On a regular basis, the IRS conducts its "Taxpayer Attitudinal Survey" which measures what the overall population thinks about different aspects of taxation. The question that is most interesting—and most controversial —is, "Do you think that it is ok to cheat on your tax returns?" According to the results of the survey, 12 percent of the population thinks it is in fact ok. Since 2004, the goal of the IRS has been to reduce this to 10 percent. But even if that goal were to be achieved, that's over 10 million tax returns with questionable numbers.
In order to make sure that as many of the tax filers as possible get caught, the IRS has been expanding its Criminal Investigation division ("CI"). The IRS CI is responsible for the investigation of tax return fraud from both legal and illegal income sources. The CI doesn't go after mistakes or a slight exaggeration on a deduction—they go after cases where the actions of a tax filer are considered criminal activity. Setting up a money laundering scheme to hide illegal income in a legal business or setting up shell companies to generate phantom expenses that reduce taxable income are just two examples of what the CI goes after.
The Criminal Investigation Division flexes its muscles
For the fiscal year that just ended, the CI had a record budget of $658 million, which they partially used to employ 4,066 FTEs (full time equivalent employees) to conduct investigations. Over 4,300 criminal investigations were conducted, and once the investigations are completed and there is sufficient proof to warrant a prosecution, the CI remits the case to either the Department of Justice or the appropriate United States Attorney. These referrals are then vetted by DOJ or the US Attorney to determine if they agree that a criminal prosecution is warranted.
In the case of the DOJ, nearly 94 percent are accepted for prosecution, and with the U.S. Attorney it’s an equally impressive 92 percent. These prosecutions led to 2,184 convictions, a conviction rate in excess of 90 percent. This tends to show that the initial investigations and subsequent prosecutions are warranted.
New strategy for the IRS Criminal Investigation Division
Given their success in recent years, the IRS CI is shifting more resources towards criminal activity related to legal sources of income. In the past, drug-related tax cases where the focus. Financial and human resources were allocated to give these cases priority over other criminal tax activities. But the 2010 fiscal year report caps several years of the IRS CI achieving great success in going after legal-income criminal cases. The majority of agent time now is spent investigating legal-income cases. This trend is likely to continue for the foreseeable future.
The vast majority of people sleep well at night by not playing games with their tax returns. But there remains a significant portion of the population that is willing to take a chance.
While the odds that you will be flagged for criminal investigation may be low, once you are flagged if you are doing something that you shouldn't be doing, it's almost certain that you will pay for it.