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The reason that the IRS doesn't send info to the Justice Department on illegal activities is the conflict that they would have with the Fifth Amendment. I think that there may be an old case about this, but that is a vague memory off of the top of my head. If the IRS gave tax return info to the Justice Dept., you would be able to claim Fifth Amendment rights and not file a tax return. The IRS has their own lawyers to try any cases resulting from tax return related issues in order to avoid any conflict.
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Correct. The IRS is bound by the "silver platter" doctrine, which basically means that they can not give information to the local or state law enforcement agencies.
A quick Google search brings this up:
In 1952 Congress created a special tax, which acted like a trap for illegal gambling operators. Bookies who did not pay the tax were charged with tax evasion. Bookies who did were charged with violating federal anti-gambling laws. The U.S. Supreme Court knocked that out as a violation of the Fifth Amendment's protection against self-incrimination. So the Feds starting turning illegal operators, and their tax returns, over to state law enforcement agencies as if they were on a silver platter. In 1968 the U.S. Supreme Court said this maneuver also was unconstitutional.
http://rose.casinocitytimes.com/articles/14500.html
If you are running an illegal operation, like drugs or stolen property, you must report the income and pay taxes on it. But the IRS can't just fax your 1040 form to the cops and say "Hey, check out Joe Smith."