Tax Administration: IRS' Efforts to Place More Emphasis on Criminal Tax Investigations
Released: 1997-11-06T00:00:00

Letter

Background

CID carries out IRS’ criminal law enforcement responsibilities under three principal statutes. Under title 26 U.S.C., IRS has authority to investigate alleged criminal tax violations, such as tax evasion and filing a false tax return. Under title 18 U.S.C., IRS has authority to investigate a broad range of fraudulent activities, such as false claims against the government and money laundering. Under title 31 U.S.C., IRS is responsible for enforcing certain recordkeeping and reporting requirements of large currency transactions, such as cash bank deposits of more than $10,000. In carrying out its responsibilities, CID coordinates as necessary with IRS’ District Counsel, the Tax Division within the Department of Justice (Justice), and local U.S. Attorneys to prosecute violators of these statutes.

Combating money laundering and other financial crimes is considered a high priority by both Justice and the Department of the Treasury (Treasury). According to Justice officials, because of CID’s expertise in conducting detailed financial investigations, U. S. Attorneys and law enforcement agencies routinely rely on CID’s assistance in investigating financial crimes, particularly those involving money laundering related to narcotics trafficking. In addition, CID agents have access to tax information, which they can use to develop financial investigations more fully. CID is also involved in ongoing efforts to identify and investigate emerging financial crimes, such as health care and bankruptcy fraud. According to CID officials, although such assistance places competing demands on CID’s time, it also aids in establishing the cooperative environment conducive to getting CID’s tax cases prosecuted and in obtaining information that can lead to criminal tax investigations.

Historically, CID’s total staffing and budget have represented about 5 percent of IRS’ overall resources. As of the end of fiscal year 1996, CID had the full-time equivalent of 4,504 staff, including 3,065 special agents, and a budget of $366 million. CID is also reimbursed for some of the assistance it provides to other law enforcement agencies, particularly Justice’s Organized Crime Drug Enforcement Task Force (OCDETF) program.

Scope and Methodology

To determine the actions CID has taken since the early 1990s to increase the time spent on tax investigations relative to nontax investigations, we interviewed senior CID officials in IRS’ National Office, officials from both the Tax and Criminal Divisions in Justice, and officials from the Office of the Under Secretary for Enforcement in Treasury. We interviewed the CID officials because of their responsibilities in managing CID operations and setting division policies. Justice and Treasury officials were interviewed to obtain their opinions regarding CID’s (1) assistance in narcotics and money laundering investigations and (2) increased emphasis on tax investigations. We also reviewed CID’s annual goals and objectives and annual performance reports for fiscal years 1990 through 1996, as well as relevant documentation on the reorganization of its administrative functions and operations.

To determine the types of investigations initiated and the results of referrals to U.S. Attorneys for prosecution and sentences resulting from these prosecutions, we analyzed IRS’ Criminal Investigation Management Information System (CIMIS) data. CID uses CIMIS data to track the status and overall results of its criminal investigations, including the direct investigative time (DIT) expended on investigations. DIT is the amount of time that CID agents spend directly working on investigations. We selected fiscal years 1990 through 1996 to identify CID’s investigative trends in order to capture data from the time of the IRS studies that raised concerns about CID’s investigative priorities through fiscal year 1996, the most recent period for which data were available.

We obtained and analyzed CIMIS data to identify nationwide by fiscal year (1) the number and results of various types of CID investigations, and (2) the principal sources of information that led to CID investigations. CID staff, at our request, reconfigured CIMIS data for fiscal years 1990 through 1996 to reflect the current IRS field alignment of 4 regions and 33 districts, as well as CID’s current program areas—fraud and narcotics—with fraud further broken out between tax gap fraud and other fraud. Other than reconciling the totals from CIMIS data extracts to CID annual performance reports, we did not verify the accuracy of the CIMIS data.

We did our work from October 1996 to August 1997 in accordance with generally accepted government auditing standards. The work was done at IRS’ National Office and Southeast Regional Office; IRS’ Georgia, South Florida, and Delaware-Maryland District Offices; and at U. S. Attorney’s offices in the Northern District of Georgia, the Southern District of Florida, and the Maryland District. We selected the offices we visited because of the proximity of our staff working on this assignment.

