes, or entering a plea deal for less severe consequences.

6. Be Prepared if a Trial is Needed

If your case goes to trial, your defense team will work to challenge evidence, highlight procedural errors, and present expert testimony. Strong preparation is key to ensuring a fair outcome.

Defending against an IRS criminal investigation requires the specialized expertise of Hall’s IRS team. With a combination of legal knowledge and financial analysis, we ensure you receive the best possible defense.

Be Prepared for IRS Scrutiny

Stay Ahead and Protect Your Finances with Hall’s IRS

Staying ahead of potential tax issues is just as important as understanding when the IRS pursues criminal charges. While we’ve covered the key triggers and defense strategies, it’s important to recognize that the IRS’s focus is always evolving.

At Hall’s IRS, we have seen firsthand how the IRS is focusing more on cryptocurrency transactions. The IRS keeps a close eye on digital assets, and even minor reporting errors can cause problems. Similarly, with the crackdown on offshore accounts, it’s becoming riskier to hide income abroad.

Similarly, there’s been a stronger push against hiding income in offshore accounts. The IRS has sophisticated tools to track international financial activities, making it riskier than ever to conceal assets abroad. Hall’s IRS advises that transparency is the best approach to avoid costly mistakes.

By staying informed and adapting to these evolving trends, you can proactively protect yourself from potential issues. Hall’s IRS is here to guide you through these challenges, offering expert advice to keep your finances secure and compliant.