Exit Interview With IRS Criminal Investigation Chief
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: chatting with the chief. Don Fort has been with the IRS Criminal Investigation division since 1991. He started as a special agent in Baltimore and worked his way up the ranks becoming head of the division in June of 2017. And now, at the end of September, he'll be retiring from the IRS. Tax Notes legal reporter Nathan Richman had a chance to speak with him before his retirement. Nate, welcome back to the podcast.
Nathan Richman: Thanks for having me.
David Stewart: Now I mentioned at the opening that Don Fort is the head of the IRS Criminal Investigation division. What does he do in that role?
Nathan Richman: Well, that means that Don is in charge of the IRS special agents who investigate tax and other financial crimes. Not to put too fine a point on it, but the Criminal Investigation division is rather appropriately named.
David Stewart: And Don's last day is the end of September. Is there any news on who will be replacing him?
Nathan Richman: Deputy Chief Jim Lee will be taking over as chief on the 1st of October, and James Robnett will then become the new deputy chief.
David Stewart: All right. Tell me a little bit about what you and Don talked about.
Nathan Richman: We discussed Don's history at CI and some of the initiatives CI has implemented during his tenure as chief. For example, we discussed the Nationally Coordinated Investigations Unit, the NCIU, a group at CI that uses data analytics to find potential cases and ensure major issues are covered throughout the country. We also discussed the Joint Chiefs of Global Tax Enforcement, the J5, a collaboration between the tax enforcement heads of the U.S., Canada, the Netherlands, the U.K., and Australia that mostly involves the top echelons, the line investigators, and few of the middle management officials in between.
David Stewart: All right, let's go to that interview.
Nathan Richman: Thanks for joining us, Don.
Don Fort: Yeah, good afternoon. Thanks for having me.
Nathan Richman: So, let's start off pretty simply. Just tell us about yourself. You're about to leave the IRS and CI after how many years?
Don Fort: Yeah, it's been a while. So, almost three decades. So, I started in the summer of 1991, pretty much I got the job right out of college and took a while to do the clear background and things like that, but have been at it now over 29 years. So, when I studied accounting in school, wasn't sure what I wanted to do. My father-in-law was actually a career long civil servant with the IRS and was actually the one that kind of turned me on to a recruiter at IRS CI. So, it's kind of an interesting how that worked out. He worked 37 years. And so, I started in the Baltimore field office, did most of my special agent time in Washington, D.C.
Nathan Richman: There've been several interesting changes during your tenure as chief. And I'm thinking about things like the NCIU, the J5, the changes in the identity theft wars. Let's start with the NCIU. Can you tell us about that?
Don Fort: So, we set up, had a major role in kind of the vision for the NCIU. And the overall vision was there's areas of tax noncompliance that impact every judicial district, in many cases, every zip code. Things like payroll tax fraud, employment tax fraud. There are civil and criminal cases in virtually every zip code around the country. And what we were really lacking as a mechanism to develop referrals in house in CI and send them out to field offices. So, some field offices may have gotten some broad referrals. They may have been self-developing payroll tax fraud cases. But then you have whole parts of CI field offices that didn't have any of those cases.
So, the idea was really to create a unit that could develop and supplement the case development work of field offices. We've struggled with this over the years. This is not a new challenge that we faced. And the shift that I took the NCIU was the challenges we had in the past were really, it was headquarter-centric. And headquarter sending field office leads was never successful.
The NCIU was embedded in the field under a director of field operations, which is a first-line executive for CI. I will say having been now about three years, and this started as a pilot, it was met with a lot of skepticism really by the field offices. Because most people have been around long enough and seen that we haven't been successful in deploying this model.
One of the things that I really attribute to the success of the NCIU, as I said, I was kind of the one that had the vision of this is what it's going to look like. And I think this is the thing that's going to make it successful. But it was the selection of the right personnel to stand up and really execute on the vision and we have really had a string of outstanding leaders in the NCIU. And we knew early on that the success was going to be predicated on first 10, 20, 30 referrals.
The first referrals that field offices got, if we can make those referrals so strong, there's no way that a special agent could say no to the case. And that's really what they did. They really went above and beyond in developing great fraud referrals that were sent out to field offices. And then we got tremendous feedback from agents. And then we got to the point where agents were asking for more. So, it has been really successful.
