The IRS Special Agent Criminal Investigation Report: SARs and SOIs

Posted on August 19, 2024 by Michael Lowe.

Tax audit: it’s a scary thought, right? Of course, most everyone in Texas knows that the Internal Revenue Service (“IRS”) conducts civil audits of federal tax returns, and that individuals as well as partnerships; corporations; and even estates of the deceased may be subject to an audit investigation. And there’s going to be more and more audits in the upcoming years. The IRS recently announced expanded audit operations involving several categories of taxpayers which we discussed earlier in an article entitled, IRS Summons Form 2039: Federal Criminal Defense in IRS Criminal Investigations.

Part of that discussion included our forecast that these audits will parallel an increase in criminal prosecutions involving allegations of federal tax crimes. This is where some people are surprised. Not everyone is aware that the IRS has its own Criminal Investigation Division (“IRS-CID”) with its own set of investigators hard at work. It’s powerful. The IRS-CID is authorized to investigate potential crimes that include not only crimes defined within (1) the Internal Revenue Code itself, but also (2) the Bank Secrecy Act and (3) federal money laundering statutes. For more, read Tax Crimes: Known Focus Areas for IRS Taxpayer Criminal Investigations.

How do these things start? Sometimes, IRS-CID opens a file with an IRS auditor (“revenue agent”) sending over an internal referral. The IRS criminal investigations can also begin with someone in federal tax collection (“revenue officer”) referring a taxpayer over to the IRS-CID. And sure, there are tips that come from the public (imagine angry exes or a disgruntled employee, for instance).

However, from a criminal defense perspective the biggest arena for IRS-CID investigations to arise is from law enforcement agencies at the local, state, or federal level who are already pursuing potential criminal allegations based upon state or federal law. It’s important from their perspective to invite the IRS-CID to their party because the IRS-CID has the exclusive ability to investigate and to refer for prosecution those alleged to have committed specific tax crimes.

Here in Texas, the IRS is a recognized partner with agents from other agencies in coordinated task forces such as the OCDETF (Organized Crime Drug Enforcement Task Force); HIDTA (High Intensity Drug Trafficking Areas); the FCTF (Financial Crimes Task Force); and the JTTF (Joint Terrorism Task Force).

IRS-CID Special Agents are Armed Law Enforcement Agents Empowered to Arrest

These IRS-CID investigations are entrusted to federal employees known as “IRS Special Agents.” (They are hiring, if you are interested in their qualifications.) These are educated, trained, and vetted law enforcement agents in their own right. Read, IRS Criminal Investigators in Texas: Special Agents Investigating Federal Financial Felony Crimes.

Specifically, IRS-CID Special Agents must have the following credentials in order to be hired:

Hold U.S. Citizenship.
Hold a current and valid driver’s license.
Successfully clear a pre-employment drug screening.
Successfully pass a pre-employment tax compliance screening.
Successfully complete a pre-employment medical examination.
Successfully complete a pre-employment Personnel Security Clearance.
Successfully undergo a background check and criminal history record examination.
Be at least 21 years old upon completion of the training academy and not exceed 37 years of age at the time of appointment.
Qualify based on education, specialized experience, or a combination of the two.
Be legally authorized to possess and carry a firearm.
No affiliations with organizations aiming to overthrow the U.S. government.

The stated job duties of an IRS-CID Special Agent are as follows:

Adhere to the utmost standards of conduct, particularly in upholding honesty and integrity.
Commit to a minimum of 50 hours per week, encompassing irregular hours, and be available around the clock, including holidays and weekends.
Sustain a level of physical fitness essential for proficiently responding to life-threatening situations during job-related tasks.
Be prepared and capable of engaging in arrests, executing search warrants, and undertaking other hazardous assignments as required.
Possess and be ready to deploy a firearm; must be prepared to safeguard oneself or others from physical threats at any moment without prior notice, employing firearms in situations posing serious threat to life; must be willing to utilize force, including lethal force, if necessary.

The Power of an IRS-CID Special Agent: Analysis, Investigation, Prosecutorial Referral

There may not be a popular TV show with glamorous actors portraying these IRS-CID investigators (yet), but their efforts are just as powerful and intensive as those undertaken by agents employed at the FBI, the CIA, or Homeland Security. The IRS-CID Special Agents are tasked with the “primary investigation” of a federal felony involving criminal tax activity. They do detailed footwork, which is the beginning of the prosecution’s ultimate case.

Once their initial investigation is done, and is reviewed and approved by their supervisor and the Special Agent in Charge, then the case turns into a bigger “subject criminal investigation.” This means the Special Agent’s papers have been graded and it’s been confirmed that there is enough factual support to continue and build a criminal case.

Now there is an official IRS-CI criminal investigation. The Special Agent has the power to do all sorts of things to gather authenticated and admissible evidence which can be used by an AUSA in a federal criminal court filing.

