IRS CI Background and Current Initiatives

August–September 2013 IRS CI Background and Current Initiatives

By Josh O. Ungerman

Josh O. Ungerman examines the Internal Revenue Service Criminal Investigation Initiatives.

Introduction elite. Criminal Investigation agents, analysts, and professional staff have a strong sense of Over the years, Internal Revenue Service Criminal purpose, dedication, and passion for follow- Investigation (“IRS CI”) has been known as a train- ing the money and pursuing those who want ing ground for the fi nest fi nancial investigators in the to terrorize and destroy this country, victimize federal government. Today, IRS CI is operating with others, and steal taxpayer dollars. approximatelyp 2,600 Special Agents working over a widew evae varietyvaarieet of subjectj matter areas. IRS CI is continu- *** ingiinng ttoo rrealignealilig itsts focus to inincludec udee a llargeargee pepercentageentage off resourcesresourcec s oon legal sourceource incomencome cases.c ses Our legacyegacy is one of perseverance and taking on complex, sensitive investigations that many oth- Backgroundnd ers simply did not have the fi nancial sleuthing ability to complete. The legacy of IRS CI dates back to 1919 when the Intelligence Unit of the Treasury Department was established. The agents in the Intelligence Units were Current Initiatives of IRS CI referred to as “T Men.” The gangster Al Capone, Public Enemy No. 1 in the United States, was fi nally brought Offshore Tax Evasion down by the Intelligence Unit of the Treasury. Next, IRS CI remains diligent in its efforts to prosecute as the Intelligence Unit focused its “T Men” on current many noncomplying U.S. taxpayers with intention- government offi cials. At one point in history, over ally unreported offshore accounts and income as two-thirds of federal prisoners were in jail based on possible. IRS CI has never waivered in this task nor the work of the “T Men.” In his Fiscal 2012 Annual backed down from the complexities of many offshore Business Report,1 Chief IRS CI Richard Weber boasted: banking and fi nancial arrangements. While the IRS continues its path of criminal pros- Since our inception in 1919, almost 100 ecutions with respect to noncompliant U.S. taxpayers years ago, we often have been the last line of with offshore activities, IRS CI remains the gateway defense in bringing down America’s criminal for the IRS’s Offshore Voluntary Disclosure Program “OVDP” which offers qualifying cooperating and Josh O. Ungerman is a Partner in the Dallas, Texas law fi rm of timely taxpayers the ability to apply for a voluntary Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. disclosure with the IRS.2

JOURNAL OF TAX PRACTICE & PROCEDURE 37 IRS CI Background and Current Initiatives

IRS CI’s job in identifying and prosecuting non- public corruption cases. This is especially true with compliant U.S. taxpayers with offshore activities is other governmental agencies.6 becoming easier through the Department of Justice’s successful issuing of John Doe Summons on both Suspicious Activity Reports (SAR) U.S. branches of banks with an offshore presence The IRS has become very adept at using SARs to and correspondent banks. Recently, in the FirstCarib- initiate criminal investigations. The IRS currently is bean International Bank (FCIB) matter, FCIB’s use of a utilizing 94 SAR teams and over 50 dedicated IRS CI correspondent account Wells Fargo, N.A. provided a led task forces.7 The SAR teams review SARs daily. link for a federal judge in San Francisco to authorize the IRS to serve a John Doe Summons on Wells Fargo Money Laundering and Forfeiture seeking information regarding U.S. taxpayers with In addition to investigating money laundering and accounts at FCIB.3 implementing asset forfeiture techniques in illegal The authorization of the John Doe Summons on source income investigations, IRS CI has shifted these Wells Fargo as a result of its correspondent banking tools to legal source after tax scenarios as the factual relationship with the FirstCaribbean International basis for structuring an asset forfeiture in many cur- Bank will likely drive many FCIB depositors into the rent investigations.8 IRS Offshore Voluntary Disclosure Program. On April 9, 2013, Justice Department Tax Division Our Bank Secrecy Act (BSA) teams are doing Assistant Attorney General Kathryn Keneally stated in amazing work—reviewing hundreds of thousands a news briefi ng that to the extent that there are people of Suspicious Activity Reports (SARs), fi nding still out there with unreported offshore bank ac- good cases, investigating them and forfeiting counts, they should stop waiting and come forward. millions of dollars in illegal proceeds.9 Tax Related Identity Theft IRS CI is experiencing a changing landscape of crime Annual Sweeps Week (Week with the advent of so many identity thieves who are of April 15) ususingsinggsg stolenstols le identities to obtain fraudulent income The IRS is gears up each January with over 800 en- ttataxax rrefunds.effuundds. However,owever, thet IRSIRS is continuingccont nuing to followfollow foforcementcemeent actionsacti for a culmination regarding a big ththehe moneymmooneye in order toto shutshut downowwn identityide tity thefteft taxtax public statementstatem of enforcement actions occurring fraud.audd.ddT TheTTh IRSRSR has establishedbli d fourf schemeh develop-l duringi theh week of April 15.10 ment centers in eighteigght citiesciti relating to identity theft income tax refundnd ffraud.raudT The IRS has also established Sequestration an identity theft clearinghouse.4 On April 9, 2013, Justice Department Tax Division In her April 9, 2013, news briefi ng, Assistant At- Assistant Attorney General Kathryn Keneally stated torney General Kathryn Keneally also reported that in a news briefi ng that “[N]obody should think that the Justice Department is making every effort to make now is the time to engage in tax fraud because of it harder to engage in identity theft without getting sequestration. We are very much here. We are very caught and to ensure that there will be severe punish- much committed to enforcement.” ment when people do get caught. Terrorist Financing Fiscal Year 2012 IRS CI Annual IRS CI fi nancial expertise is being utilized to follow Business Report the money in terrorists fi nancing cases. It is of interest Highlights that these cases are not necessarily tax crimes. The IRS has developed a counter-terrorist lead develop- IRS CI initiated 5,125 cases in fi scal year 2012.11 IRS ment center.5 CI increased investigation completions in fi scal year 2012 up to 4,937 which represents a fi ve percent Public Corruption increase over fi scal year 2011.12 IRS CI increased When IRS CI began in 1919, after taking down Al prosecution recommendations from fi scal year 2011 Capone, they turned their focus toward corrupt public to fi scal year 2012 by 8.5 percent with a total of offi cials. The IRS remains actively involved in working 3,701 prosecution recommendations.13 The largest 38 August–September 2013

