During an audit, if an IRS revenue agent suspects fraud, he can impose penalties himself, or he can refer the case to the Criminal Investigation Division (CID). The CID is part of the enforcement mechanism for the IRS. It is divided into two parts—General Enforcement (for ordinary taxpayers) and Special Enforcement (for unions, organized crime, and cases involving drugs).
The CID has broad powers. In fact, a taxpayer may not even know the CID is investigating him until the taxpayer is formally charged. The CID takes its job very seriously and conducts extremely thorough investigations. In pursuit of evidence, CID agents may contact a taxpayer’s friends, employer, co-workers, neighbors, and bankers, and spouse. There are CID offices throughout the United States. CID agents are federal investigators who have been trained in law enforcement techniques. Most CID agents are also accountants, and many have earned their CPA.
The CID may monitor mail and may apply for a court order for a phone tap. For example, In October, 2000, prompted by the IRS, the U. S. District Court ordered American Express and MasterCard to provide credit and debit card information pertaining to U. S. taxpayers involving banks in Antigua, the Bahamas, and the Cayman Islands for the 1998 and 1999 tax years. The IRS has estimated that some $70 million in annual taxes is lost through offshore tax evasion activities. The banks of Antigua, the Bahamas, and the Cayman Islands are favorite locations in which to conceal revenue from the IRS.
If taxpayers fail to report transactions and pay taxes on those transactions, they could be guilty of tax fraud, tax evasion, and money laundering under U. S. law. U. S. citizens must inform the IRS whether they have earned interest on an account deposited in a foreign bank on Form 1040, Schedule B. If they do, then they must complete TD F90-221 if the aggregate amount held in all foreign accounts exceeds $10,000 at any time during the tax year. Additionally, currency transactions involving more than $10,000 must be reported on Form 4789, and international transportation of currency or monetary instruments (such as bearer bonds) must be reported on Form 4790. By focusing on the records of U. S. credit card companies, the IRS has found an effective means to investigate offshore tax havens. Thus, many U. S. tax evaders have cause to be uneasy about their offshore activities.
Because of the many resources it takes to conduct a CID investigation, only a very small percentage of taxpayers or tax evaders are investigated by the CID. The IRS will use the CID only when it has strong implications of serious wrongdoing. Even in these cases, the CID will recommend prosecution only if it has built an airtight case against the suspect.
The CID will usually prosecute cases it determines are very strong. On the other hand, if the case may generate a lot of publicity, the CID may decide to prosecute anyway. The CID and IRS view high publicity prosecutions against high profile people as being a major deterrent for others contemplating committing a tax crime. The CID also considers the amount of money involved in a tax crime when deciding whether to prosecute a case. The average amount of money owed in most criminal tax cases exceeds $70,000. Once the decision to prosecute has been made by officials in the CID, and the Justice Department accepts the case, the chances of obtaining a conviction are about 80 percent. About half of those convicted will be incarcerated, irrespective of any prior criminal record in their past.