When IRS CI comes knocking

1 month ago 103
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Former IRS special agent Robert Nordlander dives into the difference between a Criminal Investigation investigation and a civil tax audit.

Dan Hood (00:03):

Welcome to On the Air with Accounting Today, I'm Dan Hood. Everyone has a pretty good idea of what an IRS tax audit looks like, or at least everyone in the accounting tax, accounting profession does. But the IRS Criminal Investigation unit is a whole other animal, and being investigated them is also a whole other animal with higher stakes at a very different set of potential negative outcomes. Here to talk about all that is Robert Nordlander. He's CPA and CFE; he's a former special agent with the IRS and the host of both the Fraud Fighter Podcast and Criminal Tax Files — that's another podcast — as well as the author of Criminal Tax Secrets. Robert, thanks for joining us. 

Robert Nordlander (00:34):

Well, thank you, Dan for having me. 

Dan Hood (00:36):

Excellent. I think we might start by sort of giving people a sense of what CI is, what criminal investigation is. 

Robert Nordlander (00:42):

Look the IRS is a large governed entity of course, and they have approximately, I think 70 or 80,000 employees. Out of that, there's a little over 2,000 employees that are considered criminal investigators. Those are what they call the gun. If you think of FBI, Secret Service, Homeland Security, DEA, you think of people that carry guns in handcuffs and have blue lights and enforcement laws and do search warrants and arrest warrants called IRS. Criminal investigation is that division of the Internal Revenue Service there are responsible for enforcing the tax code. And there are various parts of the tax code that are crimes. And when crimes are committed, the IRS CI are the ones that actually enforce those crimes. 

Dan Hood (01:28):

Gotcha. Maybe you can differentiate, see, because I think most people would say like, misreporting my tax, my deductions, or something like that. They would consider that a crime. Is there a difference between that kind of crime that might get a civil tax audit and sort of crime for which the gun to the gun toters for when they would get called in? 

Robert Nordlander (01:46):

Well, the question would be, has a crime been committed? And there are no dollar amounts when it comes to crimes. So if someone commits tax invasion of a dollar, that is really still a crime. Whether it's a dollar or a million dollars, there's no slower when it comes to the amount of dollar amount per crop. So the question now becomes, is it worth the time to investigate? That's number one. And the number two is, is there any willfulness to put this person in prison? Give an example. If you transpose a number 96 versus 69, that's a mistake. There's no willful to commit a tax crime or to evade taxes. It's a mistake. It happens. But let's assume that someone always is underreporting income every single year from the same source of income. Now that becomes willful and then that becomes a crime. So it's not really a mistake that's a crime. 


I'll give you an example. Depreciating something over five years versus seven, that's a little bit technical issue and you could probably have some argument, it should be five or seven, no big deal, but is it really willful? Probably not worth going to prison for. But you also have to realize that there are 10 people in a jury box that ultimately is the final audience when it comes to a tax crime. They have to determine whether or not someone should go to prison or be found guilty or not guilty of a certain crime then becomes an issue. Do I want to pursue this case from a CI perspective to a bunch of people that are 10 of them, normal, normal citizens, and would they put this person in jail for this crime? Give an example. Let's assume that there's a tax crime and the person has some type of dementia. Okay, they did it four years ago, but now they have dementia. Is there, are they really going to put someone in prison for dementia? Now the answer's probably not, so therefore it's still a crime, but they won't pursue it because it doesn't meet the jury appeal. 

Dan Hood (03:47):

Gotcha. So in a many cases there, I mean they'll be making the same considerations that a prosecutor would make. Right? And can I prove this and would a jury go for it? Can I prove it in court? And then would a jury believe it in court or act on it in court? 

Robert Nordlander (03:59):

Correct. And exactly. And then would a judge even take a look at the circumstances, even put someone in an active sentence? If you have a situation where the judge probably would not even get them a prison time, why spend that much time on a case? Because I S C I, when they investigate individuals for tax crime, they're not looking at a one year situation. They're looking at three years, five years, maybe even 10 years. So when they open up an investigation, it is for multiple years and it takes a long time to dig down into the books and records to find these crimes into the interviews. It'll take a couple years before by the time it starts to by timing goes to court. And then at the end of the day, you want the judge to think this crime is so bad that there has to be active since this time. Otherwise, why do this? Because the job the virus S C I is really to put the fear of God in people. They can only take so many cases. And so if everybody's getting probation, whether you're picking the wrong cases, you need to pick cases that actually have two years, 10 years, five years, that's worthy of a press release. So the whole general public knows don't do this or you go to prison. So that's what they're looking for. 

