Before the pandemic hit, the IRS and Department of Justice were taking strides to make the institutions more nimble in an increasingly faster environment. They were creating new task forces to improve cooperation among various divisions, establishing new offices focused on emerging threats and developing tools to streamline processes. COVID-19 put a pause on some of those changes, but not for long.
In Baker Tilly’s recent three-part webinar series, “An inside look at the IRS and Department of Justice,” leadership from both organizations discussed recent challenges and changes as well as where they are setting their sights these days. Manny Muriel, senior manager, from our tax advocacy and controversy services group, moderated the discussions.
The first webinar featured Eric Hylton, commissioner of the small business/self-employed (SB/SE) division at the IRS, and Damon Rowe, executive director of the SB/SE’s newly formed fraud enforcement office.
Hylton, who was formerly the Deputy Chief of the IRS’ criminal investigations (CI) division, said the SB/SE covers 57 million taxpayers, of which the majority file Schedules C, E and F, but it also includes about four million partnerships.
COVID-19 sidelined the SB/SE’s 20,000 employees temporarily as they got their bearings in a remote environment, but as soon as they were able to they started responding to a backlog of taxpayer correspondence.
“We’re looking at relief options and where we can help taxpayers, recognizing the challenges they are facing,” Hylton said.
However, if someone is purposely not meeting their tax obligation, he said, the SB/SE is actively pursuing them. In fact, the division has made finding high-income non-filers a priority. The SB/SE revenue agents and officers along with the office of fraud enforcement are collaborating to find Americans earning more than $100,000 a year who have stopped reporting their taxes or not filed and paid. They are looking in geographic areas, including northern Plains states and other parts of Middle America,that may have been overlooked in past years.
Hylton and Rowe also discussed a few other areas of heightened interest for their teams.
Micro-captive insurance and syndicated conservation easements are at the top of that list, but virtual currencies and COVID-19-related fraud are gaining on traction.
Another emerging threat stems from the financial relief created by government stimulus packages, like the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Soon after the act was signed, Rowe and his office were on the lookout for “promoters” preying on these funds.
“Those who are predisposed to steal from the [Small Business Administration] are predisposed to steal from [Federal Emergency Management Agency] and the IRS,” Rowe said. His team immediately started rooting out the bad actors and sharing that information with the other regulatory agencies.
Rowe, who also came from the CI unit, said having open communication among operating divisions and within the agencies is key to tamping down this type of government wide abuse.
Cooperation was also a central theme in our second webinar, which featured Don Fort, who recently retired as the chief of CI, and Jim Lee, the new CI chief.
CI is the law enforcement arm of the IRS. It is the only federal agency authorized to investigate and recommend prosecution on federal tax cases. Although it has been around for more than 100 years, it is still most famous for being the agency that brought Al Capone to justice almost 90 years ago. Some of its more recent high-profile investigations include the FIFA corruption case, the college admissions scandal “Varsity Blues” and the “Welcome to Video” indictments which is the largest Darknet Child Pornography Website,.
A constant concern for CI is keeping pace with criminals who continue to find devious and more sophisticated ways to break the law.
In 2017, CI launched its nationally coordinated investigations unit (NCIU) to use data analytics to identify and refer cases related to certain priority areas, including virtual currency, international tax and “significant” money laundering. In 2019, the NCIU referred more than 100 cases to CI field offices. (The average criminal deficiency for the NCIU’s referrals was $4.6 million versus the $2.9 million average for traditional investigations.)
CI is also requiring all employees — not just special agents — complete cyber training as nearly every case has some cyber or crypto component to it. To that end, CI has also expanded the skillset of its employee base. No longer is CI looking solely for individuals with business and accounting degrees who want to carry a badge and a gun; it is now actively recruiting data scientists.
Still, only so much of an investigation can be done behind a desk, CI special agents have to be in the field to conduct in-person interviews. The pandemic increased their workload twofold: first, they had to take some time to figure out how to do their job safely and, second, they had new types of fraud to investigate.
So in addition to rooting out individuals committing identity-theft fraud to obtain economic impact payments from government stimulus actions like the Paycheck Protection Program (PPP), CI must investigate related nontax financial crimes, such as bogus COVID-19 vaccines and fake personal protective equipment.
The IRS is not being quiet about these investigations, either.
“The timely prosecution of these cases is critical for the biggest deterrent effect right now,” Lee said.
Matthew Schneider, U.S. attorney, and Mark Chutkow, chief of the criminal division, both from the U.S. Attorney’s Office for the Eastern District of Michigan, have seen their share of COVID-19 fraud, too, which they discussed during the third part of our webinar series.
When the federal government was contributing supplemental funding to state unemployment compensation, they knew “scammers” would try to claim some of that for themselves, but they actually found contractors in a state unemployment office overriding a fraud detection system in order to put money into fraudulent accounts.
Schneider also recalled an individual who submitted 19 applications for PPP loans. They were supposed to be for different companies, but the address, financial information and employee data was exactly the same on each submission.
Right now, the government is weeding out those who fraudulently received funds, e.g., the guy who bought a Lamborghini, but Schneider knows soon enough his team will be working with their counterparts in the IRS when it comes time for the PPP loans to be forgiven. He is anticipating “fraudsters” falsifying forms with numbers to make it appear their loans should be forgiven when they should not be.
Beyond COVID-19-related crimes, the Justice Department is busy with credit card fraud, labor union fraud and corporate fiscal fraud in general.
Chutkow said his office understands the enormity of the ramifications a company endures when the Justice Department charges it for committing some kind of corporate malfeasance, so they consider a number of factors beforehand.
In the corporate fraud arena, Schneider and Chutkow agree that their biggest frustration is organizations that say they are cooperating, but really are not. They can see through that, and it makes them even more suspicious about what the organization may be hiding. Further, this kind of obstruction unnecessarily draws out an investigation and garners unwanted attention. Chutkow said, in some instances, his team has taken two years on cases that should have only taken six months because they had to get subpoenas.
When an organization is truly interested in getting to the bottom of the wrongdoing, it will hire reputable outside counsel and auditors, who can weed out and resolve the issues better and quicker than the federal government. This is especially true if one individual is responsible for an organization’s troubles. Chutkow said his office will focus on that individual. However, if the organization circles its wagons, it is a sign the company is hiding something or that it may have benefited from the individual’s poor behavior.
Their overarching message is that, even though the Justice Department is technically the largest law firm in the country, the government is not unreasonable.
“We understand mistakes happen,” Chutkow said.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
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