CI pursues financial crimes like money laundering, terrorist financing, cybercrimes, and sanctions evasion—including investigating and seizing assets of Russian elites
FS-2022-18, March 2022
Introduction
IRS Criminal Investigation (CI) serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law. It is the only federal law enforcement agency authorized to investigate federal criminal tax violations and pursues related financial crimes, such as money laundering, currency violations, and terrorist financing. These efforts are increasingly important given emerging threats in the global financial landscape.
General tax fraud investigations are at the core of CI’s law enforcement efforts—for example, agents expend substantial energy unpacking domestic and offshore tax avoidance strategies that are facilitated through trust and partnership arrangements. CI also investigates money laundering by criminals and criminal organizations, corruption, and broader non-tax related fraud cases. CI has the authority to seize assets that are involved in money laundering or other unlawful activities, and it is the largest law enforcement division of Treasury with this capacity.
In recent years, CI has significantly expanded its presence in areas of emerging importance. Since 2015, it has built up a world-class cybercrimes program to address the exponential growth of cybercrimes impacting the tax, financial, and economic systems of the U.S. This group successfully seized more than $3.5 billion of illicit cryptocurrency in fiscal year 2021, and they have already seized more than this amount in fiscal year 2022.
Alongside investigating cybercriminals, CI has recently been called upon to provide its unique expertise to assist with interagency efforts to enforce sanctions related to Russia’s invasion of Ukraine, as called for in the related Kleptocapture Task Force announced by the Department of Justice. Working with law enforcement entities across government, the IRS is already in the process of investigating Russian oligarchs and those who facilitate the illegal movement of money or assets on their behalf.
CI has experience on these dimensions: Since 2017, the IRS has been involved in more than 20 investigations directly related to illicit money laundering by oligarchs, which involved restitution of hundreds of millions of dollars paid, as well as the seizures of properties in conjunction with fellow law enforcement agencies. Typically, these investigations require IRS-CI to follow complex asset trails—any time assets are routed through United States financial systems, CI Special Agents can trace them, and they have the ability to deanonymize otherwise anonymous transactions.
CI cyber agents have also previously been engaged in the review and investigative efforts involving cryptocurrency transactions associated with Russian-based entities for the past several months. The project, known as Sanction Evaders, is looking at blockchain transactional information associated with sanctioned countries.
Given its sizable—and growing—responsibilities, it is important to highlight that today the IRS lacks the resources it needs to fully support these efforts. Since 2010, the overall IRS budget has fallen by nearly 20 percent, resulting in a significant decrease in the agency’s enforcement functions. This impacts compliance directly and indirectly: Rather than serving as a deterrent, a more limited IRS presence serves as an incentive to ignore compliance responsibilities, from both a civil and criminal perspective.
For CI in particular, since 2010, the number of employees has fallen by approximately 25 percent, from 4,017 in 2010 to under 3,000 today. This at a time when investigations are getting more complex, as highly sophisticated criminals are turning to new and hard-to-detect ways to hide illicit gains from our sight.
Many of those who chose to challenge the IRS and IRS-CI have been surprised. In fact, IRS-CI has had substantial success over the course of the last several years despite being significantly under-funded. Last year, IRS-CI identified $10.4 billion from tax fraud and financial crimes and likely deterred at least an equivalent amount of such behavior, with a budget of just over $600 million. That is a direct return of more than 16:1. But this substantially understates the immensely valuable work that CI does, because having a significant IRS presence deters criminals from malfeasance.
With additional resources, CI will be able to do much more. The IRS’s efforts in this space are imperative to helping CI target oligarchs and those who facilitate hiding their assets. More broadly, a well-funded investigations unit is critical to ensuring that the IRS has a workforce that is able to pursue the illicit behavior of highly sophisticated criminals who reap billions and billions of dollars of profits annually through complex financial crimes.
- A snapshot of recent IRS CI work
The types of criminals pursued by IRS-CI already this year are illustrative of the breadth and importance of their efforts, as well as the sophistication of the enterprises that they work to disentangle, which are set up to ensure that the illicit behavior of wealthy criminals remains unaddressed. The following information is obtained from publicly available documents.
