This is the third post in this year’s series examining important trends in white collar law and investigations. Our previous post discussed trends in anti-corruption. Up next: State AG enforcement trends.
- While the volume of IRS enforcement actions has waned, it may soon increase.
- Even at current relatively low audit and investigation levels, the IRS remains aggressive in the cases it does pursue.
- The IRS is focusing efforts on cryptocurrency matters, international investigations, and Covid-19 fraud.
- But the IRS also continues to pursue cases in many traditional areas, where a pre-filing holistic review of issues is the best approach.
Tax season is here — what better time to discuss trends in federal tax investigations?
In recent years, the overall volume of IRS enforcement activity has decreased, both in civil audits and criminal investigations (see links to recent IRS annual Data Books here, and IRS Criminal Investigation (“IRS-CI”) Annual Reports here). Despite years of calling for additional budgets and staffing, and the fact that IRS enforcement is generally a money-making enterprise for the government, meaningful increases in enforcement personnel and activities have not occurred. The recent Build Back Better bill included an $80 billion budget boost for the IRS over the next decade, but that bill has gone notoriously nowhere. Still, politicians continue to tout the benefits of a stronger IRS. While watching IRS enforcement get tossed around on Capitol Hill might be mildly entertaining (or incredibly frightful), it is important to remember decreased enforcement does not equate to zero enforcement, and as always, IRS is following the money.
In terms of white collar crime enforcement, the focus of our blog series, the IRS remains a significant and leading government agency. IRS-CI is the federal agency responsible for investigating and recommending prosecution of criminal tax violations and other related financial crimes to the Department of Justice. It is the only agency that dedicates one-hundred percent of its time to financial investigations. According to the IRS-CI’s 2021 Annual Report (“2021 Annual Report”), this past year IRS-CI spent 72% of its time investigating tax-specific crimes (including, but not limited to, the “exponentially” growing category of cybercrimes), 15.4% of its time investigating non-tax financial crimes such as money laundering (“tax fraud in progress”), and 11.2% of its time on narcotics-related cases through participation in the Organized Crime Drug Enforcement Task Force.
Since October 2020, IRS-CI Chief Jim Lee, a 25-year veteran of the organization, has headed the division. Mr. Lee clearly supports IRS-CI sticking to its core mission. While the heavy focus on convicting people and seeing them sent to jail is sometimes hard to stomach for the defense-minded among us, IRS-CI continues to tout its nearly 90% conviction rate and has emphasized that the consequence of willful non-compliance is jail time, the average being about 43 months this past year. No doubt IRS-CI’s reputation remains strong, and past performance certainly means taxpayers must take future dealings with IRS-CI seriously.
Going forward, IRS-CI under Mr. Lee has emphasized the following areas of focus in 2022:
In FY2021, IRS-CI seized $3.5 billion in cryptocurrency, comprising 93% of IRS-CI’s seizures. This included a $1 billion seizure of previously undetected bitcoin transactions executed by Silk Road, which were the proceeds of unlawful activity (Silk Road’s founder, Ross Ulbricht, was convicted in 2015 of conspiracy to distribute narcotics and money laundering). Just last week in an investigation led by IRS-CI, two individuals were arrested for conspiring to launder cryptocurrency that was stolen in a 2016 hack of Bitfinex, a virtual currency exchange. This case also involved the largest-ever financial seizure by DOJ, coming in at $3.6 billion. IRS-CI’s message around cryptocurrency is this: it’s not as anonymous as criminals think.
The focus on cryptocurrencies follows IRS-CI’s growing focus on its cybercrimes program more generally. Knowledge of cryptocurrency, blockchain and open-source intelligence (OSINT) technologies (in additional to other internet and internet-based technologies) is a significant focus in IRS-CI’s attempts to unravel complex cyber-financial criminal schemes. With that in mind, IRS-CI plans to launch an Advanced Collaboration & Data Center (“ACDC”) in the Northern Virginia area later this year. The focus of the center will be to bring together data, technology, and specialized personnel from across Treasury and government to work on high impact solutions to protect the integrity of the tax and financial systems. While IRS-CI has been doing this work on a smaller scale for the past five years, the plan is that the ACDC will give all agents across the country who encounter cyber issues in their investigations the expertise and resources to move cases forward.
IRS-CI’s presence reaches far beyond the United States, and increasingly so. Currently, IRS-CI has 22 attachés in 11 countries covering all of the major regions of the world. In addition to its own resources, IRS-CI relies heavily on international partnerships. For example, in the press release this week related to the arrests/seizures stemming from the Bitfinex hack, the government noted that police in Germany provided important assistance. This past year, IRS-CI marked the third anniversary of the establishment of the Joint Chiefs of Global Tax Enforcement, an international group of tax organizations from five countries (including the US, UK, Canada, Australia, and the Netherlands) known as the “J5.” The J5 combats tax crime through collaboration, information-sharing, and enforcement operations, and undoubtedly will be a significant factor in enforcement actions to come.
Covid-19 Related Fraud
Covid-19 related fraud continues to occur, and will be a focus of IRS enforcement. In FY2021, IRS-CI initiated over 300 Covid-19 related cases. Most of these cases involve money laundering in connection with the Paycheck Protection Program (“PPP”), but IRS-CI has also seen fraud in connection with other Covid-19 relief programs, including the Economic Injury Disaster Loan program, unemployment insurance benefits through the CARES Act, and most recently the Childcare Tax Credit. Mr. Lee emphasized that the pace of these investigations is critically important to stop this type fraud in its tracks.
While the areas outlined above are clearly at the cutting edge of IRS-CI’s efforts, it is important to remember that the IRS remains incredibly active in many other areas as well. For example, conservation easement cases continue to surge in both civil and CI matters, and even despite recent losses in some of those cases (see here and here), IRS does not appear close to backing down. Traditional examinations and enforcement actions against high-income individuals and large companies will always be a focus for the IRS. In those matters, and many others, the best defense is typically a pre-filing holistic and thorough consideration not just of the letter of the law, but also the IRS’s many available tactics to re-interpret a person’s or company’s business and financial decisions. Banking on skating past the IRS’s decreased audit/investigation presence is not a viable plan, because when they do take a shot, as Mr. Lee makes clear, they do everything they can not to miss.