That's really kind of the cornerstone project that I think tip the NCIU over the top is the model and the algorithm we built to address employment tax fraud. And so, we partnered with, it's called RAS, the research arm within the IRS. Lot of really smart data scientists and other folks that really understand how to leverage the enormous amounts of data that we have coupled with special agents and other professional staff within CI.
And it took eight or nine months to perfect this model, but we used just data that is housed within the IRS. And we're able to identify significant areas of noncompliance in the employment tax area. I think to date, we've sent out about 100 referrals to most of our field offices dealing with employment tax. The average tax loss in those cases is close to $3 million. So, very significant cases. And like I said, it really employed that the vision of trying to get referrals out to field offices that maybe didn't have as strong of an employment tax inventory as the other offices.
And the one, you know, the way, the way we often gauge success when we're looking at a project like this, is ultimately will be indictments, information, convictions, and things like that. But it takes years to work these cases. And we're only now starting to see cases where we're sending the referrals into the Department of Justice tax division, and we'll soon see indictments and more judicial actions as time passes. They're doing fantastic work. And now, it's gone from a pilot three years ago to now being a permanent structure. And we're actually in the process of trying to figure out as a permanent structure, as part of CI, where it truly belongs and where it will continue to kind of thrive as a development and referral arm for CI.
Nathan Richman: In addition to the NCIU, is there any other way CI goes about looking for new issues for scrutiny. Is there a process for anticipating new potential problem areas?
Don Fort: Yeah. There's a number of different ways. And I think this is an area we're getting a lot better at. We're building closer relationships with our civil counterparts. Because often it is the civil examiners, whether it's a revenue officer, and it could be a revenue agent in LB&I or SB, that's conducting audits. They may see the beginnings of an issue of noncompliance. I don't have a specific example, but the connections we're trying to make within the operating divisions I think are tighter and closer than they've been certainly in my tenure. So, that's one of the ways is trying to figure out if there's an emerging area of noncompliance.
We also do the same within CI. If one particular field office is seeing an issue that is unique to them, more than likely it's already existing in another field office or it will exist soon. So, trying to get those back up. And ultimately, it's not fully built out yet, but the idea is that the NCIU would eventually have enough capacity to serve as a, at least a portion of it would be research and development. So, if they got an area that looked like it was an emerging issue, they could apply some resources to it. Do it a little bit of research. Maybe reach out to the civil side. And determine what may be out there to kind of alert the field offices in terms of what they may be seeing. So, I think there are a lot of different kind of efforts underway in addition to what's being done at the NCIU.
Nathan Richman: So, you mentioned the J5, the Joint Chiefs of Global Tax Enforcement. Can you tell us what that is?
Don Fort: This is my counterparts from the U.K., Australia, Netherlands, and Canada. And it is in November 2017, the five of us, in addition to probably a hundred other heads of tax agencies around the world, met as part of the OECD. I think it occurs usually every two years, which the head of tax crimes and there's a program for several days. And we met in London. Presentations, emerging issues, sharing best practices, and things like that. But this is really the highest levels of the organization. And there really was a call of action out of that OECD meeting for the countries to think outside the box and do more. And having built up a mutual trust and knowing the chiefs from these other countries and having there be some similarities in our tax systems and the various threats to our tax systems, we all kind of came up with this idea that we were going to try to bring that things down to a smaller level.
And the challenges with these big meetings, and they're great, but sometimes when you get the highest levels of the organization and you come up with these grand plans in terms of what you're going to do, executing those grand ideas, the ground level, is sometimes lost in translation. So, the idea was we were the five chiefs and no chief was in charge. We designed it that way on purpose. We were going to pilot this idea that we were going to be the chiefs, and then it was going to be very few individuals involved in supervision. And then the frontline investigators, agents, and employees. And cutting out many, many levels of middle management to see if we could get our countries working closer together, sharing information, best practices, ultimately working on some investigative matters that may be of interest to more than one of the J5 countries.
And I think we're — looking back on it, reflecting on it now over the last two years, because we just had our two-year anniversary. It's been way more successful at this point than I expected, but in a different way. So, I talked about how long these investigations take. An average investigation from the start, when an agent starts working it, to when it gets referred to the Department of Justice is roughly two years. As the case becomes more complicated, and if there's international issues, you typically can add another six months to a year. So, it typically would take two to three years to make a recommendation to the Department of Justice on one of these cases.
