This is the second part in our 2023 series examining important trends in white collar law and investigations. Up next: health care enforcement.
The days of decreased IRS enforcement activity may be coming to a close. Although the overall volume of civil audits and criminal investigations has declined in recent years, last year’s Inflation Reduction Act, signed into law by President Biden on August 16, 2022, may reverse this trend. The Inflation Reduction Act allocates $79.6 billion to the IRS over the next 10 years, with more than half of the money going to enforcement. This law aims to supplement, not replace, the IRS’s normal annual appropriations. Stay tuned—only time will tell how these additional funds will impact the volume and focus of IRS’s criminal financial investigations.
The IRS remains a significant player in white collar crime enforcement. IRS Criminal Investigation (“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 and the only agency with authority to investigate criminal violations of the Internal Revenue Code. According to the IRS-CI’s 2022 Annual Report (“2022 Annual Report”), this past year IRS-CI spent 71.7% of its time investigating tax-specific crimes, 15.2% of its time investigating non-tax financial crimes such as money laundering (“tax fraud in progress”), and 11.6% of its time on narcotics-related financial cases through participation in the Organized Crime Drug Enforcement Task Force.
IRS-CI Chief Jim Lee, a veteran of the organization, continues to head the division. He touts the agency’s 90% conviction rate, warning crowds around the country that “if a CI special agent has you in their crosshairs, there is a good chance you are going to jail.” Indeed, the incarceration rate for those sentenced in 2022 is 77%, with an average of 42 months to each sentence.
IRS-CI specifically emphasized the following areas of focus in 2022:
- Cryptocurrency and Cybercrimes. IRS-CI has been investing in its cybercrime program since 2015, and that investment shows no signs of slowing. Calling it a “strategic realignment,” IRS-CI has focused on building internal capabilities to address cybercrime in recognition of the growing role digital assets play in the global economy and the unique risks they present. In FY 2021, the agency created the Office of Cyber and Forensic Services (“CFS”) to bring together digital asset investigation, cybercrime investigation, digital forensics, and physical forensics under one roof. The CFS supports criminal investigations agency-wide and, specifically, the Washington, D.C. and Los Angeles-based Cyber Crimes Units, which spearhead investigations into “the highest impact cases” of potential criminal activity involving digital assets.This year, IRS-CI plans to establish the Advanced Collaboration and Data Center, previously slated for completion last year, to provide centralized access to data and resources to effectively support investigations in challenging areas such as the dark web, cryptocurrency, and social media and other open-source platforms.This past year, IRS-CI’s cybercrime efforts continued to focus on cryptocurrency. In fact, all three of the cybercrime cases highlighted in the 2022 Annual Report involve the nefarious use of cryptocurrency, including the April 2022 seizure of Hydra, a darknet marketplace that conducted transactions using cryptocurrency. Looking ahead, IRS-CI identified decentralized finance, peer-to-peer payments, and anonymity-enhanced cryptocurrencies as “evolving” threats that the agency is working to address.
- Sanctions-Related Investigations. As we noted last year, IRS-CI has a strong international presence, with attachés of the agency in 11 countries and partnerships around the world. In 2022, international activity took center stage, with an increase in investigations into financial crime connected with sanctions on Russia and Russian individuals. IRS-CI participated in a multi-agency task force, Task Force KleptoCapture, which was established to located sanctioned Russians and their assets. IRS-CI also relied on its international partnerships, including its leadership of the Joint Chiefs of Global Tax Enforcement (J5), to identify potential sanctions-evaders or sanctioned assets and to develop a global strategy to deter Russian’s aggression.
Beyond these areas at the cutting edge of IRS-CI’s efforts, traditional examinations and enforcement actions against high-income individuals and large companies are and will always be a focus for the IRS. With both tax and non-tax crimes, the number of investigations initiated by IRS-CI increased slightly in 2022, but IRS-CI recommended prosecution in slightly fewer cases than the year before. Given the time-lag in tax investigations in prosecutions, it is possible that tax enforcement is or will soon be on the rise, as IRS-CI and others have been projecting for years.