star-1
star-2

Internal Revenue Service (IRS)

Definition

The Internal Revenue Service (IRS) is the United States federal agency responsible for administering and enforcing federal tax laws, collecting taxes, processing tax returns, and issuing guidance on tax compliance.

It operates under the United States Department of the Treasury and has a wide-ranging remit that intersects with financial crime, tax evasion, sanctions screening, data integrity, and cross-border risk management. 

Explanation

The IRS’s role is both service-oriented and enforcement-oriented.

On the service side, it provides taxpayer guidance, facilitates refunds, e-filing, and maintains databases of tax records.

On the enforcement side, it audits returns, investigates tax evasion, ensures compliance with the Internal Revenue Code, and cooperates with other federal and international agencies in matters of financial crime and cross-border tax compliance. 

In AML/CFT frameworks, the IRS is relevant because taxes are often integral to money laundering processes, for example, proceeds of crime being presented as income, use of false deductions or offshore structures to hide funds, and international transfers routing through jurisdictions with weak oversight.

The IRS’s auditing and investigative capabilities, therefore, act as a deterrent and detection mechanism for financial crime.

IRS and Financial Crime/AML/CFT Frameworks

Although the IRS is not primarily a regulator of AML/CFT (that role often falls to financial regulators and FIUs), its functions strongly overlap with financial crime controls:

  • It audits and investigates tax fraud, which is frequently linked to money laundering.
  • It deals with offshore accounts, cross-border flows, and tax treaties, all of which have ML/TF risk implications.
  • It holds extensive taxpayer, corporate, and trust data, which can inform risk assessments, intelligence sharing, and suspicious activity investigations.
  • It collaborates with other agencies (such as the Financial Crimes Enforcement Network, FBI, and DOJ) and participates in inter-agency efforts against illicit flows.

In this way, institutions working in AML/CFT should consider the IRS’s public data and enforcement focus when assessing tax-related risk factors for customers, correspondent banks, entities, or transactions.

Key Roles & Functions

The IRS executes multiple functions that have direct AML/CFT relevance:

  • Enforcement of tax laws, including monitoring, auditing, and investigation.
  • Administration of tax return processing and refunds.
  • Data collection and record-keeping of individuals, corporations, trusts, and tax-exempt organisations.
  • Oversight of international tax compliance, including foreign account reporting and treaty provisions.
  • Collaboration with other federal, state, and international agencies in identifying financial crime, tax evasion, and cross-border illicit flows.

Structural & Operational Highlights

Here are some of the structural and operational details about the IRS that contextualise its role:

  • The IRS is headquartered in Washington, D.C., and is part of the U.S. Treasury system. 
  • It processes hundreds of millions of individual and business tax returns annually, collects trillions of dollars in revenue, and operates large-scale technology and data-processing systems.
  • It has divisions such as Large Business & International, Small Business/Self-Employed, Tax Exempt & Government Entities, and others, which specialise in different taxpayer segments.
  • It has undergone significant modernisation, shifting from paper-based processing to electronic systems, and engaging in digital identity verification and online tools. 

Examples Relevant to AML/CFT & Risk Assessment

Offshore Unreported Income

A corporation uses offshore trusts and subsidiaries in low-regulation jurisdictions to conceal income.

The IRS, through its data and treaties, identifies the ownership and requires disclosure.

Legacy AML/CFT frameworks should recognise that involvement in such structures increases inherent risk.

High-Net-Worth Individual (HNWI) Audit

An individual with complex assets enters the U.S. tax system, uses shell companies, and fails to report foreign bank accounts.

The IRS audits, imposes penalties, and levies sanctions.

A financial institution might use this example to calibrate enhanced due diligence on clients with similar profiles.

Identity Fraud and Improper Refunds

Criminals submit fake tax returns under stolen social security numbers, receive refunds, and then move funds through multiple accounts.

The IRS investigates and anonymises networks of transactions, demonstrating overlapping fraud and money laundering detection.

Non-Profit Organisation Abuse

A tax-exempt organisation claims charitable status but channels donations into illicit activity.

The IRS revokes status, assesses penalties, and cooperates with financial crime enforcement.

For AML/CFT programmes, exposure to charitable sectors may require heightened scrutiny.

Impact on Financial Institutions and AML/CFT Programmes

Regulatory and Compliance Significance

  • Institutions should assess tax-compliance risk when onboarding new clients, especially offshore entities or clients with complex ownership.
  • Data from the IRS (public disclosures, audit history, and enforcement actions) may inform enhanced due diligence, risk-rating, and monitoring frameworks.
  • Institutions failing to consider tax risks may indirectly support money laundering or tax evasion schemes, exposing themselves to regulatory, legal, and reputational risk.

Operational and Analytical Benefits

  • Understanding IRS enforcement priorities helps AML teams align transaction monitoring triggers (for example, transfers linked to taxable events, interest in foreign jurisdictions, unusual refund flows).
  • Incorporating tax-compliance indicators (such as reported income vs transaction volume, foreign account disclosures) can strengthen risk assessments.
  • Cross-border correspondent banking relationships should recognise the IRS’s treaty network and tax-information exchange agreements (TIEAs) as part of jurisdiction-based risk.

Reputational and Strategic Considerations

  • Being linked to clients under IRS investigation (especially for tax fraud or evasion) can negatively affect an institution’s reputation and correspondent relationships.
  • Effective cooperation with tax authorities, including procedural transparency and document requests, may demonstrate the institution’s commitment to AML/CFT best practice.

Challenges & Considerations

  • Tax-compliance data is often behind confidentiality or privacy restrictions, making real-time risk assessment difficult.
  • Complex international tax structures, digital assets, and changing tax laws make it harder to assess underlying beneficial ownership, true economic purpose, or even the legitimacy of transaction flows.
  • Overlap between tax risk and AML risk means institutions might overlook one dimension (tax evasion) when focusing on another (money laundering).
  • Institutional resources and expertise may be stretched if they attempt to fully integrate tax audit or enforcement intelligence into AML programmes.

Related Terms

  • Tax Evasion
  • Beneficial Ownership
  • Exchange of Information (EOI)
  • Foreign Account Tax Compliance Act (FATCA)
  • Tax-Exempt Organisation Risk
  • Shell Companies

References

Ready to Stay
Compliant—Without Slowing Down?

Move at crypto speed without losing sight of your regulatory obligations.

With IDYC360, you can scale securely, onboard instantly, and monitor risk in real time—without the friction.

Get a Demo
charts charts-dark