Investigating and Prosecuting Tax Evaders
The Internal Revenue Service (IRS) employs fewer than 39,000 people in its Compliance and Enforcement division. Approximately 9,000 of these folks are called revenue agents, and they have the thankless task of conducting tax audits. An audit is a thorough examination -- in person or via mail -- of all financial documents and accounts related to an individual or corporate tax return. An audit can uncover clues that could lead to a formal investigation of tax evasion. From tax years 2010 through 2018, the IRS audited or "examined" (their term) 0.6 percent of individual tax returns and 0.97 percent of corporate returns [source: IRS]. Interestingly, during that same period the IRS audited 9.26 percent of individual tax returns reporting income of more than $10 million [source: IRS]. That's nearly one out of every 10 rich-people returns!
The IRS Criminal Investigation (CI) division is the unit tasked with compiling evidence that can be used to prosecute tax evaders. A team of 2,034 IRS special agents work in four separate areas:
- Legal source tax crimes – Tax fraud committed by taxpayers who falsely report or underpay taxes on legal income
- Illegal source tax crimes – Money laundering schemes to "clean" money obtained by other criminal activity
- Narcotics-related financial crimes – Money laundering investigations with a special focus on drug syndicates
- Counterterrorismfinancing – IRS agents help the FBI track money that is being funneled to overseas terrorist groups
Due to the nature of modern financial crimes, CI agents must be adept at recovering information from encrypted computer systems and global networks. If Criminal Investigations determines that there is sufficient evidence to support a prosecution for tax evasion, it notifies the Tax Division of the U.S. Department of Justice (DOJ) [source: IRS]. The DOJ then determines whether or not to pursue the case.
The CI unit of the IRS has one of the highest conviction rates (90.4 percent) in federal law enforcement [source: IRS]. In 2020, CI initiated 1,598 investigations, recommended prosecutions in 945 cases and imposed sentences in 593 cases. Tax evasion is a felony. If convicted, sentences include the payment of all owed taxes, penalties as high as $100,000 for individuals and $500,000 for corporations, and up to five years in prison [source: Legal Information Institute].
For lots more information on famous tax evaders, the Internal Revenue Service and the dreaded audit, explore the links that follow.
What is considered tax evasion?
What causes tax evasion?
What is the difference between tax avoidance and tax evasion?
Is tax avoidance a crime?
What are some examples of tax avoidance?
Originally Published: Mar 25, 2012
Author's Note: How Tax Evasion Works
I have a healthy fear of the IRS, and writing this article did little to change that. Even though I make a very modest income, I don't mess around with my 1040. You might even say that I'm a little too cautious. For example, I spend way too much time with a tape measure and a calculator trying to figure out the exact percentage of my guest room that is occupied by my home office. Does the IRS really care about the difference between 15 square feet and 18 square feet? I'm not about to risk a felony conviction to find out. The good news about researching an article about tax evasion is that it's clear that the feds only go after the big fish. Still, the less attention this guppy gets from the IRS, the better.
- Internal Revenue Service. "Criminal Investigation (CI) At a Glance" (Mar. 20, 2012.) http://www.irs.gov/irs/article/0,,id=98398,00.html
- Internal Revenue Service. "Employment Tax Evasion Schemes" (Mar. 19, 2012.) http://www.irs.gov/compliance/enforcement/article/0,,id=106705,00.html
- Internal Revenue Service. "Enforcement Statistics — Criminal Investigation (CI) Enforcement Strategy" (Mar. 20, 2012.) http://www.irs.gov/compliance/enforcement/article/0,,id=108792,00.html
- Internal Revenue Service. "Fiscal Year 2011 Enforcement and Service Results" (Mar. 19, 2012.) http://www.irs.gov/pub/newsroom/fy_2011_enforcement_results_table.pdf
- Internal Revenue Service. "How Criminal Investigations Are Initiated" (Mar. 20, 2012.) http://www.irs.gov/compliance/enforcement/article/0,,id=175752,00.html
- Internal Revenue Service. "IRS Offshore Programs Produce $4.4 Billion To Date for Nation's Taxpayers; Offshore Voluntary Disclosure Program Reopens." January 9, 2012 (Mar. 20, 2012.) http://www.irs.gov/newsroom/article/0,,id=252162,00.html
- Internal Revenue Service. "IRS to Receive Unprecedented Amount of Information in UBS Agreement." August 19, 2009 (Mar. 20, 2012.) http://www.irs.gov/newsroom/article/0,,id=212124,00.html
- Internal Revenue Service. "Publication 926: Household Employer's Tax Guide." March 2012 (Mar. 19, 2012.) http://www.irs.gov/pub/irs-pdf/p926.pdf
- Internal Revenue Service. "Report of Foreign Bank and Financial Accounts" (Mar. 18, 2012.) http://www.irs.gov/businesses/small/article/0,,id=148849,00.html
- Internal Revenue Service. "Tax Gap for Tax Year 2006: Overview." January 6, 2012 (Mar. 19, 2012.) http://www.irs.gov/pub/newsroom/overview_tax_gap_2006.pdf
- Internal Revenue Service (IRS) Oversight Board. "2011 Taxpayer Attitude Survey." January 2012 (Mar. 18, 2012.) http://www.treasury.gov/irsob/reports/2012/IRSOB~Taxpayer Attitude Survey 2012.pdf
- Legal Information Institute. Cornell University Law School. "26 USC 7201 – Attempt to Evade or Defeat Tax" (Mar. 19, 2012.) http://www.law.cornell.edu/uscode/text/26/7201
- Legal Information Institute. Cornell University Law School. "Money Laundering" (Mar. 20, 2012.) http://www.law.cornell.edu/wex/money_laundering
- Lieber, Ron. The New York Times. "Doing the Right Thing by Paying the Nanny Tax." January 23, 2009 (Mar. 20, 2012.) http://www.nytimes.com/2009/01/24/your-money/taxes/24money.html
- Nolo. "Negligence vs. Tax Fraud: How Can the IRS Tell the Difference?" (Mar. 20, 2012.) http://www.nolo.com/legal-encyclopedia/negligence-versus-tax-fraud-irs-difference-29962.html
- Sahadi, Jeanne. CNN Money. "Tax gap: IRS comes up $385 billion short." January 6, 2012 (Mar. 20, 2012.) http://money.cnn.com/2012/01/06/news/economy/tax_gap/index.htm