As we approach the end of the year, many of us are preparing to file our 2015 tax returns. As we do so, it is important to remember that errors and omissions relating to compliance with the tax laws can result in criminal charges. What follows is a very brief primer on how the Internal Revenue Service investigates tax crimes, as well as the results of some relatively recent criminal investigations.
The Criminal Investigation (“CI”) section of the Internal Revenue Service investigates possible criminal violations of the tax laws. CI has approximately 3,500 employees worldwide. Approximately 2,500 of these employees are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act violations that rise to the level of criminal conduct under the Internal Revenue Code. These investigations are very record-intensive. Because financial records are becoming increasing automated, CI agents are trained to recover evidence stored in electronic format, regardless of whether it is password protected, encrypted or electronically shielded by some other means.
CI has three investigative programs. The first is Legal Source Tax Crimes. These investigations involve legal industries and occupations, and legally earned income. Violations in this area include income tax evasion, failure to file a tax return, or filing a false tax return. Specific crimes in this area frequently include employment tax fraud and false claims for tax refunds. Individuals who refuse to file tax returns and/or pay taxes as a challenge to the constitutionality of the tax system are also typically investigated through this program. The second CI program is Illegal Source Financial Crimes. This program focuses on monies coming from illegal sources such as embezzlement, kickbacks, or health care fraud. Specific crimes in this area can include Medicare over billing, kickbacks to public officials, securities fraud, ponzi schemes and illegal gambling activities. The final investigative program is Narcotics-Related and Counterterrorism Financing Crimes. This program focuses on the financial profits of drug trafficking and money laundering operations, with an eye toward cutting off funding for such activities. All three programs are interdependent and, where necessary, coordinate with other federal law enforcement agencies.
CI recently released its FY-2015 report which summarizes, among other things, the nature and results of CI’s investigative activities for the reporting period. CI managed to get approximately 3,000 convictions. Many of these included significant prison sentences and substantial fines and restitution payments:
- A Michigan hematologist/oncologist who owned a cancer treatment clinic and testing facility prescribed and/or administered unnecessarily aggressive treatments to 553 individual patients to increase his Medicare and insurance billings. In each case, he allegedly gave a fake cancer diagnosis to healthy patients, or prescribed the wrong treatment. He pleaded guilty to health care fraud, money laundering and conspiracy to pay or receive kickbacks, was sentenced to 540 months in prison, and ordered to pay over $17 million in fines and restitution.
- A Florida couple, along with other conspirators, filed false tax returns and claimed approximately $3 million in fraudulent refunds using stolen personal identifiers (e.g., names, birth dates and social security numbers). They also assumed the identities of people who were dead, but whose personal information was located on genealogy websites. The husband was sentenced to 324 months and ordered to repay $3.6 million in files and restitution. The wife received 138 months, and was held liable for the same dollar amount.
- Another Florida resident was employed as a payroll supervisor at two companies that operated hospital facilities. He told his employers that he had set up a company to handle paying their federal, state and local payroll taxes. He kept the monies received for this purpose, and used it to finance a charter airline company. His activities led to an underpayment of $21 million in tax revenue to government agencies, and severely disrupted operations at several hospital facilities. He was sentenced to 240 months in prison and ordered to repay over $21 million in fines and restitution.
The full IRS-CI FY-2015 report is available online for those who which to review it in greater detail. See https://www.irs.gov/pub/foia/ig/ci/FY2015_IRS-CI_Annual_Report.pdf.
James S. Friedman, LLC represents individuals and small to medium-size businesses accused of tax crimes. If you or your company are being investigated for allegedly under-reporting income, filing false tax returns, failing to file tax returns, or claiming a false refund, the consequences can be serious. Contact us immediately for a consultation.