Tax Fraud
Most everyone has heard of tax evasion, which is the general term for efforts by individuals, firms, trusts, and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting, such as declaring less income, profits or gains than actually earned; or overstating deductions. In addition to prosecuting tax evaders, The Internal Revenue Service investigates other criminal activities it broadly classifies as tax fraud.
Corporate Fraud
According to the IRS, corporate fraud encompasses violations of the Internal Revenue Code (IRC) and related statutes committed by large, publicly traded (or private) corporations, and/or by their senior executives. These schemes are characterized by their scope, complexity, and the magnitude of the negative economic consequences for communities, employees, lenders, investors, and financial markets.Criminal Investigation is involved in most of the regional corporate fraud task forces because of our financial investigative expertise. Also, corporate fraud frequently involves violations of the Internal Revenue Code (IRC) through falsification of corporate and individual tax returns and CI has exclusive investigatory jurisdiction over criminal violations of the IRC.
As financial investigators, IRS Criminal Investigation (CI) Special Agents fill a unique niche in the federal law enforcement community. Because of our financial investigative expertise, CI is involved in most of the regional corporate fraud task forces. CI has exclusive investigatory jurisdiction over criminal violations of the Internal Revenue Code (IRC). Corporate fraud frequently involves violations of the IRC through falsification of corporate and individual tax returns.
Today's sophisticated corporate fraud schemes demand the analytical ability of financial investigators to wade through complex paper and computerized financial records. Due to the increase in the automation of financial records, CI Special Agents are trained in recovering computer evidence. Along with their investigative skills, Special Agents also possess computer investigative skills that enable them to recover financial data that may have been encrypted, password protected, or hidden by other electronic means.
The Sarbanes-Oxley Act provides additional investigative tools to help combat corporate fraud. This Act made provisions in the law, which hold corporate officers accountable for the content of their corporation’s income tax returns, financial statements, and their conduct relating to the manipulation of corporate records. The Act imposes stiffer sentences of up to 20 years in prison for the destruction, alteration or falsification of records in order to impede federal investigations and bankruptcies.
As an example, on July 12, 2007, in Boston, MA, George Schussel was sentenced to 60 months in prison, followed by two years of supervised release and fined $125,000 for tax fraud conspiracy and tax evasion. Schussel was also ordered to meet with the IRS to resolve his outstanding tax liability on millions of dollars that he evaded. Schussel spearheaded a scheme in which he diverted millions of unreported income generated by his company, Digital Consulting, Inc. (DCI), to an off-shore account in Bermuda to avoid paying taxes. To prevent discovery of the scheme, Schussel obstructed an audit by the IRS in March 1998. Schussel also filed false and fraudulent corporate and individual income tax returns for the calendar year 1995, by failing to report to the IRS accurate DCI revenues and income which he and his wife received.
For more information, please see Corporate Fraud.
Money Laundering
Money laundering is a very complex crime involving intricate details, often involving numerous financial transactions and financial outlets throughout the world. Criminal Investigation has the financial investigators and expertise that is critical to “follow the money trail.” The term “money laundering” refers to the activities and financial transactions that are undertaken specifically to hide the true source of the money. In most cases, the money involved is earned from an illegal enterprise and the goal is to give that money the appearance of coming from a legitimate source. Money laundering creates an underground, untaxed economy that harms our country’s overall economic strength. It is a global threat that erodes our financial systems.
One look at the daily news is proof that the crimes dealing with or motivated by money make up the majority of criminal activity in the nation. Tax evasion, public corruption, health care fraud, money laundering and drug trafficking are all examples of the types of crimes that revolve around money. In these cases, a financial investigation often becomes the key to a conviction. For this reason, IRS is one of the key agencies involved in money laundering investigations.
Money laundering is a very complex crime involving intricate details, often involving numerous financial transactions and financial outlets throughout the world. Criminal Investigation has the financial investigators and expertise that is critical to “follow the money trail.”
Criminal Investigation focuses on money laundering where the underlying conduct is a violation of the income tax laws or violations of the Bank Secrecy Act. According to the IRS, money laundering is the means by which criminals evade paying taxes on illegal income by concealing the source and the amount of profit. Money laundering is in effect tax evasion in progress.
