Tag Archive for: Audits

edd can audit small businesses back 12 quarters

Employment Development Department (EDD) performs many services, but their primary role that impacts small businesses is collecting and auditing payroll taxes. Employers pay payroll taxes for W-2 employees, but not for 1099 independent contractors. 

The line between an independent contractor and an employee was more concretely defined with the implementation of Assembly Bill 5 (AB-5). A worker must meet all three of the following criteria to be classified as an independent contractor: 

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work
  2. The worker performs work that is outside the usual course of the hiring entity’s business
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Misclassification mistakes can oftentimes be exactly that – an innocent mistake. However, there are also instances where businesses have taken advantage of classifying employees as independent contractors to avoid paying payroll taxes and investing in employee benefits. This was the case with Dynamex– read the full story here

Purposeful and accidental employee misclassifications strip employees of their benefits and the government of their tax funding. In order to protect both, EDD performs misclassification audits on businesses that are flagged for potential misclassifications. The top 4 EDD audit triggers include

  1. Independent contractors filing for unemployment
  2. Employee complaints to EDD
  3. Late filing of taxes
  4. Randomized verification audits 

If EDD sends you a notice in the mail notifying you they want to audit your business, there is a limit to how far back they can audit. 

 

EDD Audit Statute of Limitations 

The government agency can audit your business EDD can audit your business 12 quarters back from the quarter in which the audit is started, however, audits can go back up to eight years in some cases. 

Watch our full video below to learn more.

 

Only cases involving fraud or intent to evade payroll taxes are not limited by that statute of limitations. In these instances, EDD can audit the business as retroactively as they deem.

Section 1132 of the Unemployment Insurance Code states: 

“Except in the case of failure without good cause to file a return or report, fraud or intent to evade any provision of this division or authorized regulations, every notice of assessment shall be made within three years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued or within three years after the deficient return or report is filed, or was due, whichever period expires the later. An employing unit may waive this limitation period or may consent to its extension.

In case of failure without good cause to file a return or report, every notice of assessment shall be made within eight years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued. An employing unit may waive this limitation period or may consent to its extension.”

 

How Long Do EDD Audits Take?

EDD audits typically last about three to nine months depending on a myriad of factors:

  • How prepared and organized are you for the audit 
  • If they find more information that may need to deepen the investigation 
  • How backlogged the department is

Your auditor will have to review your records, federal income tax return, W-2s, payroll tax returns, 1099 forms, financial statements, and more. They also interview your 1099 independent contractors to cross-verify information. 

The more contractors you have, the longer the audit can potentially take. 

For more information on what to expect during an EDD Audit, read our article here.

 

edd can audit back 3 years

infographics

California Assembly Bill 5 (AB-5) took effect on January 1, 2020, and is the new standard by which employers must classify employees. Small business owners (SBOs) should familiarize themselves with AB-5 and the ABC test to avoid employee misclassification and potential penalties from the Internal Revenue Service (IRS).

What is Assembly Bill 5 (AB-5)?

Assembly Bill 5, commonly referred to as AB-5, is a piece of legislation that extends employee classification status to some independent contractors, requiring that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC Test.

What Caused Assembly Bill 5?

Assembly Bill 5 was inspired by the April 2018 Dynamex Case—when Dynamex reclassified all employees (previously classified as W-2s with all the associated perks) as independent contractors to save employee costs– before being signed into law by Governor Gavin Newsom in September 2019.

Read on to learn how Dynamex ruined it for everyone.

What Businesses Does AB-5 Affect?

AB-5 affects all small businesses and small business owners. Most prominently, AB-5 impacts SBOs who hire 1099 independent contractors and their operations in California.

How Does AB-5 Affect Businesses?

Through AB-5, the California Employment Development Department (EDD) places the burden of proof on businesses to show that workers are correctly classified as 1099 contractors.

The misclassification of employees can lead to:

  • High fines
  • Penalties
  • And back tax payments

How Do I Correctly Classify 1099 Independent Contractors?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify a worker as a 1099 independent contractor. 

What is ABC Test?

Check out our video below for an in-depth explanation of the ABC Test.

The ABC test is a set of requirements that the worker must meet to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must meet all three criteria of the ABC test to be correctly classified as an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the contractor fails to meet any of the criteria in the ABC test, they are automatically classified as a W-2 employee instead.  

