Investigation Methods and Penalties by the IRS Criminal Investigation Division

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In criminal tax cases, the IRS (Internal Revenue Service) plays a critical role in auditing illegal income and money laundering activities. While the IRS is primarily tasked with collecting federal taxes and ensuring compliance with tax laws, its Criminal Investigation Division (CID) also investigates and prosecutes serious tax-related crimes.

The IRS's Role in Investigating Illegal Income and Money Laundering

1. Investigation of Illegal Income

Illegal income typically originates from criminal activities such as drug trafficking, prostitution, and fraud. The IRS actively tracks such income to prevent tax evasion. Since income from illegal sources is still subject to taxation, failure to report it constitutes a prosecutable offense.

2. Money Laundering

Money laundering is the process of disguising the origins of illegally obtained funds by funneling them through legitimate financial systems. This tactic allows criminals to conceal illicit proceeds and evade taxes. The IRS monitors suspicious transactions, hidden assets, and financial patterns indicative of laundering, often working to uncover how these activities tie back to tax evasion.

3. Criminal Investigations

The IRS conducts in-depth tax audits as part of broader criminal investigations. Its Criminal Investigation Division (CID) targets individuals and entities involved in tax evasion, money laundering, and related offenses. Upon identifying sufficient evidence, the IRS works with federal prosecutors to bring formal criminal charges.

4. Interagency Collaboration

The IRS frequently collaborates with the FBI, DEA, and other federal and state law enforcement agencies to pursue cases involving illegal income and laundering schemes. These joint efforts often lead to multi-agency prosecutions of criminal networks and their financial enablers.

Investigations into Tax Evasion and Tax Fraud

The IRS and other tax authorities routinely conduct investigations into tax evasion and fraud. Tax evasion refers to the intentional act of underreporting or not paying taxes owed. Tax fraud involves knowingly submitting false information with the intent to reduce or eliminate tax liability. These offenses are considered federal crimes and are subject to strict legal consequences.

1. Tax Evasion – Common Methods:

• Underreporting Income: Failing to report cash or other income.

• Inflated or False Deductions: Claiming fictitious or exaggerated expenses to reduce taxable income.

• Filing False Returns: Providing incorrect information to minimize tax payments.

• Hiding Assets: Concealing property or holding assets in undisclosed foreign accounts to avoid taxation.
  

2. Tax Fraud – Common Types:

• False Tax Returns: Deliberately misrepresenting income or deductions.

• Fake Income or Deduction Documents: Submitting fabricated employment or expense records.

• Falsified Accounting Records: Altering books to inflate expenses or hide income.

• Abusing Identity of Others: Using another person's information to commit tax fraud or inflict tax-related harm.

  
  

Criminal Penalties Imposed by the Department of Justice:

• Tax Evasion: Up to 5 years in prison + fine of up to $250,000

• Filing False Returns: Up to 3 years in prison + fine of up to $100,000

• Failure to Report Foreign Accounts (FBAR Violations): Civil penalties up to 50% of the unreported balance

• Conspiracy to Defraud the IRS: Up to 5 years in prison

  
  

The IRS’s criminal investigations into tax evasion and fraud are essential in upholding the integrity of the federal tax system. When taxpayers deliberately engage in unlawful acts to avoid paying taxes, the IRS has the authority to investigate, prosecute, and impose legal penalties. These enforcement measures serve to promote voluntary compliance and deter fraudulent behavior.

Contact: Phone: (213) 384-1189 / Email: dwcracpa15@gmail.com

By Douglas Chong, CPA / Former IRS Revenue Agent