Dan Hood (05:10):

And is that, that's generally reflective sort of the IRS has been understaffed for years and losing people through attrition and so for instance, oh, general audit rates are regular civil, but what most people think of when they think of a tax investigation, that basic tax audit, those numbers, the numbers of those has dropped over time significantly to the point where the vast majority of people are never audited regardless of whether they should be or not. But it sounds like that cis, we already made the decision of, listen, what's important here is setting the example. We're not trying to catch every single tax criminal in the world. We're trying to get people who really send a message to other tax criminals. 

Robert Nordlander (05:47):

That's correct. Absolutely correct. Now, there will be an exception to the rule, and that would be if someone isn't held in public trust like an attorney, a CPA will be another one. The judge, the local mayor, the city councilman, they will deviate below what considered normal guidelines to, because these people are in possession of trust and therefore have to set the, we have the example against them, if that makes sense. You can't have the mayor committing tax evasion even though it's $10,000. It still be the mayor now the local, he's 

Dan Hood (06:19):

Public plumber. 

Robert Nordlander (06:20):

Yeah, yeah, exactly. The local plumber could get away with it, but some of it up with public trust would not be able to get away with it. 

Dan Hood (06:28):

Gotcha. Alright. Well now that we've established that sort of that's seems how they're picking their cases, how they're the ones that're pursuing, maybe we talk about some of the differences between a civil tax audit and a CI investigation. I mentioned sort of people are familiar with what goes on in a civil tax audit. What's the difference between that and a CI investigation? 

Robert Nordlander (06:45):

Well, a civil tax audit, this is what it is. It's the IRS thinks that there's something suspicious, or maybe there's a mismatch between maybe a 10 99 or W two and the tax U-turn and they want to further investigation determine whether or not there's additional tax due, knowing that's what that is. The burden of proof is different from a tax audit versus a criminal tax investigation. The burden of proof is on the taxpayer to prove the deduction. Did you give so much to charity? Well, you have to bring your receipts to prove that you did. Or this looks like income, does this, probably income. Then they'll tax you it as income, which you have to prove is really a loan or inheritance, that type of thing. So the burden of proof is on the taxpayer on an audit. It is, right. The opposite when it comes to a criminal tax investigation, the burden of proof is on the government. So that means if I sit there and say I had X dollars of business expenses on my tax return, the government has to step in and say, no, no, no, no, you didn't have that. You had something different. And so there is a different animal involved when it comes to burden of proof because it doesn't make a difference if it's our robbery, murder, kidnapping wire fraud or tax evasion. The proof has to be beyond a reasonable doubt at the jury. So it's all to say, 

Dan Hood (08:06):

But what's interesting though, could you talk about that enormous deduction? You're claiming something's income when it's not. I mean, that could just as easily be an audit, right? As opposed to a criminal investigation. So it's looking at it and saying, okay, you might have two very similar taxpayers. And CI says, okay, for this one, I really think I could prove it. He's not, there's no dementia. No, we really think we could take it to a a public figure. I could take this to a jury. They'll feel sympathetic. Whereas if some of those things weren't there, he might have the same tax situation. But if the person is different, like I said, not a public official no dementia issues, no other issues that may play badly in front of a jury. It sounds like those two could be up for grabs either way in terms of being a CI investigation or an audit. 

Robert Nordlander (08:49):

That would be correct. The tax laws could be the same number, but the burden of proof is different. I have to, in a CI situation, the burden of proof is on the government to prove something on the taxpayer side, they have from an audit, the taxpayer is the one has to have the burden of proof. But there's also that one extra element to it, Dan, that's willfulness a mistake, a mismatch, 10 90 nines different. It happens. But when it comes to a criminal investigation, the willfulness has to be there. It's part of the cr. It's what makes a crime. When you look at crimes, it has to be willful. 