How To Meet The ABC Test Criteria 

When classifying your 1099 independent contractors according to the ABC Test, gather the following information to make sure they are classified correctly.

The First Criteria

  • Gather information on project deliverables and how they are delivered.
  • Have your contractor submit an invoice.
  • Keep correspondence about project timelines recorded in a clear and accurate manner.
  • Ensure you’re not placing requirements on your 1099 contractors regarding how they perform their work. For instance, do not tell the workers what to do or specify reporting requirements. 
  • Document and file scope of work (SOW) from your contractor.

The Second Criteria

  • Compose a definition of your contractors’ line of work.
  • Compose your definition of your business’s line of work (i.e. what products or services does your company provide?)

The Third Criteria

  • Verify if your 1099 has insurance.
  • Ask if they have a legal entity.
  • Check if they have associations, unions, or other affiliations.
  • Review their professional certifications.
  • Gather their business card, website, and a list of other clients the contractor has worked for.

What is the Borello Test?

Before AB-5 was signed into law, the Borello test was used to determine if an employee should be classified as a 1099 independent contractor or a W-2 employee. The Borello test was established by the Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989). The test relies on 13 factors to determine employee classification.

Even with new AB-5 regulations, the Borello test can still be a useful resource to help classify employees.

EDD provides the full Borello test worksheet with the following questions to help guide classification:

  1. Do you instruct or supervise the person while he or she is working?
  2. Can the worker quit or be discharged (fired) at any time?
  3. Is the work being performed part of your regular business?
  4. Does the worker have a separately established business?
  5. Is the worker free to make business decisions that affect his or her ability to profit from the work?
  6. Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
  7. Do you have employees who do the same type of work?
  8. Do you furnish the tools, equipment, or supplies used to perform the work?
  9. Is the work considered unskilled or semi-skilled labor?
  10. Do you provide training for the worker?
  11. Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
  12. Did the worker previously perform the same or similar services for you as an employee?
  13. Does the worker believe that he or she is an employee?

Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 indicate important factors to be considered.

While answering “yes” to any one of the questions may indicate that a worker should be classified as an employee, no single factor is enough to determine classification independently.

The full worksheet provided by EDD provides further clarification on certain factors and circumstances.

If completing the provided worksheet does not provide sufficient clarification for employers, EDD also offers the ability to request a written ruling by completing a seven-page form called Determination of Employment Work Status. The form supports any business entity looking to determine if a worker is an employee or an independent contractor.

How Do I Avoid Misclassification?

You can avoid misclassification by carefully analyzing the arrangement you have with your worker in relation to the guidelines described in the ABC test and regulations set forth by AB-5.

To learn more, read on about how to hire an independent contractor.

Tax Liens: What are they and how to avoid one

The Internal Revenue Services (IRS) works swiftly when taxpayers fail to pay taxes on time, or at all. Failure to pay or late payment of taxes triggers an IRS notification to you or your business of noncompliance, and outlines the necessary steps to rectify that noncompliance. When those warnings are not acted on, further consequences and penalties ensue. Non payment of taxes can have  serious implications for you and your property in the form of a tax lien on your property. 

Learn more about what tax liens are and how to avoid them here: 

What is a Tax Lien?

According to the Internal Revenue Service (IRS), “a federal tax lien is the government’s legal claim against your personal property when you neglect or fail to pay a tax debt.” IRS will alert you if there is a balance due and they will tell you the date by which the debt must be collected. The tax lien acts as a method of guaranteed payment for the unpaid taxes owed. Other agencies besides IRS collect tax liens: California Department of Tax and Fee Administration, Franchise Tax Board and Employment Development Department (EDD). 

The National Tax Lien Association found that approximately $21 billion of real estate property taxes are delinquent each year in the United States. Neglect, refusal, or failure to pay the debt on time will result in IRS completing a public document of a Notice of Federal Tax Lien that notifies creditors that the government has a right to your property. 

In some cases, IRS can instead levy your property. A tax levy uses the physical property to pay off the tax debt when tax debt payment or payment plan arrangements are not made. When this happens, IRS seized the property and has control to sell the property and any personal items or assets that you have in order to recoup the money they are owed. 

How Does a Tax Lien Impact you?