percentage increases from fi scal year 2011 to fi scal Interestingly, the Annual Business Report acknowl- year 2012 were the convictions, which total 2,634.14 edges that sometimes the information of an individual Finally, a slight increase in conviction rate resulted that is used for a false return can be unknowingly in a 93-percent conviction rate for fi scal year 2012.15 usurped. Identity Theft. The IRS CI Annual Business Report Fraud Referral Program discusses identity theft at length. Among the topics IRS CI has placed a high degree of emphasis on discussed are the identity theft clearinghouse, stolen the Fraud Referral Program recognizing that a good identity refund fraud, and the Victim Waiver Pilot source of investigations comes from the Civil IRS Program. Divisions in the form of fraud referrals. IRS CI is Abusive Tax Schemes. The IRS CI Annual Business working fraud referrals through the Small Business/ Report identifi es the focus of CI on promoters and Self-Employed, Wage and Investment, and Large their clients who willfully participate in both domes- Business International Divisions of the IRS.16 IRS CI tic and/or offshore tax schemes. The IRS CI Annual has committed to timely evaluate each fraud referral Business Report identifi es that the participants use from these three civil divisions of the IRS.17 and create structures such as trusts, foreign corpora- tions and partnerships for the purpose of making it Legal Source appear that a true owner of assets and income is: Tax Crimes trustee; General Tax Fraud. The IRS CI Fiscal 2013 Annual nominee; Business Report describes general tax fraud investiga- nonresident alien; or tions as the backbone of CI’s enforcement program. foreign entity, when in fact a true ownership and The report focuses on taxpayers ranging from wage control remains with a U.S. taxpayer. earners all the way up to corporate executives who Nonfi ler Investigations. The IRS CI Annual Business do not pay their fair share of taxes through “willful Report describes nonfi lers as “individuals who simply non-compliance.” The schemes described in the refuse to comply with the law.” IRS CI is very concerned report include: that the active nonfi ling undermines public confi dence ddeldeliberatelyibeer y under-reporting or omitting income and the IRS’ ability to administer tax laws fairly and ef- ((“(“skimming”);skkikim mm g” fectivelyfectively.y. HHighgh income nonfi ler cases should continue mmamaintainingaiitntaitit ini g two ssetsets of bbooks;ooks; too growgrow.. eententeringterii gf false entries ini booksb andd records, EEmployment Tax. The IRS CI Annual Business Re- claiming personalsonal expenseseexp as business expenses; port describes the following employment tax evasion claiming falseed deductionseduucti or credits against taxes; schemes: and “Pyramiding” hiding or transferring assets to avoid payment to Employee leasing the IRS. Paying employees in cash Refund Fraud Program-Return Preparer Program. Filing false payroll tax returns IRS CI is looking for the orchestrated preparation and Failing to fi le payroll tax returns fi ling of false income tax returns by dishonest prepar- The Annual Business Report notes that some busi- ers. The schemes IRS CI are encountering include: ness owners intentionally fail to remit taxes which infl ated personal expenses; are withheld from their employees’ paychecks. infl ated business expenses; false deductions; Illegal Source excessive exemptions; and Financial Crimes unallowable tax credits. The IRS CI Annual Business Report identifi es illegal fi - Of note is that the Annual Business Report acknowl- nancial crimes that include fi nancial institution fraud, edges that the return preparers’ clients may not have public corruption, corporate fraud, gaming, insurance knowledge of the falsity of the returns in issue. fraud, healthcare fraud and bankruptcy fraud. Refund Fraud Program—Questionable Refund Pro- gram. The report describes this category of schemes International Operations as involving individuals fi ling false tax returns using A major theme of the International Operations section taxpayer identifi cation numbers of other individuals. of the IRS CI Annual Business Report is international

