IRS Criminal Investigators Step Up Enforcement

The Internal Revenue Service’s Criminal Investigation Division showed signs of improvement in meeting its objectives for combating tax evasion, corporate fraud, financial crime and even terrorism, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that the division’s current strategic plan calls for it to maintain a focus on legal-source tax investigations, to combat corporate fraud and terrorism, and to reduce the number of days to complete an investigation, among other priorities.

“Our report found that the IRS’s Criminal Investigation Division is generally reaching its objectives,” said TIGTA Inspector General J. Russell George in a statement. “The statistics validate that legal-source tax and tax-related investigations are a top priority for the CI Division.”

TIGTA’s report found that the CI Division demonstrated its commitment to pursuing legal-source tax and tax-related investigations as its top investigative priority. The CI Division achieved its fiscal year 2009 goal, spending 52.4 percent of its time on legal-source tax work and 72 percent on total tax investigations, a 10-year high in both areas.

However, the division did not meet its goal to complete 3,900 investigations, and instead only completed 3,848 investigations during FY 2009. According to division management, increased resources that were devoted to the prosecution of investigations in the pipeline inventory during fiscal year 2008 resulted in a significant decrease in fiscal year 2008 subject investigation initiations and a related decrease in case completions during fiscal year 2009.

The division also uses the number of convictions and the conviction rate as budgetary performance measures. The division did not meet either of its established goals for these measures, reporting declines in both the number of convictions and the conviction rate in fiscal year 2009.

Increased numbers of dismissals during fiscal 2009 (resulting from efforts to reduce the pipeline inventory) caused the drop in the overall conviction rate. In addition, the division continues to work on increasing its special agent staffing and coordinating with the operating divisions to strengthen the fraud referral program.

TIGTA made no recommendations in the report, but IRS officials were provided an opportunity to review the draft report, and made no comments.

Separately, another report released by TIGTA this week examined the Criminal Investigation Division’s efforts to investigate criminal fraud related to tax-exempt organizations and assessed the procedures used to conduct and manage such investigations.

The IRS estimates there are approximately 1.8 million tax-exempt organizations in the United States that control more than $3.4 trillion in assets. IRS management has been aware of potential fraud in the tax-exempt sector for several years and has increased their enforcement efforts, which include investigations conducted by Criminal Investigation.

During fiscal years 2007 through 2009, Criminal Investigation had an inventory of 168 tax-exempt investigations. Twenty-seven percent of the referrals received by Criminal Investigation came from other IRS functions, while about 20 percent came from the U.S. Attorney’s Office. The third largest number came from other federal agencies, including the Federal Bureau of Investigation. In general, the percentage of investigations related to tax-exempt entities seems reasonable compared to the number of tax-exempt returns filed.

Approximately 72 percent of tax-exempt investigations (121 of 168) are subject criminal investigations, which are investigations related to a specific individual or entity alleged to be in violation of laws enforced by the IRS and having criminal prosecution potential. About one third of the subject criminal investigations completed by Criminal Investigation resulted in a conviction.

TIGTA was unable to fully determine if fraud referrals were accepted or declined within 30 calendar days as stipulated in Criminal Investigation procedures. In March 2005, TIGTA reported that Criminal Investigation took an average of 93 calendar days to decide to accept or decline fraud referrals during fiscal year 2003.

In response to that report, the chief of the Criminal Investigation Division replied that several actions to address that finding were to be implemented by September 2004. The actions included implementing a fraud referral tracking system and re-emphasizing established operating procedures. Included was a requirement to better track referrals and to evaluate referrals within 30 workdays of receipt.

TIGTA attempted to determine if the Criminal Investigation Division evaluated the referrals included in its review on a timely basis. But Criminal Investigation staff was able to provide information on only 14 cases, and only five of the 14 were evaluated on a timely basis.
TIGTA recommended that the Criminal Investigation Division modify its Criminal Investigation Management Information System to capture data required to readily assess the timeliness of fraud referral evaluations.

Criminal Investigation did not agree with the recommendation, however. Instead, it proposed assessing the timeliness of fraud referral evaluations based on information currently available in its management information system, and issuing guidance to ensure special agents timely record information related to fraud referral evaluations.

TIGTA said it believes these measures will provide a general indication of whether evaluations are processed on a timely basis. In cases where the evaluation period exceeds Criminal Investigation guidelines, additional research will be required to determine whether there were delays in posting information to the management information system or actual delays in the evaluation process.

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