On December 3, 2015, the Internal Revenue Service released its 2015 Annual Investigation Report (Report). The Criminal Investigation unit (CI) focused its investigative efforts at terrorist financing, identity theft, cybercrime, public corruption, and money laundering. The number of investigations in Fiscal Year 2015 (3,853) were down from the number reported in Fiscal Year 2014 (4,297).
IRS Criminal Investigations Down
That decrease can be attributed to the 51 CI investigators lost during FY 2015 because of budget cuts, a 6 percent decrease. Since 2010, the CI has lost 445 investigators, reducing the agency’s ability to initiate and follow through with investigations.
“The report reflects the extremely high level of commitment that CI agents bring to the job and the great case work accomplished this past year,” said Richard Weber, Chief of the CI unit in a press release accompanying the report. “But the story that the report tells this year is that fewer agents do mean fewer cases. I’m extremely proud of all that we accomplished in spite of our budget challenges, but the inability to hire is really taking its toll.”
Tax Violations
Most people do not realize the scope of CI investigations. They simply think of “tax evasion.” This type of investigation comes under what is called “legal source tax crimes.” These crimes are committed, as the Report noted, “in legally permissible occupations and industries, and their actions violate tax laws or threaten the tax program.”
The overriding goal of this investigative effort is to bring about more voluntary compliance with the nation’s tax laws—give unto Caesar that which is Caesar’s. Those who fail to comply with Caesar’s edict engage in what is known as “general tax fraud.”
Tax Fraud Backbone of IRS Criminal Investigations
The Report says general tax fraud investigations are the “backbone” of CI’s enforcement program. Put simply, the IRS wants to make sure that “the taxpaying public” is complying with the Internal Revenue Code
“Compliance with the tax laws in the United States depends heavily on taxpayer self-assessment of the amount of tax, voluntary filing of tax returns and remittance of any tax owed,” the Report said. “This is frequently termed ‘voluntary compliance.’ These are individuals from all facets of the economy, whether corporate executive, small business owner, self-employed or wage earner, who through willful non-compliance do not pay their share of taxes.”
Abusive Return Preparer Fraud
Within the CI unit are various programs that targets specific types of tax fraud. For example, the Abusive Return Preparer Program generally investigates dishonest tax return preparers who, on behalf of their clients, may inflate personal or business expenses, false deductions, excessive exemptions, and/or allowable tax credits.
An example of this type of investigation is the case of two Fort Worth, Texas tax return preparers, who were sentenced to 170 months and 95 months respectively this past May. The two women were convicted on conspiracy to aid and assist in the preparation and preparation of false tax returns. One of the women owned a tax preparation business which employed her daughter-in-law as a return preparer. The false tax returns led to greater tax preparation fees–$1.9 million between 2008 and 2011.
Questionable Refund Fraud
Then there is the Questionable Refund Program whose primary focus is to identify fraudulent claims for tax refunds. This fraud usually involves individuals who file multiple tax returns with false information under the names of people who may or may not know about the scheme.
An example of this kind of refund fraud scheme is the case of R.Z, a Dallas resident who this past August was sentenced to 93 months in prison and ordered to pay $2,648,334 in restitution. RZ was convicted with TS who was sentenced to 87 months in prison and ordered to pay $2.6 million in restitution. The two men were convicted in a scheme to e-file false and fraudulent income tax returns. They reportedly rented private mailboxes in the name of aliases by using foreign United Kingdom passports. They then opened bank accounts in the name of the aliases so IRS refunds could be electronically deposited into the accounts.
Individuals Bear Brunt of Criminal Investigations
We have no problem giving unto Caesar that which is due Caesar. Our problem is that the IRS vigorously goes after individuals involved in the above described schemes, but turn a blind enforcement eye to wealthy corporations. For example, the Fiscal Times reported this past April that fifteen of the nation’s Fortune 500 companies avoided paying taxes on $23 billion in profits in 2014. Worst yet, these companies – including CBS, Mattel, Prudential, and Ryder System – paid “almost no federal income taxes on $107 billion over the past five years.
Enforcement Inequity Breeds Distrust
And this was done in a legal and proper way. And that’s the rub. This sort of inequity creates seething distrust by the American public against the IRS. And the distrust is entirely reasonable when 75 percent of the Fortune 500 companies operate at least one subsidiary in an offshore tax haven to avoid paying taxes to the tune of $620 billion. The top three companies that engage in this truly reprehensible behavior are Apple ($181 billion), General Electric ($119 billion), and Microsoft ($108 billion).
This information is contained in a study released in October by the U.S. Public Interest Research Group and the Citizens for Tax Justice. The Fiscal Times reported that these “companies have dramatically increased their use of accounting techniques that allow cash earned overseas to be booked in the name of subsidiaries that are incorporated in low-or no-tax jurisdictions, sometimes with little more than a mailbox as their physical presence. Between 2008 and 2014, the amount of money U.S. firms claimed as profits attributable to offshore entities doubled to $2.1 trillion.”
This unholy practice costs the Department of Treasury nearly $90 billion in revenues each year. Apple alone would owe the Treasury $59.2 billion if its $181 billion was not “considered overseas for tax purposes.” And the kicker here is that this Apple money, and the money from the other companies, is not kept in offshore banks but rather in “U.S.-based banks and financial institutions.”
Again, this corporate behavior is perfectly legal. But to us the behavior is no different than the behavior of ordinary, everyday tax cheats who are sent to prison.
719 Tax Fraud Offenders Convicted and Sentenced in 2014
In the Fiscal Year 2014, there were 719 tax fraud offenders sentenced under the U.S. Sentencing Guidelines. They received on average 16 months in prison, despite being an average age of 50 with no criminal history (82.8 percent). Their conduct on average deprived the Treasury $166,967.
Compare that to Apple’s $59.2 billion in lost revenue to the Treasury.
The difference is that one conduct is called tax fraud while the other is called tax avoidance.
But, as criminal defense attorneys, it’s hard for us to see, much less respect, the difference.