What Happens During a Tax Fraud Investigation?

Tax fraud is a serious offense that can lead to severe legal and financial consequences. In Illinois and everywhere else, the Internal Revenue Service (IRS) and state tax authorities go after individuals and businesses suspected of tax fraud. But what happens during a tax fraud investigation? Knowing the process can help if you’re being accused or just want to make sure you’re in compliance.

In this article, we’ll go over the stages of a tax fraud investigation and what to expect during each.

The Trigger: What Starts a Tax Fraud Investigation?

A tax fraud investigation usually begins when the IRS or state tax authorities find red flags during a review of a tax return or audit. Those red flags can include:

• Unreported income: Not reporting all sources of income is one of the most common triggers for a tax fraud investigation.
• Inconsistent deductions: Big or unusual deductions, especially compared to previous years, can raise an eyebrow.
• Large cash transactions: Big cash deposits or withdrawals that don’t match reported income can also trigger an investigation.

While most audits are routine, some can turn into full-blown investigations if the auditor thinks you did something intentionally wrong. In many cases, the IRS Criminal Investigation (CI) division is called in to take a closer look at your financial activities.

The Audit: The First Step of the Investigation

Many times a tax fraud investigation starts as a simple audit. During an audit the IRS will review your financial records to make sure everything on the tax return is accurate. Auditors will look at income, deductions and credits to find discrepancies or fraud.

During the audit if the auditor finds fraud they may refer the case to the IRS CI division for further investigation. This is where things can turn into a criminal investigation if the auditor thinks you did something intentional wrong, like falsifying information or underreporting income.

IRS Criminal Investigation Division

Once the IRS CI division is involved, the case goes from a routine audit to a criminal tax investigation. The CI division’s main mission is to investigate financial crimes, including tax fraud. They will determine if the taxpayer intentionally violated tax laws.

What the IRS CI Division Investigates

The IRS CI division will look into several areas of your financial life to see if tax fraud occurred:
Bank records: They will review your bank statements to see if your reported income matches your deposits and withdrawals.

• Business transactions: If you have a business, they will investigate your business records, contracts, and payments.
• Personal records: In some cases they may also look at your personal spending habits to see if there’s signs of unreported income, like big spending that doesn’t match your reported income.

They may also interview people close to you, like business partners, employees or even family members. Their goal is to get as much information as they can to build a case.

What Happens If You’re Under Investigation?

If you find yourself under investigation for tax fraud, you need to take it seriously. The IRS CI division does thorough investigations, and not complying or trying to hide information will make things worse. Here’s what to expect during the investigation:

1. Notification of Investigation

Usually, the IRS will notify you that you’re under investigation. This is usually done by a formal letter, but sometimes, you may find out during an audit. Once you’re notified, you need to respond quickly and get legal representation. A tax attorney can guide you through the process and protect your rights.

2. Gathering Evidence

The IRS will gather evidence to see if tax fraud occurred. This includes reviewing your tax returns, bank statements, business records and any other financial information. During this phase, the IRS may subpoena records from your bank or other financial institutions if they think the information will support their case.

3. Interviews and Subpoenas

In addition to reviewing financial records, the IRS may also interview people who are involved in your financial life. This could be business partners, employees, accountants, or family members. In some cases, they may issue subpoenas to obtain documents or testimony from individuals.

The IRS is thorough and will keep gathering evidence until they feel they have enough to either charge you or drop the investigation.

Results of a Tax Fraud Investigation

Once the IRS finishes the investigation there are several outcomes. Not all tax fraud investigations end in criminal charges but the consequences can still be severe.

Civil Penalties

If the IRS finds a taxpayer made significant errors or omissions but doesn’t think it was intentional, they may impose civil penalties. Civil penalties are:

Accuracy-related penalties: Fines up to 20% of the underpayment due to negligence or errors.
Civil fraud penalties: If fraud is proven, the penalty can be up to 75% of the unpaid tax.

Interest on unpaid taxes: The IRS will also add interest to any unpaid taxes which can add up fast.

Criminal Charges

In more serious cases where the IRS thinks tax fraud was intentional, the case may result in criminal charges. Criminal penalties for tax fraud are severe:
Imprisonment: Tax fraud can result in up to 5 years in federal prison per count.

• Fines: In addition to prison time, fines up to $250,000 for individuals (or $500,000 for corporations).
• Restitution: Defendants may also be required to pay restitution for the unpaid taxes plus interest and penalties.

If charged it’s critical to have a strong defense with the help of a tax attorney as these penalties can be life changing.

Defending Against Tax Fraud Charges

If you’re under a tax fraud investigation, it’s important to work with an experienced attorney who can guide you through the process and defend you against the charges. Here are some potential defenses your attorney may use:

Lack of Intent

One of the most common defenses in tax fraud cases is to prove the taxpayer didn’t intend to commit fraud. Mistakes on tax returns are common, and errors made without intent to defraud may not result in criminal charges. If your attorney can show any discrepancies were accidental, this could result in the case being downgraded to a civil penalty rather than a criminal charge.

Statute of Limitations

There is a statute of limitations for tax fraud cases, meaning the IRS only has a certain amount of time to charge. In most cases, the IRS has 6 years to charge someone with tax fraud. If the investigation involves tax returns from more than 6 years ago, your attorney may be able to argue that the charges are outside the statute of limitations.

Insufficient Evidence

Another defense strategy is to challenge the evidence presented by the IRS. In some cases the IRS may not have enough evidence to prove tax fraud occurred. A skilled attorney can review the evidence and have the case dismissed if there are significant weaknesses.

Bottom Line

A tax fraud investigation is serious business and can have life long consequences. Knowing what happens during the investigation from the initial audit to potential criminal charges is crucial if you’re facing tax fraud allegations. If you’re under investigation it’s important to act fast and get legal representation to protect your rights and build a strong defense.

The team at Azhari LLC has experience with tax fraud cases and can walk you through the process to ensure you have the best defense.

FAQs

1. How long does a tax fraud investigation take?

A tax fraud investigation can take several months or years, depending on the complexity of the case and the amount of evidence.

2. What happens if I ignore a tax fraud investigation?

Ignoring a tax fraud investigation can result in more severe penalties, including criminal charges. You should cooperate with the IRS and get legal counsel as soon as possible.

3. Can I settle a tax fraud case before it goes to court?

In some cases, you may be able to settle with the IRS before the case goes to court, but this depends on the facts and evidence.

4. What if I get a notice of investigation?

If you get a notice of investigation, you should consult with a tax attorney right away. They can help you understand your options and walk you through the process.

5. Can I go to jail for tax fraud?

Yes tax fraud is a federal crime and those convicted can go up to 5 years in prison per count plus fines and other penalties.