So, I think we had unrealistic expectations at the beginning that we would see a lot of investigative success in the initial years. So, there's many investigations that we have in the United States that have stemmed from work that we've done as part of the J5. But what's been more impressive is to see the relationship blossom between the frontline employees. And the sharing of ideas and sharing of technology that may be open source technology for one country that another country can utilize or — that type of level of sharing.
And we've employed some different techniques that one or more of the countries use that we've never used before. And I'm thinking in particular, we've done two challenges. One we did in the Netherlands was around technology and looking at professional enablers that may be peddling their wares to more than one J5 country. And we took investigative leads from that challenge in addition to actual computer programs being built during that challenge. It really is taking the smartest personnel from each country, giving them a task or challenge, locking them in a room, and seeing what they come up with without a lot of managerial oversight. And it has really been phenomenal to see that. And we did it recently, well not too recently now, but in November in Los Angeles. And that challenge was specifically focused at virtual currencies and cryptocurrencies. And again, we came out of that on the U.S. side with many leads that are either under investigation now or we've moved on from them.
But, it's been a really successful concept. We had a day of action not too long ago before the pandemic. So these type of innovative thinking where we're drawing on the best ideas from each country. The old school model was you have an attaché, that attaché sits in a foreign country, and there's very strict delineated rules in terms of who they communicate with. This has gotten many, many more individuals involved working together, dealing with each other on a weekly basis.
So, again, there's another one that started two years ago, really as a pilot to see if it would work out. And now, at least on the U.S. side, we're in the process of making that a permanent part of our international operations structure and part of our international strategy. But, it's gone beyond just the handful of people that were involved in the J5 initially to many, many more agents, investigators, professional staff involved in the J5 ever.
Nathan Richman: You mentioned that at least CI is starting to make this permanent. Anything else in what's next for the J5?
Don Fort: We went for the better part of two years with no turnover at the chief level. And about nine months or so ago, we all challenged each other that we were at a crossroads and trying to determine whether or not this was going to be a viable structure. And now, we're at the point that we've all determined that it is a viable structure, and we've had some turnover at the chief level. So, you've got myself, the head of the agency in the Netherlands has moved on, head of the agency in Canada has moved on. So you've got 60 percent of the chiefs within the last year that have turned over. And again, the challenge was this has to outlive the five chiefs. It has to be bigger than just the chiefs of the agency. So, all of the countries are really moving to put it in a permanent structure, apply the right resources to it, but there's a lot of outstanding work going on on the investigative side also.
Nathan Richman: Anybody considering the possibility of a J6 or a J7?
Don Fort: No, because it's still relatively early on. And we're just in the process of making the structure permanent. As something like this gets bigger, it becomes more and more unwieldy. And one of the challenges, I think we all underestimated when we started, as we look to each other, we thought we were very similar, but as you really start to dig into the details, in terms of what each agency has jurisdiction over, what the privacy laws are, what the disclosure laws are, there's a lot of differences. And each country is a little bit different. So, maneuvering through that took a lot of time and kind of sorting all that through. And I won't be here to make those decisions, but we weren't excluding anybody. There is some interest from some of the other countries. So, I think that will be one of the challenges that lie ahead for the J5, after things get settled and the new chiefs get in place becomes a permanent structure. Is there room to expand and which countries would potentially be additional partners for a J5-type effort?
Nathan Richman: Moving on to some of the inter- and intra-agency relations, what's it been like at CI since a criminal tax defense attorney took over the IRS?
Don Fort: Well, I've known Commissioner Rettig for many years, predating the beginning of his term as a commissioner of the IRS. And he was always, as a criminal defense attorney, supportive of the work that CI does even when he was on the defense side. So, he has been extremely supportive. We've been fortunate to have a number of commissioners now that have been really supportive of the work that CI does and understands that the idea that you can go to jail for a tax crime really provides that backbone of volunteer compliance and the deterrence to the overall tax system. So, he has been very supportive. I think you've probably heard him speak several times. I've probably heard him speak a hundred times. And he talks about all the operating divisions, but he also talks about CI, which has not always been the case. So, he has been really supportive.
We've been more actively involved in all IRS business. Where maybe in some years, in some decades, we weren't as involved. But he made sure when he came in that, as he says, CI always had a seat at the table. And one of the things that I'm disappointed in this year was that it was supposed to be the first year that we had put through about 10 special agent classes. So, over 200 new special agents. And obviously that came to a halt, just like everything else with the pandemic and it'll pick up next year. But that's no small feat getting that approval from the commissioner and the deputy commissioners to be able to put on that many classes of special agents. But also get the support of Department of Homeland Security and the Federal Law Enforcement Training Center to get that many new special agent classes lined up. So, like I said, that plan unfortunately fell apart this year, but we'll pick up next year with the commitment. Everything is always dependent on the budget, but a tentative commitment that hopefully there'll be 200 plus special agents trained next fiscal year.