Property acquired by IRS through a lien can be sold at auction for the amount owed plus any interest incurred. During the auction, creditors can bid against each other for your property. The proceeds of an auction benefit the governmental agency who is owed back taxes. 

Not only can your property be auctioned off, here are other ways a lien can impact you: 

  • Assets- All of your current and future assets (vehicles, properties, investments, etc.) are tied to the lien while it’s active.
  • Credit– While having an active or past tax lien no longer impacts your credit score, it may make it more difficult to obtain credit. The lien is a public record. 
  • Business- Liens are tied to a business, its property, and accounts receivable. 
  • Bankruptcy- Filing for bankruptcy does not negate a Notice of Federal Tax lien. The lien itself may continue post bankruptcy even though other debt is cleared. 

How Do I Stop A Tax Lien?

The best way to avoid a tax lien is to pay your debts on time and in full, or reach a settlement with IRS. If you or your business are facing a tax lien, the best way to conclude the lien is by paying the amount due in full by the due date. In cases where full payment by the due date is not an option, IRS does offer alternative options. 

In some cases, IRS will release the lien if there is an agreement between IRS and the taxpayer to pay the amount owed in an automatic payment plan until the debt is paid in full. In this case, you keep the asset in your possession. 

An alternative is through discharging the property to cover the tax lien. IRS, or any debt collector, cannot attempt to collect the debt owed after bankruptcy approval. However, if a court approves a bankruptcy suit, keep in mind that not all properties qualify for discharge, nor does everyone qualify for discharge. 

One way to maintain your assets in a tax lien is through withdrawal notices. This withdrawal notice removes the public notice that your property on lien, while still in debt, is not available for other creditors to bid on. You still owe the amount specified by IRS, but your property will not be available for bidding. 

Once a lien is released by paying the penalty along with interest in full, the official record is mailed out to the County Recorder office and the secretary of State within 40 days.  You do not receive the notification directy. For a copy of the letter, you must request a status of lien release from your local  County Recorder’s office. 

Have you received a Notice of Federal Tax Lien from IRS? Contact our team at Milikowsky Tax Law to help you through the process. Our experienced team of tax lawyers are your advocate in the face of IRS, EDD, CSLB, CFTB and other government audit and inquiry. 

Red Flags and Risk Factors

Risk Factors and Red Flags: Why IRS might audit you!

An audit is, in itself, not a bad thing.  we have come to equate audit with accusation or wrongdoing but an IRS audit is simply a review of the records.  Int his spirit, there is no reason to fear IRS audit.

In reality, the IRS audit process is triggered by assumption of wrongdoing and, without excellent records or an adept tax attorney paired with a skilled CPA, individuals and business owners have plenty to fear from an IRS audit.

Why IRS starts an audit

Most often, audits are begun because of suspicious activity.  Sometimes, mistakes are honest ones and sometimes IRS audits and discovers mistakes that they themselves didn’t see on first look.

Here are some of the reasons IRS can trigger an audit:

1. Honest mistakes

You’ll be fined regardless of  your intent, so ensure a competent CPA prepares your taxes.

2. Under reporting income

Businesses file their 1099s religiously.  It is in a business’ best interest to report payments to contractors, they get a deduction for so doing.  Contractors occasionally “forget” to report 1099 wages.  IRS knows the money was paid and they can easily track that no taxes were paid on that money.  Want to trigger an audit? Try hiding 1099 wages.

3. 501c write offs

Usually (and IRS bases most of its red flags on a mean) lower middle and middle class people do not donate large parts of their income to charity.  You may tithe, you may be the exception.  But, IRS is nota. fan of exceptions and large charitable donations with small incomes will trigger a second look.

4. Extraordinary business expenses

There are industry standards for business deductions.  If you write of a large format printer and you are in PR or marketing, IRS will likely see that as a legitimate expense.  That vacation to Costa Rica?  Less likely. Be conservative in writing off personal expenses as business expenses.

6. The home office

If you run your business out the converted horse barn and employees come to work in that space, your office is likely legitimate. If you claim 1/5th of your rent because you work in the kitchen, you may find IRS has something to say about it. The home office expense gets scrutinized.  If you take it, be prepared to defend it.

 

If IRS Audits your business, your best choice is to call a qualified tax attorney.

Am I at Risk?

Those of us in the middle are at a lower risk than those in the upper tax brackets and those who report no income at all.  After all, how do you live?

