In criminal cases, the IRS is the house, and the house (usually) wins

One of our recent blog posts explored the degree to which budget cuts are said to have reduced IRS enforcement activities. Each year for the past six, the number of audits has declined. The number of criminal investigations initiated is also declining.

However, that statistic may not be something with which Catsome companies find comfort, as they are examples of the IRS dropping by unannounced in a way no business or organization wants to experience. For example:

  • On March 2, 2017, three Caterpillar offices were raided by the IRS criminal investigation unit and enforcement arms of the Dept. of Commerce and Federal Deposit Insurance Corp. as part of a tax-related criminal investigation.
  • The Grapevine, Texas, offices of televangelist Benny Hinn were served with a search warrant by IRS and U.S. postal service agents.
  • Three Cleveland, Ohio, businesses were raided on May 24 by IRS and FBI agents who wouldn’t reveal the purpose of their “visit,” but it wasn’t to tell the businesses how impressed they were with the businesses’ accounting.

When the IRS raids a place of business, it doesn’t necessarily mean wrongdoing has occurred. It means the IRS and other authorities are looking for evidence of wrongdoing. News coverage of raids is often dramatic, showing officials with big letters on their jackets walking purposefully in and out of the raided office, often carrying boxes of “evidence,” whether it turns out to be evidence or not. But again, the fact that a raid has occurred doesn’t necessarily mean criminal activity has taken place. But it’s a mistake for officials of any company to assume that the IRS, budget cuts notwithstanding, won’t come knocking.

I have questions about an IRS audit.

 On Feb. 27, the IRS Criminal Investigation annual report was released, which said,

IRS CI initiated 3,395 cases in FY 2016 that focused on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing.”

In contrast, the 2015 annual report showed that nearly 500 more cases were initiated in 2015 than in 2016:

“Focusing on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing, IRS CI initiated 3,853 cases in FY 2015,”

the report said. The fact that the number of cases being opened is declining, just as are audits, could be a green light for some to attempt a questionable accounting strategy for tax purposes.

It’s a dangerous roll of the dice, as Forbes Magazine pointed out in a story about Caterpillar:

“No matter how low the resources and initiated investigations for IRS Criminal Investigation dip, it is important to remember that once an IRS investigation of you or your business commences, the odds of being investigated are 100%.”

Also, as the IRS news release on the annual report notes,

“This year, CI again boasted a conviction rate rivaling all of federal law enforcement at 92.1%.  That conviction rate speaks to the thoroughness of the investigations.”

One way the IRS attempts to dissuade companies from making bad choices is to publicize how it takes them down. The moral of this story? Companies engaging in questionable or “creative” accounting practices to save money are betting they can either convince the IRS of the purity of their practices or they’re wagering they won’t get caught.

Before placing such bets a good practice is to remember that in these cases – just as in a casino  the house (usually) wins.

I have questions about an IRS audit.


Tagged IRS, Criminal Investigation, Assurance