Dan Hood (09:26):

So some of that is also going go, like you said, proving a pattern, going back over time. They've done this every year for several years. This is not a one-time mistake, a mismatch of numbers. This is a 

Robert Nordlander (09:35):

Ride. I'm not turning over all the information to the return repair, which is classic. They hide the bank account, they tell me about everything else, but that one bank account consistently every single year. Well, anybody's raised kids knows that when you have a kid that consistently is missing something, it's probably Wilson. 

Dan Hood (09:53):

Well, but it's interesting because we are hearing you describe it that way. I had to, in some ways, if I'm a taxpayer and for instance, so for instance, I forgot to mention this account, I'm not going to get into the complexities of F bars, but there are people who with their F bar requirements, I just didn't know I had this account. So yeah, I didn't report it for five years that I had it because I didn't know I had it. It'd been left me in a legacy or something like that. Now, that might look like willfulness, but in some ways I kind of want, if I'm that person who's genuinely innocent or who will make the case theoretically that they're innocent, in some ways I kind of want CI to be there. I want it to be a CI investigation because they have to prove it. Whereas with a regular audit, the audit says, no, you know, had this account, that's it, boom, done. Whereas CI would have to prove it. Is that, am I characterizing that fairly? 

Robert Nordlander (10:38):

You are characterized correct. Because if someone just has a bank account and just sits there and they forgot about it for years, or they were told about it 20 years ago and at Thanksgiving dinner and they're like, they did nothing about it, they forgot about it. There's no willfulness there. There's not. But go back to the count. If the count has is dormant, of course it's a, well, let's assume there's a million dollars coming in, million dollars going out every single year. Well, there's no way that he could claim this. He didn't. He forgot because there's There's activity in it, 

Dan Hood (11:07):

Right? He cashed the checks. Right, exactly. 

Robert Nordlander (11:09):


Dan Hood (11:09):

Exactly. But it's just interesting because I mean, you could see in some cases a person would be like, well, if I don't have to prove it, and they have to prove it, right? Because willfulness can be, there are elements, as you said year after year of a pattern of behavior and stuff like that. But I would imagine it can also be difficult to prove what's going on inside a person's head. 

Robert Nordlander (11:27):

Well, that's true too. But let's assume that the person reported one year didn't report the next year, or there's an email out there, it says please report everything here except for this. I mean, the course starts work. 

Dan Hood (11:40):

Boom. Done. Yeah. And now that everyone's putting everything in emails, probably the paper trails are, or the electronic paper trails are probably better for ci, but worse for tax sheets or tax. 

Robert Nordlander (11:49):

Yep, exactly. 

Dan Hood (11:51):

So I, it's interesting, it sounds like there are that the things that people might think would make them subject to a CI investigation might not be the ones that would expect in the sense of, I would've thought obvious criminal activity. But it sounds like some of it's really more what gets you an audit versus a CI investigation is a little bit of how much CI can prove it how good the evidence is how much willful you said, right? You say how much willfulness they can prove or point to. Is that fair? I mean, that might go either way. No, 

Robert Nordlander (12:25):

It would be correct. And when the federal prosecutors use IRS CI and IRS CI is considered a world's honest financial investigators. And the reason being is because you can't have a psychology degree and just decide, become an IRS agent. You could, but you got to have some type of accounting and business background to do so. Yeah, dea, secret service, fbi, you can have a degree in Spanish, can't get the job. Well, you're not going to put the person with Spanish who has no business degree. Look at the financial statements and look at the bank statements. They're not going to do that. So they already come with that skillset before they even put the gun on their hip. So when they start doing its investigations, that's all they do is white collar and only CI can investigate tax crimes and bully, and most people understand this, but illegal in illegal income and legal income, it's solicitor tax, it's still taxable. So many times if federal prosecutors can't prove the drugs, but they can prove the income, so they'll bring the IRS in and say, approve the income, and the IRS proves the income and it's checkmate I against the defendant because we can't get the drugs off of yet. But we do have the income where the income come from, we don't care. It's still taxable, so therefore it's attacked on, 

Dan Hood (13:35):

This is where we got Al Capone, right? 