Adjusted gross income % of total returns filed in 2016 % of these returns examined in 2017
No adjusted gross income 1.69 2.55
$1 to $24,999 36.47 0.71
$25,000 to $49,999 23.33 0.49
$50,000 to $74,999 13.26 0.48
$75,000 to $99,999 8.59 0.45
$100,000 to $199,999 12.19 0.47
$200,000 to $499,999 3.60 0.70
$500,000 to $999,999 0.58 1.56
$1,000,000 to $4,999,999 0.26 3.52
$5,000,000 to $9,999,999 0.02 7.95
$10,000,000 or more 0.01 14.52
All returns 100.0 0.62

*source http://nerdwallet.com

 

Working Men smiling

When The California Employment Development Department, EDD did a site sweep, Ryan Brown found himself facing an audit.  As he did research on his own as to what the ramifications of an EDD audit might be, he saw steep fines, jail time and high conviction rates reported time and time again.

Ryan was afraid he would lose his business.

Ryan called Milikowsky Tax Law and set an initial meeting.  Before we signed any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

” I felt so much better coming out of the office that day.  John just starting helping me immediately”.

John and the Milikowsky Tax Law team got to work communicating with the EDD and CSLB agencies, clarifying the circumstances of Ryan’s unique situation and providing the documents the agencies asked for in a way that helped them understand his business.

After less than a month, EDD sent a final letter indicating that while minor fines were due, the case was closed.  For Ryan, the results were life-changing.  To go from the fear of losing everything to knowing his business was going to be fine was a tremendous sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client.  And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance, the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB and IRS audit.

When you review your contractors, ensure that all of your workers are correctly classified by running a Verify1099 report.  The Verify1099 report checks for valid business license, EIN, web presence and professional licensing to build a strong case for defending your classification of certain workers as 1099s. Visit https://verify1099.com to learn more and get started. EDD audits are fast-paced and have serious consequences. Be sure you are classifying your workers correctly.
If your business is currently in an EDD audit, contact the attorneys at MIlikowsky Tax Law immediately.
Man writing on a book

If your business received SBA PPP loan funds here’s what you need to know to prepare for your 2020 taxes.

As with all elements of the forgivable loan, there are steps you should take right now to ensure forgiveness and compliance. In the video below we’ve outlined several scenarios to beware of, as well as suggestions for making the process more efficient and less likely to trigger an audit.

Elements to keep in mind:

  • At least 75% of all PPP funding must be used to cover payroll expenses for your employees.
  • No more than 25% of the loan can be used to cover costs associated with utilities, interest, and other business-related expenses.
  • No expenses paid with PPP loan funds can be deducted from your 2020 tax returns.

If you have questions about complex tax law issues or if you need assistance organizing your application to qualify for the PPP loan, please contact a representative at Milikowsky Tax Law.

über and Lyft car

California Sues Uber and Lyft, Claiming Workers Are Misclassified. In January, 2020 Assembly Bill AB-5 went into effect redefining the criteria for a 1099 contract worker as opposed to a W-2 employee. The bill was aimed at the employers who drive the Gig Economy and in the subsequent months, Uber, Lyft and Door Dash poured 10s of millions of dollars into combatting the law. Last week California’s Attorney General and the Attorneys General of San Francisco and Los Angeles together filed suit against Uber and Lyft claiming that their workers are misclassified and they must pay $2,500 per misclassified worker for their violation of AB-5’s criteria.

To review: AB-5 states that, in order for a worker to be classified as a 1099 contract worker and not an employee, the worker: 1. must be free from time and financial control of the hirer 2. must perform work outside the core function of the hiring entity’s function and 3. must have their own business entity. It appears that the timing of this lawsuit is driven by budgetary concerns as the State of CA has seen apx 4M people file for unemployment during the Coronavirus pandemic.

Lyft responded by saying they would cooperate with the AG and find a solution. Uber responded in a more aggressive way saying they would prefer to take the issue to court. The New York Times article does note that, “Uber and Lyft have reported that they have substantial cash reserves to weather the downturn caused by the pandemic. Uber said it had more than $8 billion, while Lyft said it had more than $2 billion.”. It remains to be seen what will happen with the suit against the largest Gig Economy companies.