When no other crimes could be pinned to Al Capone, the Internal Revenue Service obtained a conviction for tax evasion. As the astonished Capone left the courthouse he said, "This is preposterous. You can't tax illegal income!" But the fact is income from whatever source derived (legal or illegal) is taxable income.
Had the money laundering statutes been on the books in the 1930's, Capone would also have been charged with money laundering. However, since October 1986, with the passage of the Money Laundering Control Act, organized crime members and many others have been charged and convicted of both tax evasion and money laundering.
When a criminal has a large amount of illegal income, they have to do something with it in order to hide it from the IRS. They attempt to launder it to make it appear as if it was from a legitimate source, allowing them to spend it or invest it in assets without having to worry about the IRS and tax consequences.
One of the ways to launder illegal proceeds is to move the money out of the United States and then bring it back in a clean form, often disguised as loan proceeds. Another method is to channel or co-mingle the money through various business activities to give the appearance that the money was derived from a legal source.
Financial investigations are by their nature very document intensive. They involve records, such as bank account information or real estate files, which point to the movement of money. Any record that pertains to or shows the sequence of events involving money movement is important. The major goal in a financial investigation is to identify and document the movement of money during the course of a crime. The link between where the money comes from, who gets it, when it is received and where it is stored or deposited, can provide proof of criminal activity.
IRS investigations of illegal income cases involving money laundering are critical components of the nations National Money Laundering Strategy. The long hours of tracking and documenting financial leads allows an investigation to go right to the door of the money launderers and eventually to the leader of the illegal enterprise. A complete financial analysis and reconstruction of the illegal activity (i.e. a drug organization or an abusive trust scheme) will document the financial activities related to unreported income on tax returns and money laundering which is usually key to securing a conviction.
As an example, on September 17, 2007, in San Diego, CA, Union Bank of California, N.A., a wholly-owned subsidiary of UnionBanCal Corporation, based in San Francisco, has entered into a deferred prosecution agreement on charges of failing to maintain an effective anti-money laundering program and agreed to forfeit $21.6 million to the U.S. government. Union Bank of California (UBOC) waived indictment, agreed to the filing of an Information, and accepted and acknowledged responsibility for its conduct in a factual statement accompanying the Information. In light of the bank’s significant remedial actions to date and its willingness to acknowledge responsibility for its actions, the government will recommend the dismissal with prejudice of the charge in 12 months, provided the bank fully implements significant anti-money laundering measures required by the agreement. The charges and the deferred prosecution agreement arose out of transactions conducted between May 2003 and April 2004 by and through certain accounts at UBOC held by licensed Mexican casas de cambio (currency exchange houses). Several U.S. and international undercover operations documented the export of multi-ton quantities of cocaine out of Colombia to Mexico, for transshipment to the U.S. and Europe. Investigators then traced the flow of the resulting drug proceeds in the form of bulk shipments of U.S. dollars and euros to a few Mexican casas de cambio working in concert with one another, or to the direct deposit of drug proceeds to accounts held by the casas de cambio in Spain. In either case, once the drug proceeds were successfully placed with the Mexican casas de cambio, the proceeds were then either wire transferred or, after being converted to other negotiable instruments, directly shipped to UBOC for deposit to the casas de cambio bank accounts. UBOC failed to detect, identify and report the suspicious transactions in the accounts, as required by the Bank Secrecy Act, due to deficiencies in its anti-money laundering program.
For more information, please see Money Laundering.
General Tax Fraud
The efforts of Criminal Investigation are directed at the portion of American taxpayers who willfully and intentionally violate their known legal duty of voluntarily filing income tax returns and/or paying the correct amount of income, employment, or excise taxes. These individuals pose a serious threat to tax administration and the American economy.
The term voluntary compliance means that each of us is responsible for filing a tax return when required, and for determining and paying the correct amount of tax. Fortunately, the vast majority of Americans recognize their legal responsibility, and properly report and pay over their tax obligations.
The efforts of Criminal Investigation (CI) are directed at the portion of American taxpayers who willfully and intentionally violate their known legal duty of voluntarily file income tax returns and/or pay the correct amount of income, employment, or excise taxes. These individuals pose a serious threat to tax administration and the American economy.
