What Triggers an IRS Criminal Investigation

What Triggers an IRS Criminal Investigation – The Warning Signs You Need to Know

Here’s something that should concern you: IRS criminal investigations don’t start with a knock on your door. They start months or years earlier, often without any warning, and by the time you find out you’re being investigated, the IRS has already built most of their case. The triggers that launch these investigations are more common than most people realize – and some of them come from people you trust.

In 2024, the IRS referred only 1,794 cases to the Department of Justice for prosecution. That’s the lowest number in 40 years. You might think that means the risk has decreased. It hasn’t. What it means is that when the IRS does decide to prosecute, they’re extremely selective – and they have a conviction rate above 90%. Fewer cases means higher quality cases. If you’re in their crosshairs, the odds are not in your favor.

Welcome to Spodek Law Group. Our goal is to explain exactly what triggers an IRS criminal investigation, how you can recognize the warning signs, and what you should do if you think you might be at risk. Todd Spodek has represented clients at every stage of this process – from the moment they suspected something was wrong to federal criminal defense. Understanding how these investigations begin is the first step to protecting yourself.

If you have any reason to believe you might be under investigation, call us at 212-300-5196 immediately. Waiting to find out for certain is waiting too long.

The Triggers You Never See Coming

Most people think IRS criminal investigations start with audits that go wrong. Sometimes they do. But many investigations start somewhere far more personal: with people you know.

Whistleblowers and Informants

The IRS receives thousands of tips every year from people with inside knowledge of potential tax fraud. These informants include ex-spouses, former business partners, disgruntled employees, competitors, and sometimes even family members. The IRS has a formal whistleblower program that pays financial rewards when tips lead to collected taxes – up to 30% of collected proceeds for cases involving more than $2 million.

The whistleblower reward structure creates financial incentive for people to report you. Your former bookkeeper who knows about cash transactions you didnt report? They could receive hundreds of thousands of dollars for that information. Your ex-business partner who saw the second set of books? Theres a price on that knowledge now.

Heres the uncomfortable truth: your ex-spouse knows your finances intimately. They may have signed joint tax returns with you. They know about income you received, deductions you claimed, accounts you maintained. And if the divorce is contentious, they may be angry enough to report you.

Divorce is one of the most common triggers for IRS criminal investigations. An angry ex-spouse files Form 3949-A (Information Referral) or simply calls the IRS. The information gets routed to an examination unit. Your returns get pulled. And now an agent is specifically looking for exactly what your ex described. They usually find it.

The same dynamic applies to business partners, fired employees, and former accountants. Anyone who had access to your financial information can trigger an investigation with a single phone call. You’ll never know who reported you. The IRS keeps whistleblower identities confidential.

Financial Institution Reports

Before the IRS ever contacts you, your bank may have already reported you. Banks are required to file Suspicious Activity Reports when they observe unusual patterns in your account. Large cash deposits. Structuring (breaking up deposits to avoid reporting thresholds). Unusual transfers. Any activity that could indicate money laundering or tax evasion.

Every cash transaction over $10,000 triggers an automatic Currency Transaction Report. If you regularly deposit $9,500 to stay under the threshold, thats structuring – and its a federal crime even if you owed no taxes. The structuring statute dosent care about your intent to evade taxes. The act of breaking up deposits to avoid reporting is the crime itself.

The IRS maintains a massive database of financial transactions under the Bank Secrecy Act. They’re tracking your banking activity before you ever know they’re watching. When they finally contact you, they already have months or years of financial data.

Heres what the bank surveillance network actually looks like. Your bank files a SAR. That SAR goes to FinCEN – the Financial Crimes Enforcement Network. FinCEN shares data with the IRS. The IRS cross-references your SAR against your filed tax returns. They see the deposits. They see what you reported. And when those numbers dont match, your name goes on a list.

This happens automatically. No human being decides to investigate you at this stage. Computer systems flag the discrepancy. By the time an actual agent reviews your file, the evidence is already compiled. Your bank did the IRS’s work for them.

How Audits Turn Criminal

Not every audit becomes a criminal investigation. But some do – and the transition happens in a specific way that you need to understand.

Heres how it works. A revenue agent is conducting a civil audit. They’re reviewing your returns, asking questions, requesting documents. At some point, they find something concerning. Maybe you omitted income. Maybe your deductions dont match your records. Maybe something just dosent add up.

When the agent identifies potential fraud, IRS procedures require them to stop asking questions and consult with their supervisor. If the supervisor agrees there might be fraud, they bring in a Fraud Technical Advisor – a specialist who helps evaluate whether criminal criteria are met.