Robert Nordlander (13:37):

Yep. Exactly. 

Dan Hood (13:39):

So are there any other big differences between an audit and a CI investigation from the investees point of view? I mean I'm assuming, yes, they're gun tutors, but I'm as gun tos, but I'm assuming not a lot of CI investigations involve actually drawing their weapon. I mean, are you likely to find yourself staring down a government issue firearm if you're being investigated into this, or is it much more likely to be just exhaustive in an investigation of your finances? 

Robert Nordlander (14:05):

It depends. And the reason why we say it's depends. The reason why the IRS special agents carry weapons is because when you do a search warrant, you don't know is behind his doors, you don't know if the guy is a drug dealer that happens to just file false tap returns. You don't have a clue what's going on. And in many cases when it comes to white collar crime, it's their first time dealing with the federal court system. You have a run themi drug dealer, somebody who's gang banging and not doing they're supposed to do. They understand the system. They understand once they get caught and they're done well in federal and white collar crimes, they're going to be a lot d more even more dangerous because these people have a lot to loom. It's just not, they know they did the fraud and once they do the fraud, they're going to go away for many and their livelihoods over with all this income, this nice house, this nice car, the kids, I mean, they lose a lot based upon their father, they commit. 


And so it can be difficult sometimes because we're dealing not with as ceo, we're also dealing with the person who's committing crimes on the street. I've had cases actually where it was her temper prepared crime. They were preparing false tax returns and getting thousands and thousands and thousands of dollars. I did not realize at the time I was doing the investigation that once we arrested them and was putting him through the court system, that the guy was wanted for a robbery for years. He just happened to do tax stuff during tax season, <laugh>, other nine months, he was out there committing bank robberies. Well, I didn't have a clue. Regular 

Dan Hood (15:41):

In the NFL the rest of the nine months somehow. 

Robert Nordlander (15:43):

Exactly, exactly. And I didn't have a clue about that until the very end. But I'm glad we did a search warrant, we had the weapons and everything else, and we treat it as this, it's a could potentially be a dangerous person because it can be. And we don't know who this person is. And exactly what happened is a bank robber. 

Dan Hood (15:59):

No, I mean, like I said, I'm not suggesting that having the weapons doesn't make perfect sense. I'm just curious, does it often, is it a big part? And maybe that's the sort of follow up there. Question is what, this is a percentage, I don't mean percentage, but is there a rough balance of work? You're literally out in the field serving search warrants and going into people's offices and records and stuff like that. And what percentage of it is sort of similar to an IRS audit where they're just send us these forms? 

Robert Nordlander (16:25):

Oh, it's probably 90, 95%. You're sitting behind the op, you're sitting look at that bank statements. You look at majority of a CI's law criminal investigator's life is looking at bank records, interviewing people in writing a report. It's really the main focus of that. There are times where there has to be an arrest of course, and there's times where you have to do a search warrant. Those times are rare but they do happen and sometimes they have to happen. But most part, it's really an accounting nerd. What happens to have a gun on hiss hip and a badge 

Dan Hood (17:01):

And every once in a while he gets out of the office and bust down doors. There you go. 

Robert Nordlander (17:05):

Hey, you get out of the office quite a bit. Yes. 

Dan Hood (17:08):

Excellent. One other quick questions before we're take a break. Is there a balance in this between sort of business tax fraud and personal tax fraud? Is it usually individual income tax or is there a corporate income tax involved or 

Robert Nordlander (17:22):

Most of it's individual income tax and because individuals, corporations are run by individuals and many of the defendants or subjects of a criminal investigation are small business owners, it is hard to commit tax evasion when you're a W2 employee. I mean you're making a hundred thousand dollars a year, what are you going to do itemize a little too much? I mean, maybe it's a couple thousand dollars. Is that really worth the ICE's time? No, it's going to be worth the person's time when the person up a million dollars a year and he happens to be writing off all these expenses, or he is a failure to file for many years and he happens to be a construction worker or general contractor, those type or barber or you name your legal business entity, that's where most of the crimes be happening is based upon that. 