The General Tax Fraud Program is Criminal Investigation's largest enforcement program encompassing a wide variety of investigations involving tax and money laundering crimes. This program includes investigations involving a broad spectrum of individuals and industries from all facets of the economy, from small business owners to self-employed to wage earning taxpayers. General Tax Fraud cases constitute the main component of CI's efforts to most directly influence taxpayer compliance with the Internal Revenue Code.
General Tax Fraud is the program from which CI identifies emerging areas of non-compliance in both Legal Source Tax Crimes and Illegal Source Financial Crimes. These emerging areas are instrumental in ensuring CI is focusing resources to most effectively achieve our mission.
Although not all inclusive, listed below are some of the criminal activities in violations of the tax law:
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Deliberately underreporting or omitting income
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Overstating the amount of deductions
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Keeping two sets of books
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Making false entries in books and records
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Claiming personal expenses as business expenses
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Claiming false deductions
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Hiding or transferring assets or income
As an example of general tax fraud, on October 11, 2006, in Birmingham, AL, Marie Franklin was sentenced to 12 months and one day in prison to be followed by one year of supervised release for willfully subscribing and filing a false individual income tax return. Franklin, along with her former husband, Michael Franklin, operated Future of the World Day Care Academy and Ministries, Inc., located in Bessemer, Alabama. Evidence in this case revealed that Michael Franklin and Marie Franklin filed separate returns as a married couple and reported $52,558 and $56,845 in total income for 1999 on their respective tax returns. Their actual total income was $174,490 and $178,777, respectfully, for that year. Together, the Franklins owed over $88,400 in additional taxes for 1999. Michael Franklin’s sentencing date is October 26, 2006.
For more information, please see General Tax Fraud.
Abusive Tax Preparer
The IRS Criminal Investigation Return Preparer Program (RPP) was implemented in 1996, and established procedures to foster compliance by identifying, investigating and prosecuting abusive return preparers. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. This is a significant problem for both the IRS and the taxpaying public. Abusive return preparers frequently prepare bad returns for large numbers of taxpayers who, at best, are stuck with paying additional taxes and interest and at worse, depending on culpability, are subject to penalties and maybe even criminal prosecution.
Taxpayers should be very careful when choosing a return preparer. You should be as careful as you would in choosing a doctor or a lawyer. While most preparers provide excellent service to their clients, a few unscrupulous return preparers file false and fraudulent tax returns and ultimately defraud their clients. It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.
Return Preparer Fraud
A Return Preparer is defined as any person (including a partnership or corporation) who prepares for compensation all or a substantial portion of a tax return or claim for refund under the income tax provisions of the Internal Revenue Code.
Return Preparer Fraud generally involves the orchestrated preparation and filing of false income tax returns (in either paper or electronic form) by unscrupulous preparers who may claim, for example:
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inflated personal or business expenses,
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false deductions, or
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unallowable credits or excessive exemptions, fraudulent tax credits, such as the Earned Income Tax Credit (EITC).
The preparers' clients may or may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns.
Methods of Fraud
Dishonest return preparers use a variety of methods to formulate fraudulent and illegal deductions for reducing taxable income. These include, but are not limited to, the following:
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Preparing fraudulent Schedule C, Profit or Loss from Business, claiming deductions for expenses that have not been paid by the taxpayer to offset Form 1099, Miscellaneous Income, or income earned from outside employment,
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Including false and inflated itemized deductions on Schedule A, Itemized Deductions, for:
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Claiming false Schedule E, Supplemental Income and Loss, losses
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Claiming false dependents
When Hiring a Tax Preparer
IRS Criminal Investigation (CI) reminds you;
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Taxpayers are responsible for the accuracy of all entries made on their tax returns, which include related schedules, forms and supporting documentation. This remains true whether the return is prepared by the taxpayer or by a return preparer.
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Be careful in selecting the tax professional who will prepare your return. Some basic tips and guidelines to assist taxpayers in choosing a reputable tax professional are:
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Avoid return preparers who claim they can obtain larger refunds than other preparers.
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Avoid preparers who base their fee on a percentage of the amount of the refund.
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Use a reputable tax professional that signs your tax return and provides you with a copy for your records.
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Consider whether the individual or firm will be around to answer questions about the preparation of your tax return, months, even years, after the return has been filed.