Nathan Richman: Speaking of personnel moves, CI has had some notable people leave in the last about a year. And I don't mean just you. You've been dispersing some alumni. Where have they gone and what sorts of effects do you see those moves having for CI?
Don Fort: So, I'm sure you're referring to Eric Hylton, who was my deputy for several years, moving on to be the commissioner of SB/SE, and Damon Rowe, who was our, you know, held a number of positions with CI. The last position he held was the director of international. Incredibly proud of both of them. They had long and storied successful careers in CI, particularly Eric going from being the deputy chief to running this massive and incredibly important organization in SB/SE. So, just I'll start with just saying incredibly proud of both of them. I think it's, again, a testament to the commissioner's support of CI and kind of understanding of mixing things up and mixing some of the talent from different operating divisions into other operating divisions.
So, I think on the Damon Rowe side, setting up and standing up this new Office of Fraud Enforcement, I think time will tell. I think it's a fantastic idea. I have spoken for many years about the need for rebuilding and enhancing the fraud referral program. I have thought the first case I ever worked as a special agent was a fraud referral from a revenue agent in exam. And that's when I started. That was the way most agents started their career, which was a bread and butter legal source tax case. And for a number of reasons, probably the most significant reason is just a lack of resources to hire and bring on new revenue agents. The numbers of fraud referrals really declined drastically. And again, I believe that the best strong legal source tax cases would likely come from SB/SE, LB&I examiners, and SB collection officers because they're the ones that often see the issues first. So, I think it's a step in the right direction. I know they really hit the ground running. There's a lot of different projects going on. You asked the question about trying to deem the emerging issues and things like that. I think that now really strong relationship between some of our executives and some of the executives in that office is going to yield tremendous fruit in the coming years.
Nathan Richman: How about any other further collaborations planned? Are there may be IRS rearrangements or any thoughts of cooperative endeavors with something like the FBI or DEA? Anything like that?
Don Fort: Well, we've got a lot of the pandemic — We didn't talk about it, but there's a lot of great collaboration going on that again, thankfully, we already had really strong relationships because we were able to, very early on in the pandemic, team up with our key partners, the big partners, the FBI, DEA, HSI. In particular HSI and FBI, but also a lot of the smaller agencies. The small business and all these other little OAGs that now have a piece of the pandemic fraud. We had already established relationships. So there's a lot of great collaborative efforts that are going on around the pandemic fraud, not just in Washington, D.C., but in most field offices around the country. There's various task forces that have been set up to address fraud, and we're involved in virtually every single one of those.
Nathan Richman: Well, speaking of pandemic, how, both on the operational level and on the procedural level, how has the pandemic affected CI's work?
Don Fort: I think like everybody else, in March, we went from everybody working in an office to, you know, within the course of a week, everybody working at home. And thankfully the IRS has a really strong IT infrastructure. Everybody in CI has laptops. Within the course of literally a matter of days, everybody was set up working at home. There was no delay at all in terms of mobilizing the forces remotely. Our first concern, obviously, was the health and safety of our employees.
Then, as the economic packages went out, the concern, based on history, is as soon as a package like that goes out that's designed to help the vulnerable or the businesses that may be at risk in a situation like this when they have to close down, unfortunately the fraudsters come out of the woodwork. And so, our first endeavor was a PR endeavor to really try to get the word out to individuals and businesses that there are fraudsters out there. Watch your email. Watch your texts. You know, make sure you don't fall prey to phishing schemes and things like that. So, we did well over a hundred interviews around the country and trying to get the word out.
The next phase obviously was mobilizing the forces to address the fraud, joining up with the DOJ task forces here in D.C., teaming up with HSI and FBI and other law enforcement partners, and the various task forces that are ongoing around the country. And recognize that the job of an IRS special agent is a field job. It is not a desk job, even when there's not a pandemic. And with a level of fraud that we're seeing, and I think you're seeing now every day that goes by, there are several more significant pandemic-type frauds, whether it's a PPP or a fake mask or cure or vaccine or something like that. Many, if not, most of those cases IRS CI is involved with. And we can't take off five or six months while this fraud is going on. This is largely financial fraud.
