The IRS reported that in fiscal year 2016 they initiated 3,395 federal criminal tax cases thru the IRS/Criminal Investigation Division (which is the only federal law enforcement agency with jurisdiction over federal tax crimes). The focus of these cases included: money laundering, public corruption, cyber-crimes. For FY 2016, the IRS/CI conviction rate was 92%.
The IRS/CI investigates criminal violation of the Internal Revenue Code, which overlaps into related financial crimes e.g. money laundering which are subject to criminal prosecution by the US Dept. of Justice.
As stated by Commissioner of the IRS, John Koskinen: The IRS continues to work to ensure that everyone is playing by the same rules and paying their fair share (of tax)…. The IRS is committed to fairly administering and enforcing the tax code, and our criminal investigation division plays a critical role in that effort”.
Regarding IRS Civil Tax Audits, the audit rate has declined for individual taxpayers (in 2007: 1.38m taxpayers audited, 2010: 1.58m, 2016: 1.03m taxpayers were audited which is 0.7% i.e.1 in 143 risk) and for business taxpayers (Corporations, Partnerships and S-Corporations audit rate was 0.49% lowest level since 2004 (0.36%).
High Income Earners also saw a decline in IRS tax audits for taxpayers making over $200k (1.7% audit rate), over $1m in income (5.8% audit rate).
The decline in IRS audit rates is due to a reduced IRS budget (2010: $12.2B; 2016: $11.2B) and less employees in the IRS (between 2010-2016 the IRS lost more than 17,000 employees so now a little more than 80,000 people work at the IRS).
However, due to 3rd party information reporting, there is less opportunity for taxpayers to cheat on their taxes. The IRS collects information to verify taxpayer’s tax reporting including: Employers report wages, Banks report interest, Brokerages report sales/capital gains, and Lenders report mortgage interest.
As stated by the IRS Commissioner, “the IRS still audits over 1m tax returns per year… spinning the roulette wheel and risking an audit can be an expensive bet… considering unpaid tax, penalty and interest from an audit”.
IRS budget cuts may be illusory since the IRS collects 93% of US tax revenue. As stated by Tony Reardon (President of the National Treasury Employees Union, which represents IRS workers: “You cannot increase defense spending (as proposed by the new administration to increase defense spending by $54B) and cut IRS funding at the same time. It does not add up…” which was echoed by Steven Mnuchin the new Secretary of the Treasury in his confirmation hearings.
For US taxpayers concerned with either IRS civil tax audits/ or criminal tax issues the keys are to maintain good records, have legal authority in the form of a tax opinion citing favorable law which supports the Taxpayer’s tax returns, and be professionally represented.
In the words of Mark Twain: “Do the right thing. It will gratify some people and astonish the rest.”