The IRS Isn’t the Only One Out There. Watch Out for California Criminal Tax Investigations, Too

The IRS Isn’t the Only One Out There. Watch Out for California Criminal Tax Investigations, Too

By Philip Wolf and Steven L. Walker

Do you have unfiled California or federal tax returns, and are you worried that the IRS or a California agency like the Franchise Tax Board (“FTB”) may start investigating you for a potential tax crime? Be proactive. Hire competent California tax counsel to help you avert a criminal case and possibly reduce the amount you owe.

What are Common Tax Crimes that the Government Investigates?

California and the federal government investigate and prosecute tax fraud (especially willfully failing to file returns), residency fraud, fraudulent refund claims, asset concealment, sales tax evasion, transfer mispricing, unemployment fraud, cannabis tax fraud, cigarette and tobacco products tax evasion, tax fraud involving cryptocurrency, and return preparer fraud, among others.

The government comes down hard on those it suspects of tax crimes. For instance, a Federal judge recently sentenced a Louisiana physician to four years and four months in prison, followed by one year of supervised release and a fine of $200,000 for tax evasion.[1] The IRS almost certainly will demand that this physician pay the $1.6 million in income taxes that she owes, as well as interest and penalties^.[2]  In addition to physicians, the government has gone after lawyers^[3], dentists^[4], accountants^[5], executives^[6], return preparers^[7], and even a former United States tax judge^[8], among many other professionals.

How do California and Federal Taxing Authorities Investigate Tax Crimes?

Taxing authorities usually have their special criminal branches to investigate crimes, such as IRS Criminal Investigation (“IRS-CI”)^[9], the FTB Criminal Investigation Bureau,^[10] the Employment Development Department (“EDD”) Investigation Division^[11] , and the California Department of Tax and Fee Administration (“CDTFA”) Investigations Bureau.^[12]

The investigators in these divisions are normally trained tax professionals, such as accountants.^[13] Many employees of IRS-CI have “IRS-issued handgun[s]”^[14] and can also be issued “…shotguns, rifles, ballistic shields and breaching equipment.”^[15] These investigators are serious, and many government press releases about tax convictions give these branches credit for playing key roles in helping prosecutors build cases.^[16] In 2023, 88.4% of the cases prosecutors accepted from IRS-CI resulted in a conviction.^[17]

What are Some Key Differences between a Criminal Tax Investigation by IRS-CI and by a California Agency?

Unlike IRS-CI, the “only federal agency that can investigate potential criminal violations of the Internal Revenue Code,” California has several taxing authorities responsible for administering and investigating various California taxes. The FTB investigates violations of the California Revenue and Taxation Code.^[18] The EDD is often involved in investigating fraud (including tax fraud) related to California employment matters.^[19]  The CDTFA will often investigate fraud connected to sales or use tax and other taxes on California’s cannabis excise tax.^[20]

These organizations have their procedures for conducting investigations. For instance, FTB Collection Procedure Manual is a helpful reference in determining when there will be a criminal referral in certain cases.^[21] In addition to conducting parallel investigations (i.e., separate investigations that do not intersect), many taxing authority criminal divisions work closely with each other and other law enforcement partners. The relationships among the investigative branches can sometimes be a labyrinthine.

Considerations for Minimizing Criminal Exposure in Tax Investigations.

Courts have stated that “[t]ax crimes represent an especially damaging category of criminal offenses,” which “strike[] at the foundation of a functioning government.”^[22] Because of how seriously the government takes perceived tax crimes, the best way to prevent a tax case from becoming criminal is to act proactively. Engaging competent tax counsel to assist with the process of coming into compliance can potentially limit a criminal tax referral. Depending on the circumstances, counsel can also help negotiate a lower amount of tax owed by proposing an offer in compromise in a civil tax case.

A taxpayer may have potential defenses. For example, a taxpayer might be able to take the position that the conduct was not willful in response to a penalty under California Revenue and Taxation Code §19705.  Another potential defense is whether the alleged wrongful conduct occurred beyond the statute of limitations.^[23]

Suppose you are a subject, witness, or target of a possible criminal tax investigation. In that case, obtaining competent tax counsel who can advise you of the situation and propose the best strategy is wise.

^[1] U.S. Department of Justice, Office of Public Affairs, “Louisiana Physician Sentenced for Tax Evasion”, (Feb. 29, 2024)

^[2] See e.g. Dung T. Le v. Comm’r, T.C. Memo 2020-27, see also 26 U.S.C. §6663.

^[3] See IRS-CI, “California lawyer sentenced to four years in federal prison”, (Dec. 4, 2023).

[4] United States Attorney’s Office District of Connecticut, “Connecticut Dentist Sentenced to Prison for Tax Evasion”, (Mar. 4. 2024).

^[5] United States Attorney’s Office Central District of California, “Downey Tax Preparation Company Owner Sentenced to 2½ Years in Prison for Knowingly Preparing Hundreds of False Tax Returns”, (Nov. 8, 2023)

^[6] United States Attorney’s Office Northern District of California, “California CEO Pleads Guilty To Employment Tax Crimes”, (Dec. 15, 2023).

^[7] See e.g. FTB Tax News 2023, “Tax Preparer Fraud” (Apr. 2023).

^[8] See e.g. United States Attorney’s Office District of Minnesota, “Former United States Tax Court Judge And Husband Sentenced For Multi-Year Tax Fraud Conspiracy” (Jun 22, 2017).

^[9] See IRS-CI, “Criminal Investigation”, (accessed Mar. 09, 2024).

^[10] See FTB (CIB), “Criminal Investigation Bureau February 2022 Tax News”, (accessed Mar. 09, 2024).

^[11] See EDD, “The EDD’s Response to Fraud”, (accessed Mar. 09, 2024).

^[12] See CDTFA, “Report Suspected Tax Fraud Activity”, (accessed Mar. 09, 2024).

^[13] See IRS-CI, “IRS Criminal Investigation Special Agent”, (accessed Mar. 09, 2024) which states “[a]s a Special Agent you will combine your accounting skills with law enforcement skills to investigate financial crimes. Special Agents are duly sworn law enforcement officers who are trained to ‘follow the money.’”

^[14] See e.g. IRM 9.1.4.5 (09-20-2013).

^[15] IRM 9.1.4.2 (08-11-2016)(5).

^[16] See e.g. United States Attorney’s Office Eastern District of California, “Mother and Daughter Team Plead Guilty in COVID-19 Related Jailhouse Unemployment Insurance Fraud”, (Jan. 16, 2024), which states, “This case is the product of an investigation by FBI, the California Department of Corrections and Rehabilitation’s Investigative Services Unit, and the EDD.”

^[17] IRS-CI, “IRS Criminal Investigation releases FY23 Annual Report highlighting more than 2,600 investigations, $37.1 billion identified from tax and financial crimes” (Dec. 04. 2023).

^[18] See FTB (CIB), “Criminal Investigation Bureau February 2022 Tax News”, (accessed Mar. 09, 2024).

^[19] United States Attorney’s Office, Southern District of California, “Alleged Mastermind of $5 Million Unemployment Fraud Scheme Extradited from Romania”, (Feb. 23, 2024).

^[20] CDTFA, “Report Suspected Tax Fraud Activity”, (accessed Mar. 9, 2024).

^[21] See e.g. California Franchise Tax Board Collection Procedure Manual, 4.1.2.7 Investigation Referrals.

^[22] U.S. v. Zukerman, 897 F.3d 423 (2d Cir. 2018).

^[23] See e.g. Cal. Rev. Tax. §19704. See also 26 U.S.C. §6531.