The Inside Scoop – How IRS Criminal Investigations Start
The IRS doesn’t randomly launch criminal tax investigations. These cases typically start with a referral—either from an informant, a financial institution, or even another government agency. When the IRS Criminal Investigation Division (CID) takes on a case, it means they suspect willful tax fraud or financial crimes that could result in criminal charges.
At Milikowsky Tax Law, we help businesses and individuals navigate IRS criminal tax investigations. Here’s a look at how these cases typically begin and what warning signs to watch for.
Where Do IRS Criminal Referrals Come From?
The IRS receives tips and referrals from a variety of sources, including:
1. Whistleblowers and Informants
Individuals with inside knowledge—such as former spouses, business partners, or employees—can report suspected tax fraud to the IRS. These whistleblowers may submit information anonymously, and in some cases, they may receive financial rewards if their tip leads to collected taxes.
2. Banks and Suspicious Activity Reports (SARs)
Banks are required to monitor and report suspicious financial activity to the government. If you deposit or withdraw **large amounts of cash—typically $10,000 or more—**your bank may file a Suspicious Activity Report (SAR) with the IRS and other agencies. The Bank Secrecy Act (BSA) database also tracks financial transactions that could indicate money laundering, tax evasion, or other financial crimes.
3. State and Local Government Referrals
State tax agencies, such as the California Franchise Tax Board (FTB) or Employment Development Department (EDD), may uncover suspicious activity during an audit. In some cases, they refer their findings to the IRS for further investigation.
For example, EDD audits businesses to determine if independent contractors should be classified as employees. If they suspect tax fraud, they may report their findings to the IRS. While not all EDD cases result in an IRS referral, the possibility exists—especially under changing government policies.
4. IRS Civil Audits That Escalate to Criminal Cases
Some IRS criminal investigations start as routine audits. If an IRS revenue agent uncovers signs of willful fraud, they can refer the case to the Criminal Investigation Division (CID).
A major red flag is when an IRS agent suddenly stops communicating during an audit. This often means they are waiting for a decision from CID on whether to proceed with a criminal case. Once a case is under criminal review, the civil audit is typically put on hold.
5. IRS Collection Cases and Revenue Officers
If you owe back taxes, the IRS may assign a Revenue Officer to collect the debt. Revenue Officers are assigned to specific cases in the taxpayer’s local area and have the authority to enforce collections through liens, levies, and payment agreements. If they suspect fraud—such as deliberately hiding assets to avoid paying taxes—they can escalate the case to CID.
What to Do If You Think You Are Under IRS Criminal Investigation
If you suspect that your case may be referred for criminal investigation, do not attempt to handle it on your own.
- Do not discuss your case with a CPA, accountant, or business partner—their communications are not protected under attorney-client privilege.
- Consult a tax attorney immediately. A tax attorney can investigate your case, gather evidence, and develop a legal strategy before the IRS builds a case against you.
At Milikowsky Tax Law, we specialize in IRS criminal tax defense. If you need guidance on a potential investigation, contact us today.