If an auditor discovers more than $10,000 in omitted income in a single year, theres an automatic referral to a Fraud Technical Advisor. You dont have to be hiding millions. Ten thousand dollars in one year can start the criminal pipeline.

Once criminal criteria are met, something crucial happens: the IRS suspends the audit WITHOUT telling you why. This is required by internal procedures. If theyre going to refer you for criminal prosecution, theyre not allowed to tell you. They just stop communicating.

The agent who was calling you every week suddenly goes silent. You think the audit is going well because the pressure stopped. In reality, your case just got referred to Criminal Investigation.

The Three-Conference System

When fraud is suspected, your fate gets decided in meetings you never know about. Heres how the system works.

First, theres an evaluative conference. This happens within 10 days of the fraud referral. The auditor meets with their supervisor and a Fraud Technical Advisor. They review Form 2797 – the criminal fraud referral form. They decide wheather the evidence meets criminal criteria.

Second, theres a disposition conference. This happens within 30 days. Now Criminal Investigation is at the table. Special Agents review the evidence. They decide wheather to accept the referral. If they accept, the civil audit is officially suspended and a criminal investigation begins.

Third – and this is the part people dont realize – theres a primary investigation phase before the IRS even opens an official case against you. Special Agents do preliminary work, verify the information, get supervisor approval, then Special Agent in Charge approval. Multiple layers of review happen before your officially a criminal target.

At each stage of this process, your fate is being decided without your knowledge. You might be calling the revenue agent wondering why they havent responded to your document submission. Meanwhile, prosecutors are reviewing wheather to charge you with a crime.

The Eggshell Problem

Tax attorneys have a name for the nightmare scenario every taxpayer dreads: the eggshell audit. Its when you’ve filed a fraudulent return, you’re under examination, but the agent hasnt figured it out yet. Your walking on eggshells because any wrong move can shatter your situation.

Heres the paradox. In an eggshell audit:

• You cant invoke the Fifth Amendment. You’re not under criminal investigation yet – at least not officially. Asserting your right to remain silent will tip off the agent that there’s something criminal to hide. They’ll start looking harder.
• You cant lie. Making false statements to an IRS agent is a federal crime – 18 USC § 1001. Lying creates new criminal exposure on top of whatever you already did.
• You cant tell the truth. If you confess to fraud during a civil audit, you’ve just handed them the evidence they need.

There’s no safe move. Every option makes things worse.

This is why eggshell audits require experienced legal representation immediately. An attorney can navigate the impossible choices – asserting appropriate privileges, limiting exposure, and potentially negotiating a resolution before criminal referral happens.

Heres the reverse situation thats even more dangerous: the reverse eggshell audit. This is when the agent has information about you that you dont know they have. Maybe a whistleblower reported you. Maybe your bank filed a SAR. Maybe theyre already coordinating with Criminal Investigation. You’re answering questions honestly, not realizing the agent already knows the answers and is testing whether you’ll lie.

The only protection in a reverse eggshell audit comes from case law called Tweel. If an agent affirmatively lies to you about whether there’s a criminal investigation, evidence they gather may be suppressed. But they can stay silent. They can let you believe its a routine audit while Criminal Investigation listens to your interview. The protection only works against affirmative lies – not tactical silence.

What Agents Are Looking For

IRS agents dont randomly suspect fraud. They follow a specific methodology, looking for what the IRS calls “badges of fraud” – indicators that distinguish honest mistakes from intentional evasion.

The Badges of Fraud Checklist:

• Two sets of books (one real, one for taxes)
• Fictitious deductions or false entries
• Omissions of income you clearly knew about
• Inability to explain large deposits or assets
• Concealment of assets or income sources
• False statements to the agent
• Discrepancies between returns and financial records
• Offshore accounts (especially unreported)
• Lifestyle dramatically exceeding reported income
• Failure to cooperate with reasonable requests
• Pattern of identical “mistakes” across multiple years

When an agent sees multiple badges of fraud, that’s when the case moves from civil to criminal consideration. A single discrepancy might be a mistake. Multiple badges suggest intent. Intent triggers criminal referral.

Todd Spodek has seen cases where clients had no idea they were displaying badges of fraud. They thought they were answering questions helpfully. They thought their lifestyle was “normal.” They didnt realize that every answer was being evaluated against a fraud checklist. By the time they understood the situation, they had already provided substantial evidence of willfulness.

The Lifestyle Gap

One badge of fraud deserves special attention: the gap between reported income and apparent lifestyle.

The IRS watches how you live. If you report $75,000 in income but drive a new Mercedes, live in a million-dollar house, and take three vacations a year, that’s a problem. The math dosent work. Either youre living beyond your means (which invites scrutiny of where the money is actually coming from) or you have income you havent reported.

