IRS Criminal Investigation Special Agents use the specific items method of proving income because it is generally the easiest method of proof that the IRS has in its arsenal to prove unreported income.
IRM 126.96.36.199 states, “Where the government is using the specific item method of proof (in an investigation of alleged tax evasion), the government attempts to document specific transactions that were not completely or accurately reflected on the subject’s income tax return. Additionally, the government must show that the specific omissions of income were made willfully for the purpose of understanding the subject’s income tax liability.”
This is the most direct method of proving unreported income and is the most difficult method for defense counsel to defend against.
IRM 188.8.131.52.1 states, “The type of evasion that allows for the specific item method include: omitted income, fictitious deductions, false exemptions, or false tax credits. There are two approaches to specific items, the basic and aggregate approach and depending upon the facts and circumstances the Special Agent will choose the approach.”
- The basic approach to the specific item method of proof requires the Special Agent to trace the reported items of income through the subject’s books and records to the tax return. Upon doing so, the Special Agent can specifically identify the unreported income items.
- The aggregate approach to the specific item method of proof simply requires that the Special Agent identify the total amount of income the subject should have reported in any given year. The Special Agent then compares the total amount of income with the aggregate amount of income reported on the return and arrives at an understatement of income.
A taxpayer had been audited by Small Business / Small Employed (SB/SE) in the past. A subsequent audit revealed badges of fraud, which caused SB/SE to become suspicious and refer the taxpayer for investigation by IRS Criminal Investigation (IRS CI). The taxpayer hired a criminal defense attorney and Sage Investigation. The Special Agent chose to use the basic approach to the specific item method of proving income. The case revealed the taxpayer overstated business expenses on a Schedule C for multiple years before the audit and before the referral. The Special Agent investigated by contacting the employer of the taxpayer and other witnesses and negated the claimed Schedule C business expenses. The investigation resulted in confirming substantial unreported income over multiple years, and elements of willfulness were found.
It is in a taxpayer’s best interest to involve a tax attorney early in audits that may expose them to criminal prosecution and avoid a referral to IRS CI. It is better for the taxpayer to resolve problems on the civil level with SB/SE and pay taxes, interest, and penalties than to attempt to work it out with the IRS CI and the United States Attorney’s office where they risk prison time, a fine, and the payment of taxes, interest, and penalties.
When a tax liability is due from prior audit years, and the criminal investigation reveals similar conduct, then the findings impact the Base Offense Level of the Federal Sentencing Guidelines. The guidelines allow the inclusion of the prior year’s tax liability as part of “relevant conduct,” which will raise the Offense Level Computation. The effect on the taxpayer can be additional prison time and larger fines.
If you need help in a Tax case, please contact Edmond J. Martin, Chief Investigator at Sage Investigations, LLC, at edmartininvestigations.com or call 512-659-3179 for a consultation. Click to read about our team and their CVs.