The IRS-CI Special Agent can do things like interview people who may be witnesses in the case. There may be lots of search warrants obtained to gather documents, digital information, property, and more. Surveillance happens now. Subpoenas are presented to financial institutions, phone carriers, and other companies to gather proprietary information. Federal forensic analysts may be corralled here to help deconstruct all the stuff that is being gathered at this juncture.

These investigations can take weeks or months – even years. However, at some point things will reach a point where the IRS Special Agent must make the call: does this proceed to an official prosecution for criminal acts, or does the file get closed (“discontinued”)?

If the IRS-CID Special Agent (with confirmation by higher ups including several other Special Agents as well as a Case Review team) decides that there is enough evidence to support arrest and prosecution with probable conviction, then it is time for the IRS-CID Special Agent to organize everything and sent the findings along to the prosecuting attorneys who will take the case to court.

This is done in something called a “Special Agent Report.” It is filled with all the work undertaken by the Special Agent, as well as an explanation on why there is an IRS-CI recommendation for prosecution. Sometimes, this is sent to trial attorneys in the Tax Division of the Justice Department; however, most of these reports end up with the appropriate AUSA at the Office of the United States Attorney General.

What is in the IRS-CID Special Agent Report?

The IRS-CID Special Agent is given special guidance on both the process and the procedure for completing a Special Agent Report (“SAR”) as well as the specific contents that must be included pursuant to federal regulation in all SARs. For details, read: Internal Revenue Service Manual, Investigative Reports, No. 9.5.8 (May 29, 2024) (“IRS Manual”).

Its defined purpose is to be a “prosecution recommendation report” that will “…logically present the evidence that will support a recommendation for criminal prosecution.” See, IRS Manual 9.5.8.3.

The SAR should allow the reader to do three things: (1) comprehend the facts and circumstances relating to the investigation; (2) be convinced of the thoroughness and impartiality of the investigation; and (3) to reach the same conclusions and recommendations based on the facts presented. See, IRS Manual 9.5.8.3.

It consists of a format that is provided within a special program (SarGenXpress), where each witness gets an individual file and their corresponding documentary evidence is cross-referenced. Details are provided that include things like their contact information and any special designations they may have (such as the IRS Revenue Agent that referred the matter for criminal investigation). Grand jury documents are kept separately. See IRS Manual 9.5.2; 9.5.8.3.

The Special Agent is given the following specific directions in IRS Manual 9.5.8.4.1: “[e]ach investigation is different and involves a variety of facts, circumstances, and alleged violations. The essentials of a good report are fairness, accuracy, completeness, conciseness, and logical presentation. The SAR package should be free of mathematical, grammatical, punctuation, and spelling errors.”

Moreover, the SAR must follow detailed instructions insofar as:

fairness;
completeness;
accuracy;
conciseness; and
logical presentation.

This includes such detailed directives as avoiding personal pronouns in order to avoid any “appearance of opinion,” and avoiding exaggerations since they “…tend to raise doubt relating to all the evidence presented in the report.” See, IRS Manual 9.5.8.4.1 – 9.5.8.5.

Another one: “[c]arelessness in detail, errors in computations, and incorrect dates materially affect the value of a report. Judgment in the choice of words, punctuation that clarifies the meaning, and a correct application of the rules of grammar are essential to accurate reports, appendices, schedules, and exhibits. Errors in these essentials have an unfavorable effect upon the mind of the reader.”

And of special interest to the defense lawyer are the following instructions regarding the substance of an IRS-CI SAR according to IRS Manual 9.5.8.4.4:

All elements of the offense(s) recommended for prosecution should be supported by the evidence presented. Each statement of material fact in the investigative report, with the exception of statements made in the Theory of the Investigation and Conclusions and Recommendations sections, should be supported by evidence citations. These citations should be specific, including page and paragraph numbers. Statements made in the Theory of the Investigation and Conclusions and Recommendations sections should be supported by evidence cited elsewhere in the report. No unsupported statements may appear anywhere in the report.

All defenses raised by the subject and/or their representative should be refuted, and any mitigating circumstances, exculpatory evidence, or other impediments to a prosecution recommendation should also be fully addressed. Speculation concerning potential defenses or explanations that have not been raised by the subject and/or their representative should not be included in the report.

Format of the IRS CID Special Agent Report (SAR)

These reports have to follow a special format. The SARs are to include the following:

Body of Report: • Introduction, • Recommended Charges and Prosecution Years, • Returns Filed and Statute of Limitations, • Venue, • Investigative Contact(s) with Subject(s) and/or Representative(s), • Other Pertinent Data, • Theory of the Investigation, • Books and Records and Preparation of Tax Return(s), • Elements of the Offense(s), • List of Appendices, • Disposition of Proceeds, • Relevant Conduct, • Current Lifestyle/Recent and Post-Offense Factors, • Explanations and/or Defenses of Subject, • Conclusions and Recommendations; List of Witnesses and Exhibits; Appendices; and Exhibits.

See, IRS Manual 9.5.8.6.1.