Agents are trained to notice lifestyle indicators. Your house. Your cars. Your vacation posts on social media. Your children’s private school tuition. All of this becomes circumstantial evidence that your reported income dosent match your actual financial position.

The IRS calls this “indirect proof of income.” They dont need to find the unreported cash in your bank account. They just need to show you spent more money then you claimed to earn. Where did the extra money come from? If you cant explain it, thats evidence of unreported income.

Heres how this plays out in real cases. An agent sees you reported $85,000 in income. They also see you put $40,000 down on a new boat. You paid $25,000 in property taxes. Your credit card statements show $60,000 in spending. The math adds up to a lifestyle of $125,000 or more – on $85,000 reported income.

You might have an explanation. Inheritance. Gift from family. Loan from a friend. But if you cant document it, the IRS will assume it was unreported income. And once they make that assumption, your audit has a fraud badge attached to it.

The Numbers That Matter

Let me give you the statistics that should inform your understanding of IRS criminal investigations.

Investigation Triggers:

• $10,000+ income omission = automatic Fraud Technical Advisor referral
• $10,000+ cash transaction = automatic Currency Transaction Report
• Any unusual banking pattern = potential Suspicious Activity Report

The Referral Timeline:

• 10 days for evaluative conference after referral
• 30 days for Criminal Investigation to accept or decline
• Months to years of investigation before indictment

2024 Statistics:

• 1,794 cases referred to DOJ (40-year low)
• 90%+ conviction rate on prosecuted cases
• Average sentence: 16-24 months for tax crimes

Heres what those numbers mean. The IRS is extremely selective about which cases they prosecute. They dont bring cases they might lose. When your case reaches the prosecution stage, the IRS has already gathered overwhelming evidence. They’ve spent months building the case before you ever knew you were a target.

The 90%+ conviction rate isnt because everyone charged is obviously guilty. Its because the IRS only charges cases where they’re confident they can prove willfulness beyond a reasonable doubt. By the time you’re indicted, they’ve already won – at least statistically.

Warning Signs Your Audit Is Going Criminal

If you’re currently under audit, these are the signs that things may be heading toward criminal referral:

The agent suddenly stops communicating. Radio silence after active questioning is one of the biggest red flags. It often means the audit has been suspended pending criminal review.

The agent starts asking “intent” questions. Why did you claim that deduction? Did you know about that income? What were you thinking when you filed? These questions probe willfulness, not just accuracy.

The agent requests original documents instead of copies. This suggests they’re building an evidence file, not just verifying information.

The agent asks about your knowledge of tax law. Questions about whether you understood your obligations are designed to establish willfulness.

New agents appear. If Special Agents (criminal investigators) show up alongside or instead of Revenue Agents (civil auditors), the matter has gone criminal.

You receive a target letter. This is explicit notice that you’re the target of a criminal investigation. By this point, the investigation is well advanced.

Third parties are being contacted. When the IRS starts interviewing your employees, your accountant, your business partners, or your bank directly – and you hear about it from them – thats a sign the investigation has expanded beyond your records. They’re building a case through testimony, not just documents.

Summonses are issued. If the IRS issues summonses to third parties for records about you, thats a significant escalation. Summonses compel production of documents under penalty of law. They dont use summonses for routine civil audits.

What To Do If You Think You’re At Risk

If any of these warning signs apply to you, here’s what you need to do:

Stop talking to the IRS immediately. You have the right to be represented by an attorney. Exercise it. Every additional word you say can become evidence.

Preserve all documents. Do NOT destroy anything. Document destruction during an investigation is a separate federal crime (obstruction) and almost guarantees criminal prosecution.

Contact a criminal tax attorney. Not a CPA. Not a regular tax attorney. A criminal defense attorney with specific experience in IRS investigations. The strategy for defending a criminal tax case is fundamentally different from handling a civil audit.

Understand your options before making decisions. Depending on where you are in the process, voluntary disclosure may still be available. Cooperation strategies may help. Defense positions may be strong. But you cant evaluate options without understanding your situation – and you cant understand your situation without experienced legal guidance.

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle IRS criminal matters nationwide. If you have any reason to believe you might be under investigation – or if you see any of the warning signs described in this article – call us at 212-300-5196.

Todd Spodek has represented clients at every stage of IRS criminal investigations. Some clients came to us early enough that we could prevent criminal charges entirely. Some clients came to us after indictment, and we fought for the best possible outcome. The earlier you act, the more options you have.

The worst thing you can do is wait until you know for certain. By the time you know for certain, the IRS has spent months or years building their case. Act on suspicion, not certainty. The consultation is free. The cost of waiting could be your freedom.