For the small business, this serves as a warning that, despite the fact that many people are out of work and may want to seek employment as contract workers as they wait for a new position in their chose career fields, California EDD will not soon be relaxing the stringent criteria for classification as a 1099. Business owners beware: your classifications must be air tight to avoid EDD audit. If you have questions about your worker classification, reach out to the experts at MIlikowsky Tax Law. We have defended employers who have been audited by EDD, accurately conveying their company’s situation to the government and saving money, and time as well as saving businesses from serious financial hardship associated with 1099 reclassification, including fines and back taxes they would have owed if not for our detailed defense.

AB-5 can it stand?

As we look forward from April into the second quarter of 2020 the question on many business owner’s minds is: will the rules outlined in AB-5 stand in the face of coronavirus? At the start of 2020, business owners’ level of concern about California EDD’s newfound power to audit businesses was high.  EDD was empowered and emboldened to audit businesses whose workers were misclassified as 1099s instead of W-2’s in the wake of the “Gig Work Bill”.  Concerns around the new criteria for worker classification outlined in Assembly Bill 5 were common at the start of the year, and many business owners chose to reclassify large portions of their workforce as W-2 wage earners from their previous roles as 1099 independent contractors.

And then there was coronavirus.

With the social distancing, quarantine and shelter-in-place rules that have been put into place to try to #flattenthecurve of infections from the novel coronavirus, businesses have laid of large percentages of their workforce.  As of today, April 2nd, 2020 over 6.6 million workers have filed for unemployment, 87,900 of them in the state of California. When all of this is over and businesses reopen, can the California Employment Development Department really audit businesses using the strict independent contractor classification rules set forth in AB-5?

AB-5 can it stand?

The post-COVID-19 world of work will look different.

One thing is certain in this time of uncertainty, the world of work will be transformed by this “new normal” we are all experiencing.  While many workers are struggling to implement home-based work regimens, others are discovering the benefits of a flexible schedule and more family time. When business resumes, there is sure to be a shift in the expectation of many employers.  With that shift and the slow restart to the economy that will accompany the recovery post-coronavirus, many businesses will choose to hire part time contractors as opposed to diving into the commitment of a full-time W-2 employee. And while workers will have a different set of criteria they desire in order to go to work in an office again, business owners will also have choices.  business owners will have to choose wisely how to spend money as they try to restart what has come to a halt during the outbreak.

Even if they want to, many business owners will not be able to employ W-2 workers.

The US economic recovery may take years after this downturn and the massive unemployment caused by the COVID-19 crisis.  If an employer can start creeping back into some semblance of their previous business, would CA EDD really leap in and audit that business? The answer is yes.  If an employer categorizes their independent contractors incorrectly, CA EDD will audit and under AB-5 they have every right and a responsibility to do so.

What can a business owner do to allow for 1099 contractors?

The most important step a business owner can take is to examine the way their business is structured.  There are exemptions to AB-5 and service models are one of those exemptions.  If a business can be restructured to fall into one of the exempted categories, then that business could legitimately hire 1099 contractors.  However, it is important to note that EDD can investigate any business.  So, if you do restructure and choose to hire 1099 contractors, be sure they are legitimate businesses in their own right.  Verify 1099 contractors using tool like clear1099.com or call the team at Milikowsky Tax Law.  We can review your corporate structure and make recommendations based on your industry and goals for the next stage of your business.

We don’t know if AB-5 will hold in the face of Coronavirus.

It is impossible to know what the next few months will hold.  As business owners we have to do what is best for our businesses and our families.  That may be a restructure to allow more flexibility in hiring.  The pandemic will not last forever and, as business gets back to normal, the last thing anyone wants it to be targeted for an audit.  If you are concerned about EDD audits, please reach out to our office.  We are working from home too and happy to take your call. (858) 450-1040

COVID-19

Unemployment claims are in the millions as a result of the coronavirus epidemic and the ensuing quarantine and lockdown. Small businesses are being deeply impacted by the downturn and many are having to lay off over half their workforce. Since the start of the outbreak, 3.2M people have filed for unemployment in the U.S. and more than 1M people filed for unemployment in California.  As restaurants and other businesses reliant on in-person services, foot traffic and face to face interactions reduce their workforce by large numbers to try to stay afloat and ride out the COVID-19 crisis, many more workers will be forced to file for unemployment.  