Within this format, there will be things such as details within the section entitled “Theory of the Investigation,” that have to provide the following, with the caveat that all statements made in the theory of the investigation should be supported by evidence cited elsewhere in the report. No unsupported statements may appear anywhere in the report:

Method of Violation: • State what the evidence will show. • State how the violation was accomplished by the subject(s). • State how the violation will be proven.
Method of Proof: • State the method of proof used (i.e., Specific Item, Net Worth, Bank Deposits, Expenditures, etc.). • If an indirect method of proof was used, explain why.
Method of Accounting: • State the method of accounting used (i.e., cash, accrual, completed contract, or hybrid, if applicable). • Provide the basis for using the method selected.
Source of Investigation: • State the source of the investigation. • Do not exhibit referrals.
Culpability of Spouse: • Explain any participation or culpability of the subject’s spouse, if applicable.

See, IRS Manual 9.5.8.6.3.3.

What is the Summary of Investigation Report (“SOI”)?

The Summary of Investigation report is similar to the SAR. It is also a prosecution recommendation report compiled by the IRS-CI Special Agent. It must likewise follow the mandates of the IRS Manual.

The SOI involves “non-tax grand jury investigations including non-tax grand jury plea agreement cases.” All SOI reports provide (1) a list of witnesses; (2) a list of exhibits; and (3) appendices with reference cites. There can also be summaries of witness testimony and all the documents involved. See IRS Manual 9.5.8.3.

The SOI format must have the following: Body of Report; Recommended Charges and Prosecution Years; Theory of the Investigation; Elements of the Offense(s); List of Witnesses and Exhibits; Appendices; and Exhibits. See IRS Manual 9.5.8.8.

The Discontinued Investigation Report

There are occasions where the IRS-CI Special Agent works to find evidence of criminal malfeasance and is unsuccessful. In these situations, the Special Agent will recommend that the criminal investigation end (“be discontinued”).

A report is also required in these instances. These reports also have specific directions on how they are to be written and compiled. See, IRS Manual 9.5.14 and IRS Form 10273.

Getting to See the Special Agent Report or Summary of Investigation Report

Of importance to criminal defense attorneys who are representing people who are witnesses, targets, persons of interest, or suspects in the criminal matter, is the protections given to the SAR by the Internal Revenue Service as well as the Justice Department.

Obviously, all the details in this investigatory report – particularly that section “Theory of the Investigation,” will be of great interest to any federal criminal defense attorney representing someone involved in these matters. Consider the following:

The IRS Manual instructs the Special Agent to withhold the SAR as follows (links added):

The report is an official document and may not be furnished to any person outside the Internal Revenue Service without proper authorization. Both the SAR and the SOI contain tax return information and/or grand jury information and are governed by 26 USC 6103 and/or Federal Rules of Criminal Procedures Rule 6(e) (Fed. R. Crim. P. R 6(e)).

See, IRS Manual 9.5.8.3.

The Department of Justice instructions to its AUSAs may consider the SAR as unnecessary to provide to defense counsel in pretrial discovery, as well. For instance, in the past the DOJ has instructed its prosecutors that:

The following materials should never be disclosed at the time of arraignment per Rule 16 unless plainly exculpatory. 1. Grand jury transcripts, except the transcript of the defendant; 2. Witness immunity matters; 3. Witness plea bargains; 4. Witness FBI rap sheets; 5. Memoranda of witness interviews; and 6. IRS special agent reports.

Which means that the defense attorney may expect to not receive the SAR as part of the criminal discovery process unless the AUSA has determined that it contains exculpatory evidence (at least until defense motions are filed).

Defense Considerations with IRS-CI SARs and SOIs

Understanding the complexities of the IRS Criminal Investigation Division and the workings of their Special Agents is just one component of the criminal defense lawyer’s job. Clients may face possible criminal charges involving things like felony tax evasion or tax fraud alongside serious federal crimes including money laundering, fraud (bank, mail, wire), trafficking and more.

See:

Texas criminal defense lawyers, for example, understand that individuals or businesses may be the focus of state or federal law enforcement for things like trafficking fentanyl or hiding revenue from human trafficking operations while IRS Special Agents are simultaneously seeking ways to show tax evasion by either (a) the willful attempt to evade or defeat the assessment of a tax; or (b) the willful attempt to evade or defeat the payment of a tax. See, United States v. Mal, 942 F.2d 682, 686-88 (9th Cir. 1991).

Anyone who thinks they or their business operation may be under investigation by the IRS for potential tax crimes is wise to seek the support of an advocate that understands the overlap between many of these cases in joint endeavors of state and federal agencies with the IRS. Criminal tax issues are often just one component of these multi-agency efforts.

For more, read:

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For more information, check out our web resources, read Michael Lowe’s Case Results, and read his in-depth articles,” Pre-Arrest Criminal Investigations” and “Bail after Federal Arrest in Texas and The Bail Reform Act of 1984.”

Posted on August 19, 2024 by Michael Lowe , on Arrest and Indictment, InDepth Articles, Tax Crimes

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