So, we have stepped up to lead many of these investigations and task forces. And give the agents and the field offices and the leadership a tremendous amount of credit because it's still, in many parts of the country, a very dangerous environment out there. And it varies depending on where you are geographically. But having conducting interviews outside masks and coming up with a plan to actually execute and conduct investigations.
The part that made it more challenging in this situation is I couldn't just issue an edict that on such and such a day, we will go back to the office or doing investigations because every single jurisdiction is slightly different in terms of what the level of risk is. So, really the leaders in our field offices and our agents really stepped up and again, have done a great job. And now, agents are out in the field. And they have been for months. And it's more about making sure that we are accomplishing our mission as IRS CI. And it's less about where the work is physically being performed.
Nathan Richman: Well, thank you very much for your time. It's been very interesting.
Don Fort: Yes. Appreciate it. Thank you very much.
David Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?
Faye McCray: Thank you, Dave. In Tax Notes Federal, three practitioners from McDermott Will & Emery describe how to unwind domestic and foreign C corporations, either through taxable or tax-free liquidations. Donald Williamson examines the Estate of Moore case. In Tax Notes International, Torsten Fensby considers the wider implications of the G-20 adopting the OECD’s two-pillar approach to digital taxation. Three practitioners from Matheson discuss a case involving tax assessments on the sales of a pharmaceutical company’s intellectual property pending before the Irish High Court. And on the Opinions page, Robert Goulder and Nana Ama Sarfo discuss the tax development of OECD. Benjamin Willis argues that the coronavirus can be the basis for claiming the same types of economic relief that taxpayers claim for triggered losses caused by natural disasters. And now for closer look at what's new and noteworthy in our magazines, here is Tax Notes State Editor in Chief Jéanne Rauch-Zender.
Jéanne Rauch-Zender: Thank you, Faye. I'm here with Lynn Gandhi, partner and business lawyer with Foley & Lardner, LLP in Detroit, as well as the author of the Tax Notes State column, "Smitten With the Mitten." We're here to discuss her most recent piece, "The Broad Reach of Michigan’s Industrial Processing Exemption." Lynn is joining us by phone from her home in Michigan. Welcome Lynn and thank you for joining us.
Lynn Gandhi: Thank you for having me today.
Jéanne Rauch-Zender: Now, your piece is about the Michigan Supreme Court's opinion in TOMRA of North America v. Department of Treasury. Can you give our listeners an overview of your article?
Lynn Gandhi: Glad to do so. TOMRA is a manufacturer of those big fax machines you see at your grocery store that take your bottle and can returnables. And the issue in TOMRA was whether or not those machines qualified for Michigan's industrial processing exemption, which is generally a very broad exemption following an integrated plant theory.
Michigan's exemption has a temporal limitation of industrial processing being defined as once materials leave raw material storage prior to them becoming finished goods delivered to the customer. So, initially the focus of the case had focused on whether it was raw material storage, the collection of the materials, i.e. the cans and bottles, or whether processing began the moment you stuck the can or bottle into the machine. Of course, we believed that the machines qualified for the industrial processing exemption, and the Department of Treasury disputed the refund claims that had been filed. The Department's viewpoint or interpretation of the law was that these machines were prior to the commencement of industrial processing and that they did not qualify. And that's a decision provides taxpayers a greater opportunity to use the industrial processing exemption than we had previously known. Given the Michigan Supreme Court holding changing that exemptions are strictly construed against taxpayers, and instead finding that such belief was no longer an interpretation to be adopted by Michigan court.
Jéanne Rauch-Zender: Very interesting. What prompted you to write this piece?
Lynn Gandhi: Well, I have to say that this piece is a bit of an ode to my former colleague, June Summers Haas, who retired at the end of last year. And I write this piece really in honor of June, as she was the primary attorney on this matter and took the case all the way up and through a victory at the Michigan Supreme Court for her client.
Jéanne Rauch-Zender: Thank you. Where can our listeners find you online, Lynn?
Lynn Gandhi: Oh, you can find me online at firstname.lastname@example.org. As well as if you're into social media, you can check out my Instagram @TaxxGoddess.
Jéanne Rauch-Zender: Fantastic. Thank you so much for joining us today. You can find Lynn's article online at taxnotes.com. And to be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussion on what new and noteworthy in Tax Notes. Again, that's Tax Analysts with an "s."
David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at email@example.com. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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