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There are separate criminal and civil offenses when it comes to copyright infringement, assuming USA. Very generally, under criminal law, it is an offense to distribute copyrighted material without the right or license to do so. Note the word "distribute", meaning that the crime relates to the act of copying and sharing the work, and usually does not include the receiving of such a work.
That is to say, it's generally understood that mere possession of a copyrighted work is not sufficient to prove that it was in your possession for the purpose of later distribution. A criminal prosecution would have to show that you did, in fact, infringe the copyright by distributing a copy to someone or somewhere else.
Separately, civil penalties can be sought by the copyright owner, against someone found either distributing their work, or possessing the work without a license. In this case, the copyright owner has to do the legwork to identify offenders, and then would file a civil lawsuit against them. The government is uninvolved with this, except to the extent that the court is a branch of the federal government. The penalty would be money damage, and while a judgement could be quite large -- due to the insanity of minimum damages, courtesy of the DMCA -- there is no prospect of jail time here.
So as an example, buying a bootleg DVD for $2 and keeping it in your house would not accrue criminal liability, although if police were searching your house -- which they can only do with a warrant, or your consent -- they could tip-off the copyright owner and you could later receive a civil lawsuit.
Likewise, downloading media using Megaupload, usually also doesn't meet the "distribution" requirement in criminal law, but still opens the door to civil liability if the copyright owner discovers it. However, something like BitTorrent which uploads to other peers, that would meet the distribution requirement.
To that end, if officers searching your home -- make sure to say that you don't consent to any searches -- find a running BitTorrent server and it's actively sharing copyrighted media, that's criminal and civil liability. But if they only find the media but can't find evidence of actual uploading/distributing, and can't get evidence from the ISP or anyone else, then the criminal case would be non-existent.
That said, in a bygone era, if multiple physical copies of the same copyrighted media were found in your house, such as officers finding a powered-off DVD copy machine that has sixty handwritten discs all labeled "Riven: The Sequel to Myst" next to it, then the criminal evidence is present. Prosecutors can likely convince a jury that you're the one who operated the machine to make those copies -- because you had the ability (the machine) -- and that nobody would make so many copies as personal backups. The quantity can only suggest an intent to distribute. This is not unlike how a huge amount of marijuana is chargeable as "possession with intent to distribute", although drug laws have a different type of illogical-ness.
This logic does not apply when dealing with digital files, because computers naturally keep copies as part of handling files. A cache file temporarily created by VLC does not turn people into copyright criminals.
TL;DR: when the police are searching your house, tell them: 1) you do not consent to any searches, 2) you want a copy of their warrant, which should be signed by a judicial judge, and 3) do not volunteer info to the police; call and talk to a lawyer