Different Rules for the Wealthiest
LB&I is the most important office in the IRS’s — and President Biden’s — commitment to ensure billionaires and multinational corporations pay their fair share. The IRS says the amount of U.S. taxes left uncollected could exceed $600 billion per year. And the Treasury Department, the IRS’s parent agency, has estimated that wealthy people commit an outsize share of tax evasion. As of 2019, the top 1% of Americans were estimated to be responsible for 28% of the “tax gap” — defined as the difference between taxes that are owed and collected. This number added up to an estimated $163 billion annually.
LB&I is seen as an elite office within the IRS and a destination for more experienced and sophisticated agents. The office has 5,700 employees. LB&I is leading a new push to improve oversight of investment partnerships, like hedge funds and private equity firms, that alone account for trillions of dollars in income each year and are known to operate in gray areas of tax law to provide substantial benefits to their investors.
LB&I agents who want to audit such elite taxpayers effectively have a difficult job. They not only must be excellent accountants but also must have knowledge of arcane corners of tax law, investigative skills and experience in financial forensics. Caseloads are often heavy, and incentives can tilt toward closing audits quickly. When agents find evidence of serious cheating, the easier win is to nudge a taxpayer to pay the government its owed tax rather than attempt to add on civil or criminal penalties. A 2019 report by the IRS’s inspector general examined dozens of cases where LB&I officials declined to impose civil penalty fees on taxpayers who had underpaid the agency by more than $10,000. Even when auditors find an egregious case, they may decide against crafting a criminal referral — known internally as a fraud referral — which can add significant time to an audit for an uncertain future payoff.
Welu and other current and former agents argue that this has been happening more than it should. The office, agents say, has established a soft playbook around reporting possible crimes that gives high-end taxpayers confidence that, if they’re audited, the highest cost of getting caught cheating will amount to little more than paying the taxes they owed in the first place. Although federal agents frequently deal with a degree of confrontation, it’s often discouraged at LB&I by timid managers and gun-shy attorneys, according to current and former agents.
Michael Welu holds an IRS-branded mug and wears a custom IRS ring he had made after his retirement. Image: Stephen Mally / ICIJ
Obtaining information about income, deductions and money movements is crucial for building a tax case. Although IRS agents have the power to send legally binding demands for information — known as summonses — LB&I agents issue comparatively few of them, instead relying more on information requests that do not carry the force of law, according to current and former agents. Unlike with these softer requests, a taxpayer who ignores a summons can be criminally prosecuted. A half-dozen current and former IRS agents told ICIJ that LB&I agents can go their whole careers without sending a summons.
An agent within LB&I, who spoke on the condition of anonymity, described an office culture averse to summonses. He said that as a new agent wanting to take a more forceful posture toward suspected tax cheats, he found little help. “When I asked around about how to craft a summons, no one was familiar with it,” he said. “I was asking experienced agents who had been there for a while and it was something they hadn’t done.”
The agent said managers within LB&I appear to fear that issuing a summons would upset the esteemed lawyers and accountants representing the country’s wealthiest taxpayers.
In one publicly reported instance, an auditor in LB&I’s Global High Wealth unit who merely mentioned the possibility of a summons while auditing a billionaire was forced to apologize after the billionaire’s representatives complained to the IRS, according to ProPublica.
Welu says the reluctance to issue summonses generally came from the higher levels of management. Welu would attempt to overcome this resistance by preparing a united front of lower-level attorneys to support taking steps like sending a summons for bank records or compelling a taxpayer to be interviewed by agents, he says.
“It’s standard practice in Small Business [and Self-Employed Division], and they don’t think twice about it,” Welu told ICIJ. “But in LB&I, oh my god, I’d have to round up a coalition of support. I’d have to pave the road.”
ICIJ found that LB&I’s written rules impose layers of restrictions on issuing summonses, compared with the Small Business and Self-Employed Division.
Other people don’t get those protections … It’s only large corporations and the wealthiest individuals.— Nina Olson, former IRS national taxpayer advocate
These extra steps for LB&I agents include sending two warnings to taxpayers who have not complied with a voluntary information request before sending a summons, according to agents and an ICIJ examination of the IRS handbook. LB&I auditors are also required to, at the outset of an audit, share an audit plan with taxpayers, allow them to suggest changes to the impending audit, and request they sign the plan.
Nina Olson, former IRS taxpayer advocate and now executive director at the Center for Taxpayer Rights, speaks during a Senate Finance Subcommittee hearing in Washington, D.C., in 2021. Image: Sarah Silbiger/Bloomberg via Getty Images
Nina Olson, who served for 18 years as the IRS’s national taxpayer advocate, tasked with ensuring the fair treatment of taxpayers, says that LB&I’s audit steps provide powerful actors with more information earlier that they can use to defend themselves. “LB&I has a bespoke audit process,” Olson, who left the IRS in 2019, told ICIJ. “With LB&I, you get a custom-made suit. With the Small Business and Self-Employed Division, you get it off the rack whether it fits you or not.”
While at the IRS Olson tried unsuccessfully to get the small business division to adopt the extra steps taken in LB&I audits, which she says provides taxpayers a greater level of transparency and due process.
“Other people don’t get those protections,” Olson said. “It’s only large corporations and the wealthiest individuals.”
An Ingrained Culture
One of the most recent examples of the U.S. government at least attempting to pursue a multinational corporation for alleged tax crimes was a major investigation into manufacturing giant Caterpillar, which used aggressive offshore maneuvers to avoid hundreds of millions of dollars in taxes. In 2017, federal agents, including IRS criminal investigators, raided three Caterpillar facilities in Illinois. But the following year, the criminal investigation was abruptly halted amid circumstances now under investigation by two Democratic U.S. senators. The senators are seeking information on possible political interference in the investigation by lawyers hired by Caterpillar, which included William Barr, who served as President George H.W. Bush’s attorney general and would later hold the same post under President Donald Trump.