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Never sign a blank tax form.
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Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
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Tax Evasion is a crime, a felony, punishable up to 5 years imprisonment and a $250,000 fine.
When in doubt, check it out! Taxpayers hearing claims from preparers offering larger refunds than other preparers are encouraged to check it out with a trusted tax professional or the IRS before getting involved.
For more information, please see Abusive Return Preparer.
Abusive Tax Schemes
Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.
The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes. These schemes are characterized by the use of trusts, Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability. The promoters of abusive tax schemes often employ financial instruments such as trusts in their schemes. However, the instruments are used for improper purposes including the facilitation of tax evasion.
Tax evasion using foreign jurisdictions is accomplished using many different methods. Some can be as simple as taking unreported cash receipts and personally traveling to a tax haven country and depositing the cash into a bank account. Others are more elaborate involving numerous domestic and foreign trusts, partnerships, nominees, etc. The following schemes are not all-inclusive, but just a sample of abusive tax schemes.
Abusive Foreign Trust Schemes
Abusive Foreign Trust Schemes: The foreign trust schemes usually start off as a series of domestic trusts layered upon one another. This set up is used to give the appearance that the taxpayer has turned his/her business and assets over to a trust and is no longer in control of the business or its assets. Once transferred to the domestic trust, the income and expenses are passed to one or more foreign trusts, typically in tax haven countries.
As an example, a taxpayer's business is split into two trusts. One trust would be the business trust that is in charge of the daily operations. The other trust is an equipment trust formed to hold the business's equipment that is leased back to the business trust at inflated rates to nullify any income reported on the business trust tax return (Form 1041). Next the income from the equipment trust is distributed to foreign trust-one, again, which nullifies any tax due on the equipment trust tax return. Foreign trust-one then distributes all or most of its income to foreign trust-two. Since all of foreign trust-two's income is foreign based there is no filing requirement.
Once the assets are in foreign trust-two, a bank account is opened either under the trust name or an International Business Corporation (IBC). The trust documentation and business records of this scheme all make it appear that the taxpayer is no longer in control of his/her business or its assets. The reality is that nothing ever changed. The taxpayer still exercises full control over his/her business and assets. There can be many different variations to the scheme.
International Business Corporations
International Business Corporations (IBC): The taxpayer establishes an IBC with the exact name as that of his/her business. The IBC also has a bank account in the foreign country. As the taxpayer receives checks from customers, he sends them to the bank in the foreign country. The foreign bank then uses its correspondent account in the to process the checks so that it never would appear to the customer, upon reviewing the canceled check that the payment was sent offshore. Once the checks clear, the taxpayer's IBC account is credited for the check payments. Here the taxpayer has, again, transferred the unreported income offshore to a tax haven jurisdiction.
False Billing Schemes
False Billing Schemes: A taxpayer sets up an International Business Corporation (IBC) in a tax haven country with a nominee as the owner (usually the promoter). A bank account is then opened under the IBC. On the bank's records the taxpayer would be listed as a signatory on the account. The promoter then issues invoices to the taxpayer's business for goods allegedly purchased by the taxpayer. The taxpayer then sends payment to the IBC that gets deposited into the joint account held by the IBC and taxpayer. The taxpayer takes a business deduction for the payment to the IBC thereby reducing his/her taxable income and has safely placed the unreported income into the foreign bank account.
For more information, please see Abusive Tax Schemes.
Nonfiler Enforcement
Taxpayers who fail to file income tax returns and effectively stop paying income tax, pose a serious threat to tax administration and the American economy. Their actions undermine public confidence in the Service's ability to administer the tax laws fairly and effectively.
The Internal Revenue Service's role in combating the area of nonfiling is that of outreach, education, and enforcement of the tax laws. However, it is understood that there are those who will not respond to outreach efforts and simply refuse to comply with the law. It is those individuals, who deliberately fail to comply with their obligation to file required tax returns and pay any taxes due and owing, that IRS Criminal Investigation devotes it's investigative resources. In the most egregious cases, criminal prosecution is recommended to the United States Attorney's office.
