Criminal Investigation & Civil tax audit by Robert Nordlander

Criminal Investigation & Civil tax audit by Robert Nordlander

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

See transcription recording from a podcast recording from Accounting Today.


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. 

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