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IRS Reports On 2014 Criminal Investigations

The Internal Revenue Service has released the 2014 Annual Business Report of its Criminal Investigation Division, which chronicles the priorities, staffing, and organization of the division as well as a review of the criminal investigations that were opened and the prosecutions that resulted. 

Investigations cover the following types of crimes: 

  • General Tax Fraud: Taxpayers who willfully avoid payment by underpaying their taxes, presenting false documentation, claiming personal expenses as business expenses, claiming deductions or credits against taxes, or hiding assets.
  • Refund Fraud: Criminals obtaining money under false pretenses. This is broken down into two categories – the Return Preparer Program and the Questionable Refund Program, including identity theft investigations.
  • Abusive Tax Schemes: Promoters and clients willfully participating in offshore tax schemes designed to circumvent – thereby violating – tax laws.
  • Financial Institution Fraud: Criminal violations involving fraud against banks, savings and loan associations, credit unions, check cashiers, and stock brokers.
  • Public Corruption: This includes offenses such as bribery, extortion, embezzlement, illegal kickbacks, tax fraud and money laundering involving elected and appointed officials.
  • Corporate Fraud: Violations of the internal revenue code and related statues committed by publicly traded or private corporations.
  • Gaming Fraud: Centered on illegal activity within the gaming industry, efforts uncover and shut down illegal gaming operations.
  • Insurance Fraud and Healthcare Fraud: Offenses include criminal tax and money laundering violations relative to insurance claims and fraud perpetrated against insurance companies. This includes billing healthcare insurance companies for medical expenses that were never incurred or unnecessary medical procedures and equipment.
  • Bankruptcy Fraud: Violations often include concealing assets and knowingly making false claims during the bankruptcy process. 

For 2014, the highest investigative priorities were identity theft fraud, return preparer fraud and questionable refund fraud, international tax fraud, political/public corruption, enforcement of the Bank Secrecy Act, and counterterrorism.  The business results were as follow: 

  FY 2014 FY 2013 FY 2012
Investigations Initiated 4297 5314 5125
Prosecution Recommendations 3478 4364 3701
Informations/Indictments 3272 3865 3390
Convictions 3110 3311 2634
Sentenced* 3268 2812 2466
Percent to Prison 79.6% 80.1% 81.5%

 Source: Criminal Investigation Management Information System

*”Sentenced” includes confinement to federal prison, halfway house, home detention, or some combination thereof. 

2014 saw the largest settlements in the history of the agency, including the prosecution of the BNP Paribas financial institution and two significant identity theft prosecutions. In general, investigations initiated were lower than in the previous two years, and convictions were down slightly from fiscal year 2013. However, the number of persons sentenced has increased this year over both FY 2012 and FY 2013. 

Several of the categories covered in the 2014 business report are of particular interest to tax preparers. These include corporate fraud, for those who do business returns; employment tax fraud, for those involved in the filing and payment of payroll taxes; and identity theft. All of these are covered in greater detail in the report along with examples of the investigations adjudicated in fiscal year 2014. Of greatest interest is the return preparer program which involved the orchestrated preparation and filing of false income tax returns in either paper or electronic form by dishonest preparers. 

In 2014 and 2015 the Internal Revenue Service has made a concerted effort to prosecute preparers who participate in fraud and identity theft. The IRS efforts have generated a large amount of public and Congressional interest, though the numbers are not significant. This is largely due to the fact that the IRS has a public responsibility to report these investigations and prosecutions at each stage of their development. Therefore the IRS will generally make press statements when the investigation is initiated, when prosecution is recommended, when the preparer is indicted, and when the defendant is sentenced. 

Statistics for the return preparer program over the past three fiscal years are: 

  FY 2014 FY 2013 FY 2012
Investigations Initiated 305 309 443
Prosecution Recommendations 261 281 276
Information/Indictments 230 233 202
Convictions 193 207 178
Sentenced 183 186 172
Incarceration Rate 86.3% 78.0% 84.3%
Average Months to Serve 28 27 29

 

While increased attention to this problem may result in higher rates for 2015, this table shows that the number of investigations initiated has declined in the past three years, and investigations last year involved only 305 of the nation’s nearly 40,000 tax preparation firms (0.0076, or less than 1% of all firms).  

2015 also saw the emergence of a new type of preparer fraud associated with taxpayer and preparer responsibilities under the Patient Protection and Affordable Care Act (ACA). Though there is at present only scant anecdotal evidence, some preparers are reported to have pocketed penalty payments for taxpayers rather than including it in the general payment of taxes as required by the IRS. 

The IRS itself notes that most preparers provide excellent service to their clients. However the agency has added preparer fraud to its list of “dirty dozen” tax scams, and has aggressively pursued a program to educate and regulate preparers: 

  • Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front but taxpayers still need to be extremely careful and do everything they can to avoid becoming a victim (IR-2015-7)

Professional taxpayers should be aware of steps that must be taken to avoid participation in fraudulent activities. However, those who have questions about the conduct required of preparers should consult the following to IRS resources: 

 

 

 

 

 

 

 

 

 

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