Russian bank founder sentenced for evading taxes
In 2013, when the value of Oleg Tinkov’s investment in his Russian bank’s stock rose to over $1 billion, he quickly renounced his U.S. citizenship and substantially understated his wealth on tax filings with the IRS to avoid exit taxes. Expatriation law requires that those with a net worth of more than $2 million pay taxes on their assets as if they were sold on the day before expatriation, but despite the value of his post-Initial Public Offering assets rising to above $1.1 billion, Tinkov claimed he did not have assets above $2 million. In addition, he did not report any gain from the constructive sale of his property worth more than $1.1 billion, causing a tax loss of nearly $250 million. A year after his expatriation, Tinkov was the 15th richest oligarch in Russia, with an estimated net worth of over $8 billion.
Tinkov was indicted in September of 2019 for willfully filing false tax returns following an investigation by CI agents, and he was arrested in February 2020. As part of his restitution, Oleg Tinkov paid $508,936,184, which is more than double the amount he sought to escape paying to the U.S. Treasury through renouncing his U.S. citizenship and concealing from the IRS large stock gains, which he knew were reportable. This payment includes $248,525,339 in taxes, statutory interest on that tax, and a nearly $100 million fraud penalty.
$1.3 billion tax shelter scheme
IRS-CI’s primary resource commitment involves the investigation of tax crimes, which constitute over 70% of investigative time by CI agents. Resources are especially focused on unpacking complex structures that facilitate abusive tax schemes by wealthy individuals and corporations.
To take a recent example, in February 2022, a grand jury returned an indictment of seven individuals with conspiracy to defraud the United States and other crimes because of their promotion of fraudulent tax shelters involving syndicated conservation easements for at least two decades. The co-conspirators allegedly guaranteed a 4-to-1 tax deduction ratio to their clients and invoked various schemes to value easements as necessary to deliver the ratio promised. The indictment charged that these were abusive tax shelters lacking in economic substance and further contended that the defendants helped clients claim illicit charitable deductions after the conclusion of tax years through backdating documents. In total, the defendants allegedly sold over $1.3 billion in false and fraudulent tax deductions through their crimes.
Over the course of a four-year investigation, IRS-CI agents dedicated thousands of hours to unpacking the schemes these perpetrators allegedly facilitated to help their wealthy clients skirt tax obligations. These kinds of investigations involve incredibly complicated work for the CI team, as the tax shelters are often intentionally designed to impede the ability of the IRS to detect their fraudulent nature, including through appraisals that overinflate land values and fake votes among participants meant to create the illusion that the transactions are legitimate real estate investment opportunities and not abusive tax shelters. With additional resources and investigative support, IRS-CI could reduce the investigative time and ensure that criminals are held accountable quicker.
$3.6 billion of stolen cryptocurrency seized in FY 2021, a total already surpassed in FY 2022
Over the last several years, CI has observed significant growth in the number of criminals using the cyber environment for fraud and illicit transactions. This criminality is made possible by an underlying technological ecosystem that facilitates remaining anonymous and eluding law enforcement while concealing financial transactions, ownership of assets, or other evidence. The possibility that these technologies will be deployed to facilitate sanctions evasion is also top-of-mind for CI investigators at present.
In order to navigate this landscape, CI must deploy sophisticated blockchain analysis tools to unweave darknet transactions. For example, following the prosecution of Silk Road creator Ross Ulbricht in 2015 for several criminal counts, CI agents were tasked with the persistent investigation of stolen funds from this and other dark net marketplaces. As a result of their determined and resolute action, CI agents seized approximately $1 billion of Bitcoin in 2020. Finding these funds required the efforts of several CI agents and contractors, including the use of third-party analytic tools to trace assets to individuals who had hacked Silk Road to pocket illicit gains.
Even more recently, in February of this year, two individuals were arrested for laundering cryptocurrency stolen during a 2016 hack of a digital asset exchange. Thus far, $3.6 billion has been seized by CI agents who managed to track unauthorized transactions that sent stolen Bitcoin from this hack to digital wallets under the control of the launderers. The defendants allegedly employed numerous complex techniques to hide these funds, including automating transactions to quickly move funds and then deposit them into a variety of currency exchanges and darknet markets and withdrawing funds to break the chain of transactions and impeded detection.
Despite this complexity, today CI currently devotes only about six percent of its investigative time to cybercrimes/crypto currency, so it is just scratching the surface of the amount of criminal activity that is being detected.