COVID-19

Coronavirus global pandemic outbreak

Business owners who lay off portions of their workforce, both 1099 and W-2, due to the global slowdown from COVID-19 should communicate clearly with those people who are let go, informing them of their ability or lack of ability to file for unemployment.  To quickly review: a 1099 contractor can only file for unemployment if their independent business is folding, not if they lose contract work with one of their clients (you). A W-2 worker can file for unemployment benefits listing their most recent full time employer with no negative ramifications to the business entity listed on the unemployment documentation. 

As small to mid-sized businesses (under 500 employees) prepare for the many possible repercussions of the coronavirus outbreak they should be aware that one of the possible effects could be an uptick in EDD audit activity.  The California Employment Development Department audits businesses for many reasons. One of the surest ways to trigger an EDD audit, however, is to have a 1099 contractor incorrectly file for unemployment. If your company has released 1099 contractors due to the downturn from coronavirus and those 1099 contractors in turn file for unemployment listing your business as their most recent employer (whether through ignorance or malice), EDD is likely to audit your company. 

Communication and education are the best friends of business owners looking to protect themselves from unnecessary, time consuming and potentially damaging or even criminal investigations and audits by CA EDD. As a business owner you must: 

Inform workers who are let go of their status.  

Remind them that 1099 contractors cannot file for unemployment unless their own independent business has folded. 

Keep impeccable records. 

The following business records should be kept for each 1099 contractor you hire: EIN’s, evidence of a contract, copy of the contractor’s business card, the contractor’s website or evidence they are promoting their own business, business tax license, and Professional Licenses.

Do your research

The law changed at the start of 2020 and EDD is auditing businesses who hire a large number of 1099 contractors.  Know the new criteria and when in doubt, double check a 1099 contractor’s status using a tool like clear1099.com or other reliable reference. 

Above all if you are audited by CA EDD, reach out to a qualified ta attorney.  We can help mitigate the damage an EDD audit can cause.

handcuffs and mullet

IRS Criminal Investigations, How They Begin and Why

IRS Criminal investigations begin with a suspicion of fraud and violations of:

  • Internal Revenue Code
  • Bank Secrecy Act
  • Money laundering statutes

…Among others.

When IRS determines there is a case against a violator, they refer it to the Department of Justice.

Why IRS Special Agents target a business for investigation

  1. An IRS revenue agent, an auditor detects possible fraud.
  2. An IRS Revenue officer – a collections officer detects possible fraud.
  3. A member of the community reports possible fraud.
  4. Another agency, such as law enforcement or EDD or state tax board reports possible fraud.

What happens if an IRS Audit is begun?

  • The primary investigation starts  when the special agent’s front line supervisor looks at the initial findings and decides whether to continue the investigation.
  • Then a subject criminal investigation commences.
  • At this point, at least two Criminal Investigators at a management level have reviewed the ‘primary investigation’ material and determined there is sufficient evidence to initiate a subject criminal investigation*.

The Process of a Criminal Investigation

The special agent works closely with IRS Chief Counsel Criminal Tax Attorneys during the course of the criminal investigation.  AS in any criminal case the accused, or investigated, party has rights.  Among those rights are the right to counsel. IRS Special Investigators will gather information by any means necessary.

  • Interviews of third party witnesses
  • Surveillance
  • Search warrants
  • Subpoenaing bank records
  • Reviewing financial data.

A determination is made to go to trial or not

If the special agent determine that the evidence does not substantiate criminal activity, then the audit is discontinued.

If the special agent determines that the evidence does incriminate, then prosecution is recommended and a prosecution recommendation is sent to:

1.  The Department of Justice, Tax Division, (if it is a tax investigation) or
2.  The United States Attorney for all other investigations.

Prosecution by the Dept. of Justice

Once the case is turned over, the IRS special agent turns over all findings to the lawyers for the prosecution and is no longer involved in the case. The ultimate goal of an IRS Criminal Investigation prosecution recommendation is to obtain a conviction – either by a guilty verdict or plea. There are approximately 3,000 criminal prosecutions per year * as of 2017.

If IRS Criminal Investigators contact you, know your rights, contact a qualified Tax Attorney immediately and take the 5th amendment which is the right to remain silent.

*https://www.irs.gov/compliance/criminal-investigation/program-and-emphasis-areas-for-irs-criminal-investigation