I’ve written several articles over the past year about the bogus “I’m from the IRS” scam. This is the phone call plot that involves offshore criminals targeting U.S. citizens for theft by posing as IRS tax collectors. The caller claims to be attempting to collect a tax debt which, if not paid that instant via credit card, will land the target in jail. The caller threatens to unleash arrest, criminal prosecution and lawsuit against the target if he doesn’t cough up money “now.”
In the past, I have thoroughly debunked the calls by analyzing the language and syntax used by the callers. For example, see my discussion of the issue in my book, How to Win Your Tax Audit, chapter 19. Because of the continued proliferation of these calls, it
is worthwhile to address the real chances of a person actually going to jail for any tax crime, as well as the process the IRS uses to pursue a potential criminal case.
Looking Forward to My New Book
What follows here is an excerpt from chapter 3 of my book, How go Get Tax Amnesty, which I am in the process of re-writing. It has been five years since I wrote the last Tax Amnesty Supplement and it was in 1999 that Tax Amnesty was fully re-written. To date, the book has gone through nine revisions and supplements. The current project involves a line-by-line re-write. Chapter 3 is especially relevant today not only because of the pervasive phone scam but because so many people facing tax debt automatically think they are going to jail. This discussion will ease those fears.
What are the Real Chances of Going to Jail?
IRS statistics indicate that between 5,000 and 6,000 cases are referred for a criminal investigation annually. Let’s put that in perspective. In 2015, about 146 million individual income tax returns were filed with the IRS. That does not include business tax returns, which add at least another 100 million to the pool of tax returns. For simplicity sake, I’ll use only individual tax returns as the universe of potential criminal targets (146 million returns). Dividing that number by the number of criminal investigation referrals (no more than 6,000 annually—and usually less), we find that a given person has about a .004 percent chance (0.00004) of being targeted for criminal prosecution by the IRS.
Let’s break this down a little further, since we all agree that the percent chance of contracting, say, the Black Plague, while admittedly just as slight, is meaningless if you are among the precious few persons who make up the .004-percent pool.
Very generally speaking, there are three broad categories of tax crimes the IRS investigates.They are:
- legal-source tax crimes,
- illegal-source tax crimes, and
- narcotics-related financial crimes.
Under the Legal Source Tax Crimes Program, IRS’s Criminal investigation (CI) function identifies, investigates and assists in the prosecution of crimes involving legal industries, legal occupations and, more specifically, legally earned income. These crimes are what we might call “typical” tax crimes. They involve the failure to file tax returns, filing false tax returns (or other documents), tax evasion and the like.
Under the Illegal Source Financial Crimes Program, CI identifies, investigates and assists in the prosecution of crimes involving income derived from illegal sources (other than narcotics, discussed next). Illegal-source income is any income earned through any illegal business activity; for example, illegal gun sales, gambling, extortion or prostitution. Such crimes encompass all tax crimes as well as money laundering and currency violations.
Under the Narcotics-Related Financial Crimes Program, CI identifies, investigates and assists in the prosecution of the most significant narcotics-related tax and money laundering offenders.
Historically, of the total criminal investigations begun in a given year, about 20 percent involve narcotics, organized crime and public corruption—all so-called illegal-source income cases. Only about half of the criminal investigations involve legal-source income cases, what you might consider typical tax crimes. These numbers have held more or less consistent since the first edition of How to Get Tax Amnesty was released in 1992. So if you do not derive your income from some illegal source, such as a drug dealer, crime boss, or corrupt politician, right out of the chute you see that your chances of being implicated in a tax crime are cut in half.
A phenomenon that has presented itself to the IRS in recent years—which was virtually non-existent just fifteen years ago—is the crime of identity theft. ID theft was first identified as a problem for the agency in 2004 but has since grown into a beast. The number of ID theft cases handled by the IRS is growing at an alarming rate. For example, the number of cases reported to the IRS’s Identity Protection Specialized Unit increased by 78 percent in just one year, from 2011 to 2012. And the Taxpayer Advocate Service (TAS) saw an increase in its ID theft cases of 60 percent during that same period. However, since 2008, the number of ID cases reported to TAS increased by more than 650 percent. National Taxpayer Advocate (NTA), 2012 Annual Report to Congress, p. 43.
The Treasury Inspector General for Tax Administration (TIGTA) calls ID theft an “epidemic” facing taxpayers. In 2013, the head of TIGTA testified during a Senate Committee hearing that ID theft scams “have become so prevalent that they are being called the ‘crime of the 21st century’.” Testimony of J. Russell George, TIGTA, April 10, 2013.
Because this is such a huge problem, and because the IRS has made controlling ID theft such a priority, ID theft cases are among the most aggressively prosecuted criminal cases today. According to the IRS’s criminal investigation and prosecution data for 2013, about 29 percent of the 4,364 cases recommended for prosecution that year involved identity theft. See: IRS Criminal Investigation, Fiscal Year 2013, National Operations Annual Report, February 2014. As such, if you stay away from ID theft schemes, your chances of being targeted by the IRS for prosecution drop considerably.
Let’s bring all of this into sharp relief. Keep in mind that in 2015, about 146 million individual income tax returns were filed. When that figure is compared to the approximately 6,000 criminal investigations undertaken annually, you quickly realize that you have a greater chance of being eaten by a shark than you do of being implicated in a criminal tax investigation.
And we can hone the numbers down ever further. Because while about 6,000 investigations are undertaken annually, only about 75 percent of those run their full course and actually result in a full scale, liberty-threatening criminal prosecution. And fully 50 percent of those involve illegal source income, such as narcotics crimes and ID theft.
When considered in this light, I would have to say that as a practical matter, you are not going to jail!
The Signposts of a Criminal Investigation . . .
The rest of this article is found in Dan's September issue of Pilla Talks Taxes. This and other aspects will be found in his
new addition of How to get Tax Amnesty, due out in January of 2016.
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