We requested comments on a draft of this report from the Acting Commissioner of Internal Revenue and the Attorney General. Their comments are discussed at the end of this letter.

Actions to Increase Direct Investigative Time Spent on Tax Investigations

In the early 1990s, concerns raised in IRS studies regarding CID’s investigative priorities spurred CID to take actions to increase the amount of time its agents spent on tax investigations. Between fiscal years 1990 and 1992, the percent of DIT spent on tax gap investigations decreased from 56 percent to 46 percent; since then, the percent of DIT spent on tax gap investigations increased to 59 percent as of fiscal year 1996. CID has established a range of 57 to 61 percent of DIT to be spent on tax gap investigations as its goal for fiscal year 1997 and beyond.

Subsequent to hearings on IRS employee misconduct in 1989 before the Subcommittee on Commerce, Consumer and Monetary Affairs, House Committee on Government Operations, the Commissioner of Internal Revenue appointed an independent panel to review various concerns raised during the hearings, including issues relating to criminal investigations. In its October 1990 report, the panel stated that there had been a significant decrease in CID resources applied to tax investigations and a corresponding increase in resources applied to nontax investigations. The panel believed that CID’s work priorities were not properly aligned with IRS’ strategic goal of increasing taxpayers’ compliance with the tax laws. The panel recommended that CID (1) establish a criminal enforcement policy in line with IRS’ overall efforts to increase compliance with the tax laws, (2) ensure that its allocation of resources and mix of cases are consistent with such a policy, and (3) closely monitor and control implementation of this policy through the National Office.

Also, to address concerns about whether CID’s workload was properly balanced between tax and nontax investigative efforts, IRS convened a study group that included representatives from Justice and Treasury. The study group’s August 1991 report found that CID resources used for tax investigations had declined about 18 percentage points between fiscal years 1980 and 1990; on that basis, the study group recommended that resources devoted to tax investigations be increased and that future resources devoted to narcotics investigations be limited to the amount expended in fiscal year 1991. The IRS Executive Committee agreed with these recommendations, and in June 1992 CID initiated an action plan to implement them.

The actions led to a reorganization of CID, which began in October 1993 and was fully implemented in October 1994. The reorganization was done in part with the intent of giving CID’s national office a better means to control and monitor field activities to keep them aligned with national policies and objectives as recommended by the review panel and the study group. In terms of its organizational structure, CID was reduced from 7 regions and 63 districts to 4 regions and 34 districts. In addition, the position of Director of Investigation (DI), reporting directly to the IRS National Office Assistant Commissioner for Criminal Investigation, was established in each region to oversee and coordinate investigative activities. The DIs replaced seven former Assistant Regional Commissioners for Criminal Investigation, who reported directly to the Regional Commissioners. The DIs are responsible for ensuring that CID field offices adhere to national office program objectives and policies.

Another action CID took to better track the allocation of its resources to tax versus nontax investigations was to consolidate its major program areas and to establish a specific category for tax gap investigations. In fiscal year 1995, CID consolidated the five program areas under which investigations had been categorized and tracked—narcotics, organized crime, public corruption, financial compliance, and other illegal crime—into two principal program areas—fraud and narcotics. The fraud program was subdivided into tax gap fraud and other fraud. Tax gap fraud pertains to investigations of legal industries with alleged criminal tax violations. The other fraud category involves investigations of illegal industries or money laundering investigations with no tax-related charges.The narcotics program primarily relates to investigations of money laundering activity by individuals and organizations involved in narcotics trafficking.

Beginning in fiscal year 1996, CID set specific national goals for the percent of DIT to be used on tax gap and narcotics investigations to help ensure that additional resources would be allocated to tax gap investigations. The fiscal year 1996 DIT goals were 58 percent for tax gap investigations—1 percent higher than the actual DIT for fiscal year 1995—and 24 percent for narcotics investigations—the same as the actual DIT for fiscal year 1995.

Since CID began taking these actions, DIT applied to tax gap investigations has increased. (See fig. 1.) According to data provided by IRS, the percent of time applied to tax gap investigations for fiscal years 1993 through 1996 increased 13 percentage points. As of fiscal year 1996, CID applied 59 percent of DIT to tax gap investigations, exceeding its goal by 1 percentage point, while applying 22 percent of DIT to narcotics investigations, 2 percentage points short of its goal.

