IRS spots $37.1B in tax and financial crimes

The Internal Revenue Service’s Criminal Investigation unit identified $37.1 billion in tax and financial crimes in fiscal year 2023, exceeding the previous fiscal year, while leveraging new technology to ferret out wrongdoing, according to a new report.

The annual report, released Monday, said IRS CI initiated more than 2,676 criminal investigations and obtained an 88.4% conviction rate over the course of the past fiscal year, which began Oct. 1, 2022, and ended Sept. 30, 2023. That’s up from fiscal year 2022, when IRS CI initiated more than 2,550 criminal investigations and identified over $31 billion from tax and financial crimes. 

The agency has been using technology such as data analytics and is even beginning to wade cautiously into using artificial intelligence, to identify and investigate complex financial crimes. This past fiscal year, IRS criminal investigators queried Bank Secrecy Act-related data in over 89.6% of their investigations, and 14% of the CI unit’s investigations were initiated based on information provided by banks under the BSA. Investigators used data analytics to support more than 1,300 questionable refund and return preparer investigations, 231 of which included identity theft, in fiscal year 23. The CI team seized over 1.7 petabytes of digital data from more than 3,300 computer devices to support investigations this past fiscal year.

“IRS Criminal Investigation plays a vital role for tax administration and law enforcement, and the results from the past year dramatically illustrate the results,” said IRS Commissioner Danny Werfel in a statement Monday. “Criminal Investigation’s work has identified tens of billions of dollars on issues including tax fraud, money laundering and cybercrimes. The work of Criminal Investigation employees — who often put themselves in harm’s way to get the job done — continues to make a difference in helping uphold tax laws and protect taxpayers.”

At the same time, the IRS is facing the threat of budget cuts from Republicans in Congress, with House Republicans voting last month to cut $14.3 billion in funding from IRS enforcement to fund aid to Israel. The extra funding was allocated to the IRS by the Inflation Reduction Act last year, which led to rumor that the money would be used to pay for armies of armed IRS agents.

“We are still dealing occasionally with the wildly inappropriate misinformation that’s out there regarding IRS agents being armed, which is quite frankly inappropriate and incredibly dangerous,” said IRS CI chief Jim Lee during a press conference Monday. “But the reality is I cannot be more proud of the tenacity of the special agents, of the investigative and administrative analysts, communication specialists, really all personnel that operationally make CI tick. They carry out the mission every single day on behalf of the American public.”

IRS CI seized $271 million in assets in FY 2023, in line with previous years. “We continue to be one of the highest, if not the highest, contributors to the Treasury Executive Office for Asset Forfeiture year in and year out,” said Lee. 

The 88.4% conviction rate remains amongst the highest in law enforcement at around 88.4%, he noted. “What that means is if you get in the crosshairs of an IRS CI special agent, it’s highly likely that you’re going to go to jail,” said Lee. 

Close to 70% of IRS CI’s time is focused on tax-related crimes, with the remaining financial crimes tied to activities such as narcotics trafficking, bank secrecy and money laundering. Tax fraud related to pandemic-related programs such as the Employee Retention Credit remains an area of focus. 

“COVID fraud is still out there,” said Lee. “By the end of the fiscal year, we had more than 1,400 investigations that we initiated. We’re nearing almost 700 indictments, and in just those COVID-related frauds, we have more than a 98% conviction rate. We’re making an effort to ensure you know that the money goes where it was intended to go and that those that tried to scam the hardworking honest American public out of help they really needed, to make sure that they realize that the government is doing something about that.”

The average sentence on the close to 300 COVID fraud cases that have made it all the way through the judicial system is about 36 months. “The federal judges back home do not take these COVID crimes lightly,” said Lee. “I don’t see it lightening up. There are a lot of historic COVID crimes out there. I have a lot in inventory now, and we’re going to continue to work [on] them, so I don’t see it slowing down in fiscal year ’24. With Employee Retention Credits, anybody following the Internal Revenue Service knows that we’re looking at that particular COVID type crime.”

He acknowledged that IRS CI has a number of ERC investigations underway, but only a handful that have actually been charged and only four sentenced to date. However, the average investigation takes about 18 months, and Lee expects more to come.

IRS CI has been ramping up its hiring in recent years, even before the extra infusion of funding from the Inflation Reduction Act. “This the fourth year in a row that we saw a net increase in special agent hiring,” said Lee. “That’s a real change from eight to 10 years ago, where we were actually negative in attrition.”

There are about 3,200 total personnel at IRS CI, and roughly 2,200 are sworn federal law enforcement officers or special agents, while the others are personnel across all disciplines. “In fiscal year 2024, we plan to hire just as much or more than we’ve hired in the past couple of years,” said Lee. 

In fiscal 23, the CI unit experienced significant wins from partnerships both within and outside the U.S. In July, a CI investigation, with help from the Joint Chiefs of Global Tax Enforcement, led to the indictment and arrest of an international tax advisor accused of concealing millions of dollars of income for high-income Americans. IRS CI’s participation in the Joint Criminal Opioid and Darknet Enforcement Task Force also played a major part in the success of Operation SpecTor, an operation netted 288 arrests and the seizure of 117 firearms, 850 kilograms of drugs that included 64 kilograms of fentanyl or fentanyl-laced narcotics and $53.4 million in cash and virtual currencies.

IRS CI has been working with the Joint Chiefs of Tax Enforcement from five countries (Australia, Canada, the Netherlands, U.S. and U.K.), known as the J5, tracing the use of cryptocurrency for cybercrime and held a meeting last month to coordinate their efforts during an annual J5 challenge event.

“That challenge brings the public and private sectors together — investigators, subject-matter experts, data scientists, and private partners, from the five jurisdictions of the J5,” said Lee. “They focused on digital assets and operational data sets to develop investigations.” 

During the J5’s recent crypto challenge, IRS CI used artificial intelligence to analyze voluminous amounts of bank filings for crypto and digital asset cases to put it into a manageable format that they could actually read, according to Lee, in answer to a question from reporters. They also used an older machine learning tool to do some querying of that data to make sense of the voluminous amount of data and look for investigative leads that they might not otherwise be able to find.

Training law enforcement partners on the latest investigative techniques also played a crucial role in combating crime in fiscal year 2023, according to the report. IRS CI’s International Training Team delivered 33 trainings to over 1,100 law enforcement officials from 96 countries. In May and September 2023, CI, in conjunction with private-sector and global law enforcement partners, delivered blockchain analysis tools and cyber training to Ukrainian law enforcement agencies to aid in sanctions-related enforcement efforts. The agency rounded out the fiscal year by training a team of investigators from Gulf countries on techniques to identify and combat the flow of money to and within terrorist organizations.