JOURNAL OF TAX PRACTICE & PROCEDURE 39 IRS CI Background and Current Initiatives

collaboration. International collaboration is described ceeds as a major challenge facing IRS CI. The IRS as vital to IRS CI’s efforts to combat offshore tax eva- CI Annual Business Report admits that in “most” sion and fraud. IRS CI Special Agents and Attachés money laundering cases, the money involved is are “strategically” stationed in ten foreign countries. earned from an illegal enterprise and the goal is Additionally, current overseas offi ces are in: to give the money the appearance of coming from 1. Beijing, China; a legitimate source. The IRS CI Annual Business 2. Bogota, Columbia; Report does not address the increase in the seg- 3. Bridgeton, Barbados; ment of the BSA structuring case solely involving 4. Frankfurt, Germany; legal source after tax funds. 5. Hong Kong, China; 6. London, England; 7. Mexico City, Mexico; ENDNOTES 8. Ottawa, Canada; 1 IRS CI Fiscal Year 2012 National Operations Annual Business Report 9. Panama City, Panama; and – Chief's Message – Richard Webber, at 2, available at www.irs.gov/ pub/foia/ig/ci/REPORT-fy2012-ci-annual-report-05-09-2013.pdf. IRS 10. Sydney, Australia. Voluntary Disclosure Program Frequently Asked Questions and Answers IRS CI has established the International League (June 26, 2012), at #23. Development Center which is specifi cally tasked 2 IRS Voluntary Disclosure Program Frequently Asked Questions and Answers (June 26, 2012), at #23. with conducting research on potential international 3 DOJ Press Release, Court Authorizes Service of John Doe Summons criminal investigations. Furthermore, IRS CI has Seeking the Identities of U.S. Taxpayers with Offshore Accounts at personnel assigned to Interpol in Washington, D.C. Canadian Imperial Bank of Commerce’s First Caribbean International who assist in joint investigations in the apprehen- Bank (Apr. 30, 2013). 4 IRS Criminal Investigation Targets Identity Theft Refund Fraud FS-2013-4 sion of international fugitives. Finally, Simultaneous (Feb. 2013). Criminal Investigation Program Agreements provide 5 IRS Criminal Investigation Responds to Terrorism (Mar. 8, 2013). IRS CI with the ability to share fi nancial information 6 IRS Public Corruption Investigations – Criminal Investigations (CI) (Oct. 17, 2012). on criminal tax suspects along with associated par- 7 IRS CI Fiscal Year 2012 National Operations Annual Business Report – Money ties and promoters who are based in both the foreign Laundering and Bank Secrecy Act (BSA), at 21. jurisdictionurisu sdicctioon and the United States. IRS CI currentlyy 8 For example, in a currency structuring investigation where the funds are deemed to be from a legal source and after-tax income, the IRS may hashhaas SCIPSSCIP agreements:ag ements: stilltill assertssert a fforfeitureorfe penalty on the funds at issue and may use the MMeMexico;exiiccoo;; IRS MMitigationigation Guidelines as guidance of the amount to be forfeited. IItalIlItaly;y; SSee e.g. IRMRM Exhibit 9.7.7-5. 9 France; IRS CI Fiscal Year 2012 National Operations Annual Business Reports – Cheif's Message – Richard Webber, at 2. Canada; 10 Id. Accomplishements – Overall Fiscal Year 2012 (FY 2012) Investiga- South Korea; and tion Statistics, at 4. Japan. 11 Id. 12 Id. 13 Id. Money Laundering and Bank 14 Id. Secrecy Act (BSA) 15 Id. 16 Id. Legal Source Tax Crimes – Fraud Referral Program, at 7. Interestingly, the IRS CI Annual Business Report 17 Id. describes the laundering of criminally derived pro-

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