More than ten billion dollars. That’s how much money was identified by the IRS-Criminal Investigation department, sometimes called CI, from tax fraud and financial crimes in the past fiscal year.
It’s a breathtaking figure, nearly as much—about 90%—as the entire IRS budget for the fiscal year that ended Sept. 30, 2021, according to CI’s recent annual report.
About CI
That’s true despite the department’s size. CI comprises just under 3,000 employees worldwide; about 70% of those employees are special agents who tackle crimes focusing on tax, money laundering, and Bank Secrecy Act laws.
CI “follows the money” in many financial crimes cases. And, while other federal agencies, like the Federal Bureau of Investigation, may also chase financial criminals, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.
How effective are they? For the last fiscal year, IRS-CI initiated 2,581 investigations, recommending 1,982 potential defendants for trial. Those cases, usually prosecuted by the Tax Department of the Attorney General’s Office of the U.S. Department of Justice, resulted in 1,268 sentencings—a nearly 80% to-prison rate, CI said.
Money Laundering
More than 40% of CI investigations focused on money laundering. Money laundering is, at its most basic, hiding or flipping money. Most commonly, it’s used to conceal “dirty money” gained through criminal activities so that it can appear “clean” or legitimate. Today, CI says that criminals move illicit gains using various enterprises, such as banks, money transmitters, stock brokerage houses, casinos, and virtual currency exchanges. The flow of illegal funds around the world is estimated to be hundreds of billions of dollars.
CI special agents are trained to follow the money through traditional and virtual financial banking systems. CI Chief Jim Lee has noted that “the speed at which money moves today is almost instantaneous,” making it easier for criminals to exploit the latest technological advancements. CI has, he says, committed to staying ahead of these developments.
Sometimes, tech and tax crimes collide. This year, for example, CI saw the first-ever sentencing of a Bitcoin case with a tax component. In the case, a former Microsoft employee, Volodymyr Kvashuk, was convicted in a scheme to embezzle over $10 million from the company, using a bitcoin mixer to hide taxable income. Online mixers are companies that pool cryptocurrency funds together and create a series of new transactions to conceal the source of the funds—like an ultra-sophisticated version of money laundering. Kvashuk used the money to buy waterfront property and a Tesla before he was convicted on 18 felony counts—including wire fraud, money laundering, and filing false tax returns—and sentenced to nine years in federal prison, CI said.
Tax Evasion and Tax Fraud
IRS-CI agents spent most of their investigative man-hours in the last fiscal year—about 72%—investigating tax-related crimes like tax evasion and tax fraud.
General tax fraud investigations are at the core of CI’s law enforcement efforts. That’s because the integrity of our tax system depends heavily on the taxpayers’ willingness to properly file tax returns and pay the resulting tax. And most taxpayers—just over 80% according to the IRS—pay voluntarily and on time.
But those who deliberately underreport or omit income from their tax returns account for a hefty balance. According to Treasury, “The ‘tax gap'—the difference between taxes owed and collected—totals around $600 billion annually” and “is equal to 3% of GDP, or all the income taxes paid by the lowest-earning 90% of taxpayers.”
Pandemic-Related Fraud
The pandemic also created opportunities for scammers and criminals. As part of their investigations, CI looked into fraudulent claims involving economic impact payments (i.e., stimulus checks), Paycheck Protection Program (or PPP) loans, and Employer Retention Credits (ERC). In one instance, David T. Hines of Miami, Florida, pleaded guilty to fraudulently obtaining nearly $4 million in PPP loans, which he used to buy, among other things, a Lamborghini Huracan sports car.
In another case, Dinesh Sah of Coppell, Texas, was sentenced to more than ten years in prison, connected to efforts to obtain approximately $24.8 million in PPP loans by submitting 15 fraudulent applications. He used the money to pay off mortgages in California, buy homes in Texas, and purchase several luxury cars, CI said.
Undercover Operations
CI uses various techniques in its investigations—including going undercover. In FY 2021, agents conducted approximately 292 covert operations in areas focused on unscrupulous tax return preparers, offshore tax schemes, money launderers, dark web marketplace operators, and tax evasion.
The department has a bit of a reputation when it comes to going undercover: Nearly 100 years prior, in 1929, agent Michael Malone—a member of the newly created IRS Intelligence Unit, the precursor to CI—successfully infiltrated Al Capone’s Chicago gang, resulting in putting Capone behind bars. Malone was an undercover agent on other notable tax evasion cases, including those targeting Irving Wexler—better known as Waxey Gorden—and Leon Gleckman, the “Al Capone of St. Paul.”
If that sounds like the kind of thing that requires special training, you’re not wrong. CI begin their training at the National Criminal Investigation Training Academy—NCITA—located at the Federal Law Enforcement Training Center in Brunswick, Georgia. New special agents complete training in areas like basic criminal investigation skills, federal criminal law, courtroom procedures, enforcement operations, interviewing skills, and firearms training. Despite the challenges of the pandemic, CI graduated 124 new special agents in the last fiscal year.
Annual Report
More information about CI can be found in the annual report, which includes case examples for each U.S. field office, an overview of CI’s international footprint, details about the specialized services provided by CI, and investigative statistics, broken down by discipline, for the last fiscal year.
“The annual report provides a glimpse into the significant work our special agents and professional staff did during the past fiscal year,” Lee said. “They identified over $10 billion in tax fraud and other financial crimes, including seizing a value of $3.5 billion in ill-gotten cryptocurrency gains.”
But that’s not what Lee focused on.
“Looking back at 2021, I am most proud of our employees,” he said. “They tenaciously overcame personal and professional challenges during the COVID pandemic and continued to serve the American people by protecting the tax system that funds our country’s services and benefits. These aren’t just good numbers for a pandemic year, these are good numbers, period.”
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.
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