Navigating the intricacies of tax audits can be complex, and sometimes, a seemingly ordinary audit might take an unexpected turn into criminal investigation territory. Let’s explore three key factors that can escalate a civil IRS audit to a criminal investigation and what you need to know to stay on the right side of the law.
1. Unexplained Cash Transactions
If your bank account exhibits an unusually high number of cash deposits, particularly if they don’t align with the nature of your business or your earnings as a wage earner, the IRS might become suspicious. Large cash deposits, especially those from ATMs or different banks, without a reasonable explanation, could trigger an audit. If you’re unable to provide a valid reason for these transactions, it could lead to the case being referred to the Criminal Investigation Division (CID) of the IRS. It’s important to remember that while this is a red flag, it’s not the only factor the IRS considers.
2. Cryptocurrency and Unaccounted Income
The emergence of cryptocurrency has brought new challenges to tax reporting. If you possess a cryptocurrency or digital currency account, especially a decentralized wallet, and are unable to provide a clear account of your earnings, it might raise concerns. For instance, if funds from SBA or EIDL loans are transferred to a Coinbase account and then to a decentralized wallet without a documented trail, the IRS could investigate. Failure to provide proper accounting for significant amounts involving cryptocurrency might trigger a criminal investigation.
3. Foreign Bank Account Reporting Violations
Holding a foreign bank account is not inherently illegal, but it requires accurate reporting. If your aggregate balance across all foreign accounts exceeds $10,000, you are required to file a FinCEN 114 report. Failing to do so, along with not indicating your foreign accounts on your Schedule B, could lead to a criminal investigation referral. While the IRS acknowledges that not every case will result in criminal action, these actions are recognized as potential indicators of fraudulent behavior.
Understanding Indicia of Fraud
The IRS refers to these warning signs as “Indicia of Fraud.” If the agency comes across transactions that lack explanation, unreported income, or foreign account reporting discrepancies, your case might pique their curiosity. Remember, while these indicators might raise concerns, each case is unique and doesn’t guarantee a criminal investigation.
What to Do If You are Concerned About an IRS Investigation
IRS audits are no small matter, and the possibility of an audit evolving into a criminal investigation is a serious concern. To navigate this complex landscape successfully, it’s crucial to have a clear understanding of your financial transactions, accurate reporting, and professional guidance. If you find yourself in a situation that matches any of these warning signs, consider seeking professional advice to ensure that your financial practices align with legal requirements.
For expert insights and assistance with tax-related matters, don’t hesitate to reach out to Milikowsky Tax Law. I’m John Milikowsky, and I hope this information provides valuable insight into the intricacies of IRS audits and potential criminal investigations.