All citizens must comply with the requirements of the tax law to file returns and pay taxes. Fortunately, the vast majority of Americans recognize their civic duty and voluntarily comply with their tax filing obligation. Whether because of an inability to pay or severe procrastination, some citizens drop out of the tax system. The IRS has made attempts to make it easier for persons to voluntarily comply with the tax laws and to bring themselves current on any outstanding filings or tax due. Assistance is provided to those persons to resolve issues that caused them to drop out of the tax system and bring them back into compliance.
Publication 501, Exemptions, Standard Deductions and Filing Information, discusses some tax rules that affect every person who may have to file a federal income tax return. It answers some basic questions: who must file; who should file; what filing status to use; how many exemptions to claim; and the amount of the standard deduction.
The first section of this publication explains who must file an income tax return. If you have little or no gross income, reading this section will help you decide if you have to file a return. The second section is about who should file a return. Reading this section will help you decide if you should file a return, even if you are not required to do so. The third section helps you determine which filing status to use. Filing status is important in determining whether you must file a return, your standard deduction, and your tax rate. It also helps determine what credits you may be entitled to. The fourth section discusses exemptions, which reduce your taxable income. The discussions include the social security number requirement for dependents, the rules for multiple support agreements, and the rules for divorced or separated parents.
Tax Tip 2005-3, Who Must File a Tax Return. The law does require you to file a tax return if your income is above a certain level.
Currently, the same arguments concerning the legality of the tax system are being used in an attempt to convince employers they do not have to withhold employment taxes. Other employment tax evasion schemes are used to circumvent the tax laws or to line the pockets of employers.
Employment Tax evasion has serious consequences not only for the employers but the employees. Employers are subject to both criminal and civil sanctions, but employees also suffer because as a result of their employer’s actions they may not qualify for social security, Medicare, or unemployment benefits (or they may qualify for reduced benefits). The economic strength of these programs depends on everyone paying their fair share.
For more information, please see Nonfiler Enforcement.
Employment Tax Enforcement
Employers are required by law to withhold employment taxes from their employees. Employment taxes include:
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Federal Income tax withholding
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Social Security and Medicare Taxes
The federal income tax is a "pay as you go tax." You must pay the tax as you earn or receive income during the year. For most employees this takes the form of income taxes withheld from their pay checks. Self-employed persons are also required to make estimated tax payments during the year. The pay as you go system was designed to ensure that taxpayers meet their tax obligations timely.
Social Security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security taxes pay for benefits under the old age, survivors, and disability insurance part of FICA. Medicare taxes pay for hospital benefits. Each employee contributes part of these taxes and the employer pays a matching amount. Self-employed taxpayers must also pay social security and Medicare taxes in the form of self-employment taxes. The programs funded by employment taxes provide essential benefits to many citizens. The importance of the programs will continue to grow as more citizens reach retirement age. The Federal Unemployment Tax Act (FUTA) tax, together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs.
Both employer and employee hold the responsibility for collecting and remitting withholding taxes to the Internal Revenue Service (IRS). For the most part, the employer withholds these taxes on behalf of their employees, but in cases where an employer does not do this, or where an employee is self-employed, it is the responsibility of the employee to pay these withholding taxes.
Employer's Responsibility
Employers must report income and employment taxes withheld from their employees on an Employer's Quarterly Federal Tax Return (Form 941) and deposit these taxes in full to an authorized bank or financial institution pursuant to Federal Tax Deposit Requirements. Employers are also responsible for filing a FUTA return annually, and depositing those taxes.
Employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for willfully failing to pay employment taxes.
Employees’ Responsibility
Employees who do not have taxes withheld nor remit them personally, are still liable for these taxes and may not qualify for Social Security, Medicare, or unemployment benefits.
Employees who are concerned that their employer is improperly withholding or failing to withhold federal income and employment taxes should report their employer by contacting the IRS at 1-800-829-1040. In cases where the employer withheld employment taxes but failed to deposit them, or failed to issue W-2s, the employee should contact the employer to request the W-2. If the employee is unable to secure a W-2 from the employer, the employee should complete and attach Form 4852, Substitute for W-2, to their tax return using the best information available to calculate the wages and the withholding. This information can often be secured from pay stubs.
In addition, if the employer refuses to withhold employment taxes from these wages and the IRS is unable to collect the employment taxes from the employer, the employee still has the responsibility to pay income tax and is ultimately responsible for his/her share of the FICA tax.