According to CID national office officials, the goal for the amount of DIT to be allocated to tax gap investigations in fiscal year 1997 is a range of 57 to 61 percent, and the goal for narcotics investigations is a range of 23 to 25 percent. They stated that these goals, which are expected to be the goals for the next few years, were developed with input from the DIs. It is CID officials’ judgment that these goals will enable CID to (1) conduct investigations in support of IRS’ strategic goal of increasing compliance with the tax laws; (2) contribute to the government’s efforts in combating narcotics and money laundering; and (3) continue allocating some of its investigative time to cases involving emerging financial crimes, such as health care fraud.

Trends in the Number and Results of CID Investigations for Fiscal Years 1990 Through 1996

CID considers completed investigations that merit referral to the U.S. Attorneys for prosecution as an important step toward the eventual prosecution, conviction, and sentencing for criminal tax violations and related financial crimes. By publicizing convictions, CID hopes to deter others from engaging in such criminal activity and to promote voluntary compliance with the tax laws. Consequently, CID uses statistical data from CIMIS to track the number and percent of investigations initiated, as well as the number and percent of referrals made to U.S. Attorneys for prosecution and sentences handed down by the U.S. courts based on CID cases. CIMIS data show that the percent of tax gap investigations initiated, the percent of tax gap cases referred to U.S. Attorneys for prosecution, and the percent of court sentences based on tax gap cases have all begun to increase since CID increased the time spent on tax gap investigations. However, as of fiscal year 1996, the increases have not been enough to match fiscal year 1990 levels for these indicators.

Trends in the Types of Investigations Initiated

As shown in figure 2, tax gap investigations represented 54 percent of all CID investigations initiated in fiscal year 1996. This is an increase over the fiscal year 1992 level of 47 percent and just under the fiscal year 1990 level of 55 percent. The figure also shows that between fiscal years 1990 and 1996, narcotics investigations decreased from 30 percent to 25 percent of all CID investigations initiated. Other fraud investigations were 6 percentage points higher in fiscal 1996 than in fiscal year 1990.

Trends in Investigations Referred to the U.S. Attorneys for Prosecution

Figure 3 shows that, in general, the percent of CID cases being referred to the U.S. Attorneys for prosecution for tax gap fraud since fiscal year 1992 has increased, while the percent of other types of referrals—narcotics and other fraud cases—either declined or remained somewhat stable. Specifically, tax gap referrals represented 47 percent of all CID referrals in fiscal year 1996 compared to 39 percent in fiscal year 1992 and 49 percent in fiscal year 1990.

Trends in Sentences From Cases Referred to the U.S. Attorneys for Prosecution

Court sentences—including incarceration, probation, and fines—based on tax gap investigations decreased from 54 percent of all court sentences based on CID investigations in fiscal year 1990 to a low of 37 percent in fiscal year 1994. Since that time tax gap sentences have increased to 44 percent of all court sentences for CID cases as of fiscal year 1996. Overall, sentences based on narcotics investigations increased from 32 percent to 39 percent of all court sentences based on CID investigations between fiscal years 1990 and 1993, then decreased to 31 percent as of fiscal year 1996. (See fig. 4.)

Additional information relating to CID’s investigations between fiscal years 1990 and 1996 is shown in appendixes I, II, III, and IV. Appendix I shows the number of staff days applied nationwide by type of criminal investigation. Appendix II contains information on the percent of DIT applied to each type of criminal investigation by IRS location. Appendix III shows the numbers of investigations, referrals to the U.S. Attorneys for prosecution, and court sentences by type of criminal investigation. Appendix IV discusses the principal sources of information on which CID’s investigations were based.

Agency Comments and Our Evaluation

IRS and the Department of Justice each provided comments on a draft of this report. Each agency generally agreed with the information presented in the report and offered technical comments, which we have incorporated where appropriate.

Copies of this report are being sent to the Chairmen and Ranking Minority Members of the Senate Committee on Finance, the Senate Committee on Governmental Affairs, the House Committee on Ways and Means, and the House Committee on Government Reform and Oversight; the Chairman and Ranking Minority Member of the Subcommittee on Treasury, General Government, and Civil Service, Senate Committee on Appropriations; and the Chairman and Ranking Minority Member of the Subcommittee on Treasury, Postal Service, and General Government, House Committee on Appropriations; various other congressional committees; the Secretary of the Treasury; the Attorney General; and other interested parties. We will also make copies available to others upon request.