Budget picture IRS-CI has made remarkable progress in the last several years due to the commitment of extremely talented and dedicated agents. But it has done so without the resources in place to support its efforts. Since 2010, the CI workforce has decreased in size by approximately 25 percent, as the CI budget has only been able to accommodate reduced staffing levels as we are required to pay for labor budget increases (pay raises, benefit increases, etc.) by not backfilling attrition. Figure 1: IRS CI staffing over time
The bleak budget picture has had a material impact on the ability of the CI team to pursue enforcement actions. At the end of this fiscal year, CI expects to have fewer than 3,000 employees. In order to meet its investigative needs, CI needs to grow by more than 40 percent by hiring at least 2,500 additional employees in the next five years (net gain of 1,300 after attrition). Building up the CI workforce along these dimensions would enable CI to reach its target level of criminal tax prosecution recommendations (around 1,600 per year), which would impact voluntary compliance substantially as it would deter sophisticated actors from complicated tax fraud and money laundering schemes, knowing that a larger and stronger investigative team stands ready to pursue misdeeds.
The table below provides a breakdown of the hiring needs of the CI unit. Note that these include only the employees associated with investigations and supporting staff and not additional needs for IT and data support. IT needs include securing licenses for data access for high-risk frontier and emerging markets, which today are substantially lacking. As one example, IRS CI today has only five agents who can access Sayari, a tool that allows for access to local government databases across the world in dozens of languages and jurisdictions and will help to identify Russian-based actors who attempt to illegally evade sanctions and facilitate financial movement of funds.
|
|
FY23
|
FY24
|
FY25
|
FY26
|
FY27
|
NET GAIN FY23-FY27
|
|
|
|
|
TOTAL Starting On-Rolls:
|
2,995
|
3,295
|
3,575
|
3,835
|
4,078
|
|
|
Special Agents
|
2,197
|
2,429
|
2,648
|
2,854
|
3,048
|
|
|
Less: 5.82% Attrition*
|
128
|
141
|
154
|
166
|
177
|
|
|
Add: Hiring
|
360
|
360
|
360
|
360
|
360
|
|
|
Special Agent Total:
|
2,429
|
2,648
|
2,854
|
3,048
|
3,230
|
1,033
|
|
Professional Staff
|
798
|
866
|
927
|
982
|
1,031
|
|
|
Less: 10.29% Attrition*
|
82
|
89
|
95
|
101
|
106
|
|
|
Add: Hiring
|
150
|
150
|
150
|
150
|
150
|
|
|
Professional Staff Total:
|
866
|
927
|
982
|
1,031
|
1,075
|
276
|
|
TOTAL Ending On-Rolls:
|
3,295
|
3,575
|
3,835
|
4,078
|
4,305
|
1,310
|
|
* Based on a 10-year attrition average
|
|
|
|
Maintains a professional staff to SA ratio of 30%
|
|
|
Table 1: Workforce needs for CI
Return on CI investments
Even before deterrent effects are factored in, historical analysis makes clear than at an average in $1.8 million annually in tax deficiency is identified by IRS-CI per special agent, such that the ratio of tax deficiency to labor cost is 8:1. These estimates do not consider revenue from non-tax investigations. To get a rough sense of magnitudes, consider that IRS-CI last year identified $10.4 billion from tax fraud and financial crimes, with a budget of just $636 million. That is more than a 16:1 return. Additional resources to the IRS will thus produce very significant direct gains in that more agents means fewer dollars in the hands of criminals. Beyond illicit proceeds identified, CI agents successfully worked to convict more than 1,200 sophisticated financial criminals.
IRS-CI agents have unparalleled experience in tracking how financial assets change hands and deploy state-of-the-art investigative tactics to tracing criminal behavior. Given this expertise, it is no surprise that CI has been called on to dedicate resources to the Kleptocapture task force convened to hold Russian oligarchs accountable for potential schemes to evade sanctions or launder money. These efforts fit in to CI’s broader objectives of persecuting wealthy tax evaders and financial criminals who deploy sophisticated techniques to reap billions in illicit gains each year.
Given the magnitude of the challenge it faces, it is imperative for CI to be adequately funded to investigate and prosecute criminals. Today, it is not—the workforce of CI has shrunk by 25% over the course of the last decade, which is consistent with diminishing resources across the agency that have impeded the IRS’ ability to serve American taxpayers and enforce the law. CI, like the rest of the IRS, is in desperate need of stable, long-term funding to develop a deeper understanding of the global financial landscape and trace and seize assets that today are in the hands of criminals. This is work that the IRS is well-equipped to do—once it has the resources to do it.