Evading employment taxes can have serious consequences for employers and the employees. Employers may be subject to criminal and civil sanctions for willfully failing to pay employment taxes. Employees suffer because they may not qualify for social security, Medicare, or unemployment benefits when employers do not report or pay employment and unemployment taxes. Consequently, taxes withheld and paid by compliant employers are used to pay the refunds and social security benefits of employees whose employers did not pay the withheld taxes.
Employment Tax Evasion Schemes
Employment tax evasion schemes can take a variety of forms. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns.
Pyramiding
"Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.
Employment Leasing
Employee leasing is another legal business practice, which is sometimes subject to abuse. Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid.
Paying Employees in Cash
Paying employees, whole or partially, in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.
Filing False Payroll Tax Returns
Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.
As an example, on August 10, 2007, in Boston, MA, Stephen J. Mazzola, of Wakefield, MA, was sentenced to 18 months in prison, to be followed by three years of supervised release and fined $7,500. He was convicted in June 2006 on four counts of filing false quarterly employment tax returns, tax evasion and obstructing an IRS audit. Mazzola owned Stoneham Towing and Bodyworks Company. According to court documents, Mazzola paid employees cash wages “under-the-table” to conceal cash income. Mazzola also produced false records to obstruct an IRS audit.
For more information, please see Employment Tax Enforcement.
Criminal Investigations
Criminal Investigation (CI) classifies its investigations into program and emphasis areas of fraud. Each program area below contains information on CI's involvement in that area, national statistics, and case summaries.
1. Abusive Return Preparer Enforcement - Taxpayers should be very careful when choosing a return preparer. You should be as careful as you would in choosing a doctor or a lawyer. While most preparers provide excellent service to their clients, a few unscrupulous return preparers file false and fraudulent tax returns and ultimately defraud their clients. It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.
2. Abusive Tax Schemes - Abusive tax scheme originally took the structure of abusive domestic and foreign trust arrangements. However, these schemes have evolved into sophisticated arrangements that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
3. Bankruptcy Fraud - One of Criminal Investigation's goals in bankruptcy fraud investigations is to increase voluntary compliance with federal tax laws through the prosecution of those committing significant crimes in the bankruptcy arena. Since the IRS is often a major creditor in many bankruptcy proceedings, it is important that we protect the interests of the IRS.
4. Corporate Fraud - Criminal Investigation is involved in most of the regional corporate fraud task forces because of our financial investigative expertise. Also, corporate fraud frequently involves violations of the Internal Revenue Code (IRC) through falsification of corporate and individual tax returns and CI has exclusive investigatory jurisdiction over criminal violations of the IRC.
5. Employment Tax Enforcement - Employment tax evasion schemes can take a variety of forms. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns. Evading employment taxes can have serious consequences for employers and the employees.
6. Excise Tax Fraud - Criminal Investigation continues to see schemes designed to evade excise taxes on motor fuel, tires, freon and other ozone-depleting chemicals, as well as truck chassis. The impact of these schemes goes far beyond the revenue loss.
7. Financial Institution Fraud - Criminal Investigation focuses on tax and money laundering violations involving fraud against banks, savings and loan associations, credit unions, check cashers, money remitters, and other financial institutions. Currency Transaction Reports and Suspicious Activity Reports continue to be effective investigative tools in the financial world.
8. Gaming - Illegal gaming operations, including bookmaking, numbers, Internet and some charitable gaming operations, continue to be areas of compliance concern. Criminal Investigation continues to play an enforcement role in the illegal gaming industry and to support regulatory and legislative initiatives aimed at eliminating an environment conducive to illegal gambling.
9. General Tax Fraud - The efforts of Criminal Investigation are directed at the portion of American taxpayers who willfully and intentionally violate their known legal duty of voluntarily filing income tax returns and/or paying the correct amount of income, employment, or excise taxes. These individuals pose a serious threat to tax administration and the American economy.
10. Healthcare Fraud - Multi-agency healthcare fraud investigations and prosecutions show that perpetrators of these schemes financially benefited from their fraudulent activities in false billings, mental health, nursing home fraud, chiropractic fraud, durable medical equipment fraud, staged accidents, pharmaceutical diversion, and patient referral (kickbacks) schemes. In these investigations, Criminal Investigation follows the money trail and considers both tax and money laundering perspectives.
