The Internal Revenue Service (IRS) employs both audits and criminal investigations to enforce tax laws, but they serve very different roles and carry distinct implications for taxpayers.
What Triggers an Audit or Criminal Investigation?
IRS audits typically arise from random selections or identifiable discrepancies in tax returns, such as unusually high deductions or unreported income. Audits serve as a compliance check to ensure taxpayers report income and claim deductions correctly.
In contrast, criminal investigations are launched when evidence suggests intentional wrongdoing, such as tax evasion or fraud. These investigations are conducted by the IRS Criminal Investigation Division and focus on uncovering deliberate illegal activity.
How Do IRS Audits Work?
An audit begins with a notification letter from the IRS. There are three main types:
- Correspondence Audit: Conducted by mail, the IRS requests specific documents related to your tax return.
- Office Audit: Conducted at an IRS office where you answer questions about your tax return.
- Field Audit: An IRS agent visits your home or place of business for an in-depth review.
Audits usually focus on particular return items like income, deductions, or credits. If discrepancies are found, the IRS may propose adjustments, which could result in additional tax owed plus interest or penalties. However, an audit itself does not imply wrongdoing.
How Do Criminal Investigations Work?
Criminal investigations are thorough legal inquiries aimed at gathering evidence of tax fraud or other financial crimes. IRS agents may:
- Examine extensive financial records for signs of concealment or falsification.
- Interview involved individuals or witnesses.
- Obtain search warrants to collect evidence.
If sufficient evidence of intentional crimes like tax evasion is found, the IRS can refer the case for criminal prosecution, potentially leading to fines, restitution, or imprisonment.
Real-World Examples
Audit Example: A self-employed individual claims significant business expenses. The IRS requests receipts and finds some expenses were personal, resulting in an adjusted tax bill.
Criminal Investigation Example: A business owner fabricates invoices to hide income. The IRS Criminal Investigation Division gathers evidence and charges the owner with tax fraud.
Who Is Affected?
Anyone who files taxes may be subject to an audit, especially if their returns stand out for unusual deductions or inconsistencies. Criminal investigations are rarer and typically involve obvious evidence of fraudulent activity.
Handling Audits and Investigations
For audits, maintain organized financial records, respond timely to IRS requests, and consider consulting a tax professional.
If facing a criminal investigation, immediately hire a tax attorney. Do not attempt to handle the situation alone or negotiate with investigators.
Common Misconceptions
- Audit implies guilt: Many audits conclude without changes.
- Ignoring IRS notices: Failing to respond can escalate issues.
- Criminal investigations are just tough audits: They are formal legal processes with serious legal consequences.
Frequently Asked Questions
Can an audit lead to a criminal investigation? Yes, if fraud is suspected during an audit, the IRS Criminal Investigation Division may get involved.
How long do audits and investigations take? Audits often last a few months; criminal investigations can extend over several years depending on complexity.
What if I disagree with audit findings? You can appeal through the IRS Office of Appeals or pursue tax court.
Summary Table
| Feature | Audit | Criminal Investigation |
|---|---|---|
| Purpose | Verify tax return accuracy | Investigate suspected criminal tax fraud |
| Trigger | Random or discrepancy identification | Evidence of intentional wrongdoing |
| Process | Document review and interviews | Comprehensive legal inquiry, searches |
| Consequences | Additional tax, penalties, interest | Fines, prosecution, possible jail time |
| Frequency | Relatively common | Rare and serious |
| Taxpayer Involvement | Provide records and explanations | Use legal counsel; highly cautious response |
Sources
- IRS.gov — Audit Process and Procedures
- IRS Criminal Investigation Division Overview — irs.gov/ci
- ConsumerFinance.gov — Tax Enforcement Basics
Understanding these distinctions equips you to navigate any IRS inquiry effectively and protect your rights. For more on audits, see our guide on IRS Audits.