Criminal Tax Enforcement – What to Look For in 2024

Foley Hoag LLP - White Collar Law & Investigations

This is the third in our 2024 Year in Preview series examining important trends in white collar law and investigations in the coming year. We will be posting further installments in the series throughout the next several weeks. Our previous post, "Massachusetts’ New Attorney General – A Look Back and a Look Ahead at the Year Ahead," can be found here.

IRS enforcement activity remained strong in 2023, with the volume of investigations and prosecutions initiated holding steady from 2022. Despite the substantial funding boost provided by the Inflation Reduction Act, with some $79.6 billion flowing to the IRS over the next 10 years—much earmarked for enforcement—enforcement staffing is still historically low. For example, while overall staffing at IRS Criminal Investigation (“IRS-CI”) has increased modestly over the past two years (up 4% over 2022), it remains nearly 22% lower than the staffing levels of 2010 (see recent IRS annual Data Books, and IRS-CI Annual Reports). So while we may fairly expect to see a further staffing bump in 2024, any further effects translating this into enhanced enforcement may take longer yet to materialize. 

According to the IRS-CI’s 2023 Annual Report (“2023 Annual Report”), the agency continues to dedicate its resources primarily to tax investigations (69.9% of agent time), in accord with IRS-CI’s status as the only federal law enforcement agency with jurisdiction to investigate federal tax crimes. Among other areas commanding attention, narcotics-related investigations stand out with 11.3% of investigative time, demonstrating the broad scope of financial crimes handled by the agency and the high priority placed on narcotics across the federal law enforcement landscape. 

Several trends emerge from review of the 2023 Annual Report and the enforcement actions highlighted by the agency.

National Security
IRS-CI has a prominent role in national security initiatives, including sanctions-related initiatives that have carried over from our preview of 2023 trends. In a separate announcement from May 2023, IRS-CI announced it then had 23 sanctions-related investigations ongoing. 

Task Force KleptoCapture continues to target Russian oligarchs and other high-priority sanctions evaders. IRS-CI has also provided blockchain-analysis training and tools to Ukrainian law enforcement.

And clearly mindful of attention towards the ongoing conflict in Gaza, IRS-CI specifically called out “past disruptions of terrorist organizations like Hamas,” without noting any specific ongoing Hamas-related investigations. This suggests IRS-CI may be scrutinizing the region for opportunities to become involved.

Energy-Credit Abuses
IRS-CI has focused on various fuel credits in 2023. First, it highlighted the Fuel Tax Credit (FTC), a longstanding credit intended for off-highway businesses and farms, as a frequent vehicle for unscrupulous promotion of tax refunds to individuals via inapplicable credits. IRS-CI noted a “significant” increase in individual returns claiming the FTC and a corresponding uptick in FTC-related investigations implicating $164 million in potentially fraudulent credits. 

While the FTC has been part of the tax code for decades, investigations into abuse of such credits have expanded to include renewable energy credits, such as in the prosecution of five individuals in connection with a $1 billion biofuel conspiracy centered on Utah biodiesel company Washakie Renewable Energy—touted by the agency as one of the largest fraud schemes in U.S. history.

Demonstrating focus on the energy space, IRS-CI also investigated a scheme seeking to defraud a tax-free renewable-energy grant program funded through the American Recovery and Reinvestment Act of 2009. 

Looking ahead, the 2021 Bipartisan Infrastructure Law and the Inflation Reduction Act, cornerstones of President Biden’s legislative agenda to date, have earmarked $97 billion in funding for the Department of Energy in part to establish and expand similar renewable-energy grant programs. Participants in such grant programs should be keenly aware of IRS scrutiny of their grant submissions and the potential for IRS-CI enforcement, even beyond the traditional scope of “tax” investigations. 

Darknet and Cybercrime
While the IRS has long been involved in investigating financial cybercrime, several initiatives this year highlight the growing resources dedicated to this expertise. IRS-CI highlighted the continuing emphasis on investigations involving digital assets, leveraging partnerships with the private sector to investigate techniques such as chain-hopping and token swapping. 

This cyber expertise can be particularly important in the cutting edge of enforcement against darknet marketplaces, which IRS-CI has recognized in organizing existing resources to support a Cyber-Organized Crime Drug Enforcement Task Force (Cyber-OCDETF) to focus on investigations involving the darknet and virtual currencies. 

Additionally, IRS-CI and partners from another task force (the Joint Criminal Opioid and Darknet Enforcement task force) announced a major takedown in Operation SpecTor, resulting in 288 arrests (and seizure of substantial amounts of narcotics and firearms) relating to alleged crimes involving cryptocurrency and darknet marketplaces. Coordinated takedowns of this nature require substantial collaboration across enforcement agencies and thus serve as a public pronouncement of the investigating agencies’ priorities.