11. Insurance Fraud - Insurance Fraud can involve tax law and/or money laundering violations relative to insurance claims and fraud perpetrated against insurance companies. The variety of schemes include agent/broker premium diversion, phony insurance companies, offshore/unlicensed Internet companies, staged auto accidents, viatical and senior settlement.
12. Money Laundering - Money laundering is a very complex crime involving intricate details, often involving numerous financial transactions and financial outlets throughout the world. Criminal Investigation has the financial investigators and expertise that is critical to “follow the money trail.”
12. Narcotics-Related Investigations - Criminal Investigation's contribution to the war on narcotics is vital but sometimes difficult to recognize, because the work of IRS special agents usually doesn't make the headlines. The long hours of tracking down and documenting financial leads allows an investigation to go right to the door of the leader of the narcotics organization, which contributes to the disrupting and dismantling the country's major drug and money laundering organizations.
13. Nonfiler Enforcement - There have always been individuals who, for a variety of reasons, argue taxes are voluntary or illegal. The courts of repeatedly rejected their arguments as frivolous and routinely impose financial penalties for raising such frivolous arguments. Take the time to learn the truth about frivolous tax arguments.
14. Public Corruption Crimes - Public corruption investigations encompass a wide variety of criminal offenses including bribery, extortion, embezzlement, illegal kickbacks, entitlement and subsidy fraud, bank fraud, tax fraud, and money laundering. Criminal Investigation concentrates its resources on the tax and money laundering aspects of these investigations in cooperation with other federal, state, and local law enforcement agencies. The expertise used in investigations has established our reputation as one of the leaders in the fight against corrupt public officials.
15. Questionable Refund Program (QRP) - Questionable Refund Program (QRP) is a nationwide, multifunctional program designed to identify fraudulent returns, to stop the payment of fraudulent refunds and to refer identified fraudulent refund schemes to be investigated and prosecuted criminally.
16. Telemarketing Fraud - The typical illegal telemarketer operates by exploiting the trust of consumers to whom they present an opportunity "too good to be true." These opportunities include cash, vehicles, vacations, jewelry, investments, donations to charity, participation in lotteries, or the opportunity to recoup losses from prior schemes. These "opportunities" are, in fact, "too good to be true."
For more information, please see Program and Emphasis Areas for Criminal Investigation.
How To Recognize & Avoid Tax Scams
To help the public recognize and avoid abusive tax schemes, the IRS offers an abundance of educational materials. Participating in an illegal scheme to avoid paying taxes can result in imprisonment and fines, as well as the repayment of taxes owed with penalties and interest. Education is the best way to avoid the pitfalls of these “too good to be true” tax scams.
Common Scheme Types
More Information
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IRS News Release 2004-48
IRS, Justice Department Note Increase in Tax Enforcement: Civil and Criminal Enforcement Against Tax Cheats on the Rise
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For more information, please see Tax Scams - How to Recognize and Avoid Them.
Reporting Tax Fraud
If you suspect or know of an individual or company that is not complying with the tax laws, you may report this activity by completing Form 3949-A. You may fill out Form 3949-A online, print it and mail it to:
Internal Revenue Service
Fresno, CA 93888
If you do not wish to use Form 3949-A, you may send a letter to the address above. Please include the following information, if available:
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Name and address of the person you are reporting
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The taxpayer identification number (social security number for an individual or employer identification number for a business)
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A brief description of the alleged violation, including how you became aware of or obtained the information
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The years involved
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The estimated dollar amount of any unreported income
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Your name, address and daytime telephone number
Although you are not required to identify yourself, it is helpful to do so. Your identity can be kept confidential. You may also be entitled to a reward.
Frequently Asked Questions - 1.13 IRS Procedures: Reporting Fraud
How to Report Abusive Tax Promotions and/or Promoters:
Complete the referral form which documents the information necessary to report an abusive tax avoidance scheme. The form can be mailed or faxed to the IRS address and fax number on the form.
How to Report Abusive CPAs, Attorneys or Enrolled Agents:
Report suspicious actions by tax professionals to the email address of the IRS Office of Professional Responsibility.
For more information, please see Report Suspected Tax Fraud Activity!