Dan Hood (18:13):

It is. That's Willie Sutton said, that's where the money is. Alright, well this is fascinating and I would love to dive much, much more deeply into this and we will dive a little bit more deeply into the topic in a second, but we have to take a quick break. All right. And we're back talking with Robert Norlander of the Fighting Fraud Podcast a long time. I r s investigator a CPA himself and full of fascinating details. Like I said, I love, I'm fascinated by fraud and tax fraud and tax crimes and all this sort of stuff and could talk for years with you and we'll probably have to have you back on to talk about great fraud, great crime tax, crime stories and stuff. But I want to pivot a little bit to talk about the role of the practitioner in all this, or a protection practitioner and potentially a non practitioner, but professional advisor. So start with saying when is there a role for attacked practitioner if their client is the subject of a CI investigation? 

Robert Nordlander (19:04):

Well, it depends. If you're a witness or you're helping out of the pits. If you have a client that happens to be under a criminal investigation, my best advice would be to not talk to that person. Okay. Because you already are a witness in anything that you say or they say makes anything even worse, honestly. So if you are a witness in an investigation, just don't talk to the taxpayer have a taxpayer talk to your attorney if you want to talk, if they want to do so. But typically the taxpayers or defendants know, don't talk to anybody else. If they have good representation, they'll tell 'em not to say anything. And by no means lie. When IRS criminal investigations is getting a, say a CPA as a witness, what they're looking for is what was given to the CPA. It had a CPA prepare the attack return. 


What was the CPA hired for? They're looking for the reliance to defense. Did the taxpayer align upon the CPA and the CPA just screwed it up? Or did the CPA just do their best with what they had and maybe maybe the CPA didn't receive everything, they should have the hidden back account. That's what they're looking for. So that's the witness side of things. Now, let's assume that there's an attorney, there's an defendant, and the attorney is hired by the defendant and the attorney needs some help, and he goes to a CPA and go, Hey, can you help me because I don't know anything about taxes. Help me figure out what the true loss is of the activity of my client. There's a defendant. Now, that's what you would need a professional to look into that to make sure that the taxes the calculations are correct. 


But remember, and this is where I think it separates between a good consultant and a bad consultant, a good consultant for an attorney understands the behind the scenes and how the beans are counted. Everybody knows in accounting the beans are counted differently. Cost accounting count things differently than financial accounting and tax accounting. Everybody's got to know the way they measure things. Well, in a criminal tax case, things are measured differently. They're very conservative. If you don't have a receipt for it, it's automatically deducted anyways. So it's one of those deals where the burden of proof is on the government and a good consultant to the attorney will understand that issue. So, 

Dan Hood (21:24):

But I'm, yeah, going back to for the average, right, if the average tax payers client gets audited, a good tax payer would say, well, I was my work, I'll help you defend it unless you have reason to believe that your client's cheat. In which case you might say, well, I'm going to step back. But generally speaking, the instinct of most tax preparers would be to, well, I got to defend it. I've got to help my client with this. But it sounds like in this case, if you discovered to your client is investigated by ci, your best bet is to sort of step away, be neutral, answer under everybody's questions is appropriate but don't try to stick up for him per se. 

Robert Nordlander (21:56):

That's correct. And don't start this happens quite often. You're missing the CI comes up and says, how'd you get this document that says that proves this number and you forgot about it, or you didn't create it or you lost it. And then all of a sudden now the CPA goes, whoa, I better cover my track, not cover my tracks at in unin intent, bad or bad intentions, but just I got to put this file in there. No, no, no, no. Just leave it like it is. If something's missing out on the file when there's a criminal investigation, just let it miss and then you can talk about later. Don't try 

Dan Hood (22:31):

To recreate it. 

Robert Nordlander (22:32):

Don't recreate anything secretly. Exactly, because it makes it look bad. 

Dan Hood (22:36):

Yeah, no, certainly. Yeah, that would look suspicious. Yeah, having missed having missed the document, yeah, people missed documents. That happens. But having recreated it afterwards we'll turn it if we're assuming, like you said, that the tax practitioner's going to take a step back don't not abandon their client, but this is not a role for them. Wrangling with CI is not a role for the tax preparer. Who is it a role for? You mentioned attorneys. Is that usually who people would hire if their CI comes knocking at their door, is you go to some attorney who would focus on this? 