Major contributors to this report are listed in appendix VI. Please contact me on (202) 512-9110 if you or your staff have any questions about this report.

Investigative Time Applied Nationwide by Type of Criminal Investigation in Fiscal Years 1990 Through 1996

This appendix presents the nationwide number of staff days applied directly to the major types of Criminal Investigation Division (CID) investigations. This does not include staff days applied to noninvestigative activities, such as training.

Table I.1: Number of Direct Staff Days Applied Nationwide by Type of Criminal Investigation in Fiscal Years 1990 Through 1996 Number of staff days by fiscal year Note 1: Investigative time spent following up on information provided to CID that indicates potential criminal violations prior to initiation of an investigation is categorized as information items.

Note 2: Totals do not add due to rounding.

Percent of Direct Investigative Time Applied to CID Investigations in Fiscal Years 1990 Through 1996

This appendix shows the percent of direct investigative time (DIT) applied to the major types of CID investigations nationwide, by regions, and by district offices from fiscal years 1990 through 1996. For fiscal year 1996, CID set national DIT goals of 58 percent for tax gap investigations and 24 percent for narcotics investigations. To achieve these goals, CID requested that the Directors of Investigation for each region help to ensure that the regional DIT was within a range of 58 to 60 percent for tax gap investigations and 24 to 26 percent for narcotics investigations.

Table II.1: Percent of Total DIT Applied to Tax Gap Investigations by Location in Fiscal Years 1990 Through 1996 Percent of DIT by fiscal years (continued)

Percent of DIT by fiscal years Table II.2: Percent of Total DIT Applied to Narcotics Investigations by Location in Fiscal Years 1990 Through 1996 Percent of DIT by fiscal years (continued)

Table II.3: Percent of Total DIT Applied to Other Fraud Investigations by Location in Fiscal Years 1990 Through 1996 Percent of DIT by fiscal years (continued)

The Number and Results of CID Investigations in Fiscal Years 1990 Through 1996

This appendix presents information on the number of CID investigations that were initiated, the number of investigations in which CID recommended prosecution, and the number of sentences resulting from prosecutions from fiscal year 1990 through fiscal year 1996. According to CID officials, completing an investigation and subsequently prosecuting and sentencing the subject of the investigation may take a year or more. As a result, the number of prosecution recommendations and sentences shown in a particular fiscal year in tables III.2 and III.3 may not have resulted from the investigations initiated in the corresponding fiscal year in table III.1.

Sources of Information That Resulted in CID Investigations in Fiscal Years 1990 Through 1996

CID relies on various sources of information for initiating its investigations, including information from (1) within IRS, such as from the Examination Division; (2) other government sources, such as U.S. Attorneys; (3) currency transaction reports; and (4) the public. Although information from other government sources may result in various types of CID investigations, including tax fraud, information from within IRS predominantly results in tax fraud investigations. Information provided from within IRS and by other government sources accounted for about 75 percent of the total CID investigations initiated each year for fiscal years 1990 through 1996. As shown in figure IV.1, investigations based on information provided by other government sources increased from about 45 percent in fiscal year 1990 to about 51 percent in fiscal year 1996. Investigations based on information provided from within IRS fluctuated from about 32 percent in fiscal year 1990 to about 29 percent in fiscal year 1996.

In 1991, a study group convened to examine CID’s workload and to recommend changes to better balance, direct, and strengthen its future investigative activities recommended that IRS reemphasize its internal fraud referral program. In an effort to increase the quality of internal fraud referrals from other IRS groups to CID that may lead to tax fraud investigations, IRS established formal fraud referral procedures effective for fiscal year 1996. This included establishing the position of fraud coordinator in each district office to act as a focal point for fraud referrals. According to CID officials, the objective of these procedures is to increase coordination between CID and other IRS functions, particularly the Examination Division, in an effort to ensure that only cases involving potential criminal fraud, rather than civil fraud, are referred to CID. CID officials further stated that it is too soon to determine the overall success of the new procedures.

Comments From the Internal Revenue Service

Major Contributors to This Report

General Government Division, Washington, D.C.

Atlanta Field Office

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