LB&I did refer Caterpillar to IRS criminal investigators, but it did so only after the Criminal Investigation Division notified LB&I that it had opened its own inquiry into the corporation’s possible tax dodges, according to two longtime IRS agents familiar with the case.
U.S. Internal Revenue Service special agents enter the Caterpillar Inc. headquarters in Peoria, Illinois, U.S., in March 2017. Image: Daniel Acker/Bloomberg via Getty Images
“It’s Caterpillar — LB&I had been auditing them forever. How could they have missed these issues?” a supervisory agent within the Criminal Investigation Division told ICIJ on the condition of anonymity. “It was just an instance of CYA,” the agent said of LB&I’s referral, using the acronym for “cover your ass.”
In statements to ICIJ, the agency defended LB&I, emphasizing that its cases are extremely complex and said that “there are major differences between a large international corporation and any other for-profit enterprise.”
“The accounting profession operates under a professional code of conduct as well as under the purview of oversight review boards outside of the IRS related to the preparation of certified audited financial statements,” IRS spokesperson Robyn Walker told ICIJ in a written statement. “These internal controls and checks and balances generally limit the opportunity for criminal activity. Instead, noncompliance for this population often presents itself in the form of disputes between the IRS and the taxpayers as to whether a taxpayer’s position is consistent with laws and regulations.”
A key part of the IRS’s mission is to enforce U.S. tax laws. Tax crime investigations and prosecutions allow the agency to show that cheating carries consequences — and thus persuade taxpayers to voluntarily comply with the law.
ICIJ reviewed data showing small numbers of cases that LB&I flags as potential crimes to investigate. Last year, the office flagged just seven instances of possible crimes to investigate further — the most since 2017, when it flagged eight.
Those are ridiculous numbers … In my experience, it’s an ingrained culture where they don’t like to serve summonses.— former IRS agent Don Fort
That’s seven cases of possible crimes among all of the large corporations and ultrawealthy people that the office oversees. Last year, Fortune 500 companies brought in $18 trillion in combined revenue, and trillions of dollars more flowed through the investment partnerships favored by the ultrawealthy.
The low number of referrals from LB&I has left investigators in the agency’s criminal division frustrated.
Former IRS criminal investigation chief Don Fort. Image: Andrew Harrer/Bloomberg via Getty Images
“Those are ridiculous numbers,” Don Fort, a longtime IRS agent who led the Criminal Investigation Division before leaving in 2020, told ICIJ of LB&I’s referrals. “In my experience, it’s an ingrained culture where they don’t like to serve summonses, they don’t like to do fraud referrals.”
The sources of investigations opened by the IRS’s criminal investigators between 2014 and 2020 illustrate the small role LB&I plays in the agency’s criminal cases. During that period, according to the referrals data reviewed by ICIJ, LB&I sent criminal investigators no more than 40 fraud referrals. In comparison, according to a separate dataset, the IRS opened roughly 260 times as many criminal investigations from information it received from federal agencies outside the IRS, including federal prosecutors. The agency opened nine times as many criminal investigations from reading news stories.
ICIJ acquired this additional data regarding the sources of criminal investigations from Robert Warren, a former IRS agent and assistant professor of accounting at Radford University in Virginia. Warren says that over the past 13 years, IRS criminal investigators have spent only a fraction of their time pursuing cases primarily related to tax crimes. Instead the investigators frequently chase cases such as drug crimes, cryptocurrency schemes and money laundering. Warren says this is a distraction from the agency’s core mission. Many IRS criminal investigators are uninterested in chasing tax crimes due to a perceived reluctance of prosecutors to issue indictments and the generally light punishments that tax convictions often fetch, he says.
“If they can put in the same amount of work on a case that gets a higher rate of return, they’re going to go with the higher rate of return,” Warren told ICIJ.
In 2020, then-IRS Commissioner Charles Rettig oversaw the establishment of the Office of Fraud Enforcement, which helps the civil divisions develop tax fraud cases. Rettig told ICIJ that when he arrived at the agency, he was shocked to discover only 7% of the IRS’s criminal investigations had come from the civil divisions, which include LB&I. “To me, the civil side isn’t doing their job if they’re out there and” can’t detect possible tax crimes, Rettig said.
Olson, the former IRS taxpayer advocate, expressed concern about where the fraud enforcement office fell in the IRS’s organizational chart: within the Small Business and Self-Employed Division. She worries that this may send the message that the IRS is more interested in finding crimes among less powerful taxpayers. “It should be a separate operational unit,” Olson told ICIJ.
Damon Rowe, a career IRS criminal investigator who ran the fraud enforcement office until retiring from the agency in 2022, disagreed, saying the office’s place did not bias it in favor of any one division.
Rowe told ICIJ that while the office saw plenty of potential criminal cases coming from the small business division, he sensed a cultural aversion within LB&I to flagging possible crimes among corporations and the ultrawealthy. His inability to meaningfully lift LB&I’s criminal referral numbers remains a major regret from his time running the fraud enforcement office, he says.
“I get that these cases are hard, but that doesn’t mean that they shouldn’t try,” Rowe said. “If LB&I believes there’s an infraction, they’re more willing to work it out with the taxpayer rather than call over a fraud enforcement agent to take a look.”
The Treasury Department’s Inspector General for Tax Administration has apparently taken notice of LB&I’s differing approach. The watchdog opened an investigation in 2022 to determine whether the division gives large corporations preferential treatment, according to sources familiar with the inquiry.
In an email, the inspector general told ICIJ that inquiry is ongoing and that its report on matter should be released by end fiscal year office did not elaborate further.