Robert Nordlander (23:07):

Well, if you're talking about defendant, absolutely. A defendant needs to have an attorney. They need to have not just a tax attorney, but a criminal tax attorney. You want someone who's in criminal court all the time. What you do not want if you were defendant in this type of case, is your D U I attorney. I don't want a D U I attorney. I don't want a divorce attorney. I don't want an adoption attorney. I want a criminal tax attorney. That's what I want. Somebody does this stuff. So be sure that if someone is a dependent, get a criminal tax attorney or someone who's a criminal defense in federal court, not just your will a state guy. They're not going to be in court with you. It's seen this plenty of times where I did an investigation and says that all this iris is after me. They go get a civil attorney, and then I'm talking to a civil attorney and I know very good, well, that civil attorney's not going to be in criminal court later on. They do mergers and the acquisitions and maybe a few tax returns, but they're not who they are So 

Dan Hood (24:10):

Mean anyway, you want someone who's going to be able to go in and litigate it for you and to be exactly know, cross, cross-examining people and doing all the good television looking kind of stuff. 

Robert Nordlander (24:19):

Oh yeah, exactly. And your civil attorneys are just not made for that. 

Dan Hood (24:24):

And do you find that most of the criminal tax attorneys have their own background set of staff to be able to do the investigations and look at the stuff and figure out the documents and stuff? Or do they work with tax preparers or accountants at all? Any point? Or is it mostly they'll have their own teams, and I realize it's a big field. So 

Robert Nordlander (24:45):

Your criminal tax attorneys, it's like saying how's the used card salesman? Good ones, and there's bad ones. <laugh>, honestly. Fair enough. The good ones ask questions and hire professionals to help 'em out. The other ones, sometimes they wing it and it just depends on the situation. I've seen good criminal, I've seen good attorneys, I've seen bad attorneys. It's like having CPAs. There's good ones and there's bad ones. But the best way that to solve that problem is ask recommendations and referrals. That's the best way to handle it. But in my opinion, a good criminal tax attorney actually ask questions, understands what's going on, probably has a little bit of accounting background, maybe they don't have to have it. I've seen some good ones that didn't have in the county background, but they understood the concepts of what was going on. And in my opinion, they hire actually someone like myself to help them that beat the waters. Because criminal taxes different than are any other white collar crime. It is slightly different because the rules are different. Taxes are always different. Yeah. A fraud to fraud to fraud. Sometimes tax may have a different angle to it something maybe not, may be deductible when it is or vice versa. 

Dan Hood (25:58):

A lot of that all comes down to the minutiae, right, of the minutia of the tax law and the tax ranks. 

Robert Nordlander (26:03):

It really does. Is this a loan, this income? Well, it depends, right? Is this a cruel or is this cash basis and how it depends on how you count the beans. 

Dan Hood (26:12):

It is. In fact, like I said, it's a fascinating topic. We could be here all day but unfortunately we can't be here all day. But we'll have to you back at some point, like I said, to talk about a lot more aspects of this because there's so many neat among other things, I'm sure there's a lot of great stories to talk about great frauds and great tax crimes going on but unfortunately what we're running out of time today. So Robert, any final thoughts? Any final thoughts as people go away that they should bear in mind about CI investigations versus tax audits or just CI Investigations is all. 

Robert Nordlander (26:40):

The key is just to comply. When do you complete your tax charge? Be honest on it. If you make a mistake, you make a mistake, it happens everywhere. But be assure fail failed to file a tax returns of crime. So be sure you file your tax insurance and file accurate to the best of your ability and you'll have no problem whatsoever. 

Dan Hood (26:58):

Alright, Robert Nordlander, thank you so much for joining us. 

Robert Nordlander (27:01):

Thanks Dan. Appreciate it. 

Dan Hood (27:02):

And thank you all for listening. This episode around the air was produced by Accounting Today with audio production by Kellie Malone. Ready to review us on your favorite podcast platform and see the rest of our content on accountingtoday.com. Thanks again to our guest and thank you for listening.

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