In June 2023, IRS-CI announced a pilot program in which it is sending four IRS-CI agent “cyber attachés” around the globe to collaborate with local law enforcement in Australia, South America (specifically, Bogota, Colombia), Asia (Singapore), and Europe (Frankfurt, Germany). These long-term assignments supplement IRS-CI’s existing 11 foreign attaché postings around the globe. 

Again in June 2023, IRS-CI also joined with other federal agencies to launch the Darknet Marketplace and Digital Currency Crimes Task Force. The proliferation of these task forces highlights the increasing emphasis on cross-agency collaboration, particularly when operating in complex and cutting-edge subject areas.

COVID-19 Relief Programs
Among the individual enforcement actions called out by the 2023 Annual Report, frauds implicating various COVID-19 relief—whether through the CARES Act, Paycheck Protection Program, or relief programs for business or individuals—remain a standout contributor to the bottom-line case statistics and show no signs of slowing down. While the names of the government programs may change, one thing remains constant: whenever a government program broadly disburses new funds or credits to the public, IRS-CI will play a prominent role in closely scrutinizing associated filings for low-hanging fruit. 

Syndicated Conservation Easements
Intended as a charitable tax deduction to promote the conservation of open land, conservation easements—and particularly the “syndicated” variety involving multiple investors in a pass-through entity that purchases a single plot of land to be conserved—have recently been in IRS-CI’s crosshairs as a vehicle for purportedly fraudulent tax shelters. In addition to pushing Congress for reform of this credit, the IRS has brought significant enforcement actions in this space, including the noteworthy case against Jack Fisher and his associates. As highlighted in the 2023 Annual Report, Fisher was found guilty in September 2023 of running a scheme in which he and his associates backdated investor buy-ins, and allegedly inflated the value of easements so that high net worth investors could claim unmerited deductions. 

The government alleged that Fisher conspired with his CPA, attorney, and land-appraiser co-defendants to sell stakes in landholding entities to wealthy investors, with the subject land being appraised in some cases for more than 10 times what Fisher’s companies had paid for it. After taking in investors, sometimes after the close of the tax year, the entities donated conservation easements on the land. Given the appraised values, the investors were able to claim substantial tax deductions above their cash investments. Following a lengthy trial, the jury convicted Fisher and an attorney co-defendant, James Sinnott. In January 2024, Fisher was sentenced to 25 years in prison for his role in leading the scheme to sell over $1.3 billion in fraudulent deductions, while Sinnott was sentenced to 23 years. Importantly, beyond the inflated-appraisal conduct, Fisher and Sinnott were both implicated in more traditional fraudulent conduct to support the scheme, including through backdating documents for submission to the IRS. 

Notably, one of the appraisers who had worked with Fisher, Clayton Weibel, was acquitted. One lesson from this split verdict may be that a high appraisal ratio and the argument that deductions were “too good to be true” will not alone carry the day for the government in a criminal case where its burden includes proving a mens rea requirement, while the presence of more traditionally fraudulent conduct may make for a stronger case to a jury. Nonetheless, practitioners in this space should proceed with caution, as the two convictions and eight guilty pleas obtained in connection with Fisher’s scheme—including two post-trial pleas in January 2024—may embolden the Department of Justice and IRS-CI to continue to bring such cases in the criminal system, despite the Weibel acquittal. 

Regardless of the specific impact of the Fisher case, though, the existing syndicated conservation easement regime is nearing its end. Long a target of the IRS, syndicated conservation easements have been legal for many years. But as part of the federal omnibus spending legislation enacted in late 2022, Congress passed a provision that limits deductions for investors in syndicated conservation easements to 2.5 times their investment. This apparent compromise permits some legitimate investment in promoting conservation while attempting to curtail the disproportionate returns offered by abusive tax shelters. Charles Rettig, IRS Commissioner until November 2023, characterized the deduction cap as “critical to the ongoing efforts of the IRS to stem the tide of abusive syndicated conservation easements.” The legislation gives the IRS a new enforcement tool, as it has promised to “ensur[e] compliance with the conservation easement deduction law as amended . . . and will continue to scrutinize transactions that are ‘too good to be true.’” The IRS is now working on operationalizing this new tool, as in November 2023 the agency announced proposed implementing regulations that include explanations, definitions, and guidance on statutory exceptions and calculation methods. Time will tell if the new limit on profit has the impact the IRS sought on only the truly fraudulent schemes, or whether it will prove a heavy-handed response that chills legitimate conservation. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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