Growing duties, even before FATCA, put vital work of weakened IRS Criminal Investigation at risk

Updated and revised March 6, 2014, 8:22 AM

For the past six years, the US Internal Revenue Service Criminal Investigation division, which many consider the world’s finest financial investigative agency, has faced a serious dilemma. Its workload and enforcement coverage have increased, but its Special Agent force has decreased because of steady cuts in Presidential budget requests and Congressional appropriations.

In 2009, the year before the Foreign Account Tax Compliance Act (FATCA) was enacted, IRS CI, as it is commonly called, had 2,771 Special Agents. In the following four fiscal years, the number of IRS CI Special Agents dropped from 2,697 to 2,685 to 2,615 and to 2,541 in fiscal year 2013.

In the present fiscal year 2014, President Obama’s budget requests that Congress appropriate funds for 2,503 IRS CI Special Agents. This represents a nearly 10% decline in Special Agents in six years. This downward trend has continued for more than a decade.

IRS CI, which gained its fame for having been the government agency that finally made a winning criminal case for undeclared income against the gangster Al Capone in the 1940s, is the sole agency responsible for enforcing criminal violations of US tax law. But its duties extend far beyond that.

It also plays an active role and investigates many cases for money laundering violations, official corruption, Bank Secrecy Act violations, among other responsibilities and initiatives.

With the advent of virtual currency, identity theft and the growing international pursuit of official corruption, IRS CI is likely to have more work than its small Special Agent force can possibly handle.

It is unknown what enforcement responsibilities will flow from the data flood the civilian side of the Internal Revenue Service will receive under FATCA. This US law, which takes effect on July 1, 2014, requires financial institutions in other countries to report information about the financial accounts that US persons maintain at their institutions. It is a virtual certainty that the criminal tax cases that will fall on IRS CI to investigate under FATCA will be numerous.

IRS-CI’s 2013 report highlights successes in the face of cuts

In its his 2013 annual report released last week, IRS CI said it had achieved a 25 percent increase in convictions against tax evaders and other financial criminals over 2012. It said it attained achieved convictions in 93% of the 5,314 cases initiated despite a 5 percent decline in the number of Special Agents it employed.

IRS CI has taken to hiring retired IRS CI Special Agents as contractors to fill the manpower void resulting from budget cuts. In most cases, the retired Special Agents have substantial experience in investigating complex cases.

Michael McDonald, who was an IRS CI Special Agent for 28 years before retirement, says that the specialized work of IRS CI calls for financial crime experts, as are many of the outsourced contractors.

“Other agencies are doing the same thing and it is funded by asset forfeiture funds from the Department of Justice, not from the federal budget,” said McDonald, who is now principal of Michael McDonald & Associates, in Wellington, Florida.

According to the 2013 IRS CI Annual Report, Special Agents make up about 70 percent of the total IRS-CI staff. It does not say how many outside contractors work with IRS-CI.

“You can have a reduction of five percent of your budgeted staff, but if you match that with additional outside people, you’re ahead of the game and you’re bringing in seasoned, experienced agents,” McDonald added.

Division has 90% conviction rate in tax fraud cases

Historically, IRS-CI has a high level of success in prosecutions of the cases it investigates. Since it was created in 1919, the conviction rate for prosecutions in federal tax cases has never dropped below 90 percent. In 2013, IRS-CI reports a continuation of these strong numbers. It says it initiated 13% more investigations than in 2012 and increased the number of recommended prosecutions by 18% over the previous year.

“IRS CI agents are so good because, unlike the FBI and ICE who are also very good, IRS CI agents are actually accountants,” McDonald said. “They come into IRS CI predisposed to work financial crime cases.”

The number of IRS CI Special Agents in 2014 will be the smallest in more than a decade, as the following chart demonstrates.


Impact of budget and staffing cuts not felt immediately

The real effect of tight IRS CI budgets may not be felt for some time. Donald Semesky, a former IRS-CI Special Agent as well as the architect 2004 of the Drug Enforcement Administration Office of Financial Operations, said the investigative cycle usually runs two to three years. The latest reduction in IRS CI resources, which affect the number of Special Agents, travel and technological tools, might not have a noticeable effect on enforcement results until 2016, says Semesky.

While the budget fallout might come later, a lack of resources has an immediate effect on the division’s operations.

“They are downsizing by a lack of replacement,” Semesky says. “There are a lot of specialty positions at IRS CI that have never been backfilled, so they just don’t exist anymore.”

Semesky, now a principal at Financial Operations Consultants, LLC, in Washington, DC, also has seen how agencies overcome budget cuts by hiring contractors with asset forfeiture funds. It is what IRS-CI must do to assume more tasks with fewer people and less resources, he adds.

“The jurisdiction is larger, the oversight is more, the responsibilities are greater,” he concluded.

Congress pares IRS funding

Not all federal agencies involved in the financial crime arena have suffered budget cuts. In the budget agreement reached by Congress in January 2014, the US Treasury Department Office of Terrorism and Financial Intelligence and the Securities and Exchange Commission received increased appropriations.
The overall IRS appropriation was $1.7 billion less than what President Obama’s budget requested. Since 2010, IRS has eliminated more than 10,000 staff positions because of budget cuts.

Some observers who oppose these IRS budget cuts say that the cuts are illogical because the IRS, including IRS CI, brings in more money to the federal treasury than what it costs to operate them. Some estimates state that the budget cuts the IRS has suffered since 2010 have reduced tax collections by about $8 billion dollars.

With limited resources, IRS-CI teams up to fight identity theft

Identity theft is one of the fastest-growing financial crimes. It targets a wide range of financial institutions, companies and individuals, often reaping substantial profits for its perpetrators. In 2013, the Department of Justice reported that 11.5 million Americans were victims of identity theft with more than $21 billion in losses.

IRS-CI took on identity theft as a top priority and initiated 1,492 investigations in 2013, a 66% increase over those in 2012 and a 440% jump over 2011. IRS CI reports that it worked with 35 bulky agency Identity Theft Task Forces, which combine local, state and federal law enforcement agency resources.

The work of IRS CI is as diverse as that of any federal law enforcement agency.

IRS-CI Chief Richard Weber, the former Chief of the US Department of Justice Asset Forfeiture and Money Laundering Section, said in the 2013 IRS CI report, “Our cases involved individuals and corporations from all segments of society.”

“They led us into corporate board rooms, offices of public officials, tax preparation businesses, identity theft gangs and narcotics trafficking organizations,” Weber added.

Read the IRS CI 2013 Report here