Accounting for Justice in the IRS: Kathy Enstrom Uses Accounting Skills to Protect the U.S. Tax Code from Criminals

Topics: Financial Crime, Fraud, Government, Government Fraud Blogs, Government Regulation

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When Kathy Enstrom began her career in the Internal Revenue Service’s Criminal Investigations unit (IRS-CI) 24 years ago, computers were so scarce that she had to share a terminal with a co-worker, and the government was still using dot-matrix printers. Now, as Director of Operations, Policy, and Support for the IRS-CI, Enstrom manages a small army of forensic accountants who investigate everything from white-collar fraud and identify theft to narcotics trafficking, terrorism, espionage, and cybercrime.

“Many people don’t know that the IRS has its own investigative division,” says Enstrom. “Even I didn’t know it existed when I first interviewed for a job here. But when I heard about it, I was intrigued.” Accounting itself wasn’t very exciting, she recalls — but using her accounting degree to fight crime and serve her country was a different story altogether. “I’ve been a badge-carrying agent ever since,” she says.

Following the Money Since 1919

Begun 100 years ago, the IRS-CI is best-known as the agency that put Al Capone behind bars. But in recent years the agency has been involved in numerous high-profile cases, including the 2015 FIFA corruption caseHouse Speaker Dennis Hastert’s sex-abuse cover-up, a $2.6 billion judgment against Swiss banking giant Credit SuisseWillie Nelson’s legendary tax troubles and, most recently, the Byzantine financial dealings of Paul Manafort.

“We are known as the government’s premier financial investigators,” Enstrom explains. “Whenever the justice department needs an agent or agency to conduct a criminal financial investigation, we are the first agency they call. We specialize in complex financial investigations, including money laundering and tax evasion, and we are the only federal agency that can recommend prosecution for a tax crime.”

The nature of those crimes has changed dramatically over the years. When Enstrom started, identity theft was more or less confined to people stealing credit-card numbers or scamming people for their personal information over the phone. Now, malevolent hackers and massive data breaches can imperil the identities of millions of people with a keystroke, and criminals who once laundered money in the back room of a casino now do it in the darkest corners of the internet, with sophisticated tools that past criminals never even dreamed of.

“Our primary responsibility is to protect the federal tax system,” Enstrom says. “My loyalty is to the country, and my passion is fairness and justice. I believe people should pay their fair share, and I believe those who don’t should be held accountable.”

Kathy Enstrom, Director of Operations, Policy, and Support for the Internal Revenue Service’s Criminal Investigations unit

Holding an increasingly sophisticated class of cyber-crooks accountable is no easy task, however. The government’s forensic financial investigators are highly trained to “follow the money,” and use the latest data-analytics tools and techniques to map the flow of illicit funds around the world. But criminals never stand still; they are constantly innovating new ways to hide their activity through ever-more-complex labyrinths of encryption, deception, and subterfuge. Furthermore, the IRS-CI’s resources are limited. Years of budget cuts and hiring freezes have left the department under-staffed, even as cyber-criminal activity itself has exploded. The average investigation takes from 12 to 18 months, so it is Enstrom’s responsibility to decide which cases to pursue, and how to deploy agency resources effectively and efficiently.

“We use several variables to prioritize the cases we pursue,” she explains. Those variables can include requests from another federal agency or the U.S. attorney’s office to get involved,  and whether the case will have a strong deterrent effect. “We try to work investigations that will likely result in jail time,” she says. “Because the publicity in those cases lets citizens see that the IRS is working on their behalf, and it lets criminals know that we’re coming after them.”

Fighting Cybercrime with Data Analytics

Another increasingly important tool the IRS-CI uses to prioritize and investigate cases is data analytics powered by machine learning and artificial intelligence. In the Summer of 2017, the IRS-CI announced the creation of the National Coordinated Investigation Unit (NCIU), which will modernize and consolidate the IRS’s efforts to better leverage the power of all the data at its disposal. Tax evasion through cryptocurrencies and online money-laundering schemes is an increasingly high priority for the agency, and the international nature of these crimes requires a high degree of information-sharing and coordination.

“Data analytics allows us to work smarter and to investigate more complex cases,” Enstrom says. In 2013, for example, Enstrom’s agency worked in tandem with several federal enforcement agencies to shut down Silk Road, the infamous Bitcoin marketplace for drugs, guns, stolen IDs, hacking tools and other illegal items and services. Since then, the IRS-CI has radically stepped up its efforts to understand and track illicit financial activity in the burgeoning world of crypto-currency, including analytical methods for extracting data embedded inside blockchain technology, and ways to identify “exchangers” — people who help convert crypto coins into actual cash.

“We have entire units that are completely dedicated to cybercrime,” says Enstrom. “And the agents in those units receive a great deal of specialized training in order to take down large marketplaces and exchangers.”

The combination of trained agents and the use of data analytic algorithms is the new frontier of tax justice. As Enstrom points out, “The beauty of an algorithm is that once you’ve created it, you can use it over and over again with the click of a mouse.”

Of course, if fighting cybercrime and tax fraud were that easy, Enstrom would be out of job. But being replaced by an algorithm is not something she worries about, because “as long as there is a tax system, there are going to be people who try to cheat the system,” she says. “So, my job is secure.”


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