Surviving a Tax Audit: A Comprehensive Guide

How to Survive a Tax Audit When You Fudged the Numbers

To some taxpayers, fudging the numbers on an income tax return seems as American as apple pie and hot dogs.

Trust us, though: The IRS disagrees.

If you have fudged the numbers on your taxes, the chances exponentially increase that the IRS will select your return for a tax audit. The IRS uses software that scans tax returns, income records, and spending habits of taxpayers for anomalies that could indicate tax fraud.

So, if you aggressively fudge the numbers on your return, your tax return may be flagged for a tax audit, and whether you realize it or not, you are at risk of prosecution for tax crimes.

To others, it could be a source of endless sleepless nights, especially when you know you have cheated on your tax return. Sensitive tax audits underscore the complex and demanding nature of tax practice. Tax practitioners must navigate a landscape requiring astute judgment, discretion, and an intricate understanding of administrative, constitutional, and evidentiary rules. Balancing client obligations with ethical and legal responsibilities becomes paramount, particularly in high-risk eggshell audits, which are civil but carry the risk of jump-starting an IRS’s clandestine criminal tax investigation. This risk is highlighted in potential tax fraud, money laundering, or structuring scenarios. It becomes even more complex in reverse eggshell audits, where a civil tax audit and a clandestine criminal tax investigation intersect from the outset of the audit. Moreover, these audits may align with undisclosed criminal investigations by other California state or federal agencies. 

Faced with these multifaceted challenges, Tax Attorneys and taxpayers alike must consider critical actions such as filing amended tax returns for past errors and handling current year returns amidst an audit while maintaining the privilege against self-incrimination without inadvertently waiving it. In eggshell audits, the possibility of a criminal tax referral is a significant concern, underscoring the depth and breadth of issues at play. Take the decisive step to restore your peace of mind. Reach out to us now, and let’s secure your financial tranquility, ensuring you can rest easy once more and simultaneously avoid the sleepless nights accompanying high-risk eggshell, reverse eggshell tax audits, and exponentially worse criminal tax investigations. 

When contacting you by mail regarding an audit, the IRS may request to come to your home or business for the meeting. You should not agree to this meeting. IRS agents often hope to look at your personal property to see if your belongings don’t match the income level you’ve reported. This helps them build a case of tax fraud.

Instead, you may want to hire a tax attorney and meet with the IRS at the attorney’s office as part of your defense strategy, or better yet, have the attorney attempt to prevent you from being interviewed at all, as you cannot make criminal tax admissions if you do not speak with them.

To schedule a 10-minute call with an experienced tax lawyer to discuss a tax audit you are facing, contact the Tax Law Offices of David W. Klasing.

What is a Tax Audit?

With over 230 million tax returns filed yearly, the IRS has developed computerized statistical protocols to easily identify when a taxpayer submitted a return with potentially incorrect information. Various types of software are used to catch reporting irregularities in tax returns versus information supplied by third parties, including financial institutions, individuals, and businesses. When the IRS flags a taxpayer’s return, they will determine whether they should investigate the matter, which is the purpose of a tax audit.

Depending on the information you gave the IRS, you may receive notice that an IRS agent wants to examine the records further. For example, evidence of unreported revenue would immediately garner the attention of an IRS examiner.

Correspondence Audits

Notification of any type of IRS tax audit will almost always be sent through the mail whether the IRS wants to conduct a correspondence or an in-person field or office audit (which have been temporarily curtailed because of COVID-19). In a correspondence audit, an IRS examiner will request specific documents to verify selective details in your tax returns be mailed to them. As a result, a person who claims to have donated $20,000 to charities may be asked to provide documentation substantiating those donations.

If you have the information on hand, you simply need to mail it to the IRS agent in question, and this would likely be enough to resolve the audit. However, if you do not have the records to substantiate the challenged transactions or made a series of significant errors or outright cheated when filing your tax return, it is important to hire representation to limit the years and additional issues that come under audit and to ensure that the audit stays solely about money and does not morph into criminal tax exposure/prosecution. Our skilled, dually licensed California Tax Attorneys and CPAs will be able to help you with this.

Office Audits

Receiving notice of an on-site IRS audit is an extremely stressful communication to receive for the average taxpayer. The IRS agent handling your audit will almost certainly interview you extensively regarding the positions taken on your tax returns and your ability to substantiate them. Every deposit to any personal or business account you control will be considered taxable income unless you can prove it is not.   Any claimed deduction will be considered a nondeductible personal expense unless you can prove otherwise.  You will face civil penalties and even potential criminal tax exposure if you cannot prove that the tax return you filed was substantially correct or convince the auditor that any substantial mistakes you made were in good faith and not Badges of Fraud.

Fortunately, you have located the absolute right choice to hire for legal and accounting representation for an in-person audit. The Tax Law Offices of David W. Klasing have a proven track record of providing successful audit representation for many industries, entity types, estates, trusts, businesses, and individuals in office audits all over California, the Nation, and worldwide for ex-pats. They could be indispensable in getting you safely through a civil, Eggshell, or Reverse Eggshell Office Audit.  We can protect you from almost everything except the proper amount of tax liability you should have paid in the first place.

Field Audits

IRS field audits are the most expansive, in-depth, and consequently high-risk examination that the agency performs. For example, the IRS agent assigned to your case will often request to meet at and tour your business or home and then will proceed to question you about possibly every line item on your personal or business income tax returns. You would benefit by working with our dually licensed California Tax Attorneys and CPAs during a field audit to ensure that your net worth and liberty are protected to the full extent possible.

When a field auditor detects fraud indicators, IRS protocols necessitate consultation with the auditor’s group manager and potentially with a Fraud Technical Advisor (FTA). The FTA is pivotal in shaping potential fraud cases, participating in cases where criminal or civil tax fraud penalties may apply. Agreement among the auditor, manager, and FTA on the possibility of fraud leads to formulating a fraud development plan and issuing Form 11661, Fraud Development Recommendation –Examination. 

If explicit acts of fraud are later identified, the auditor must halt the examination discreetly. Unusual silence or communication gaps from the auditor might suggest a criminal tax referral is underway. Should the fraud criteria be met, the FTA will advise referring the case to the clandestine IRS Criminal Investigation Division (CI) using Form 2797, Referral Report of Potential Criminal Fraud Cases. A subsequent meeting involving the auditor, their manager, a CI special agent, and the FTA is convened to assess the evidence and decide on the fraud tax referral. This meeting evaluates various factors, including the tax amount involved, the egregiousness of the violation, public interest, and the expected deterrent effect. Typically, within 30 days, a decision on accepting or rejecting the referral is made during a follow-up meeting.

At the conclusion of any of the above audits, the IRS will come to one of three decisions:

• The taxpayer owes additional tax, civil or civil fraud penalties, and interest to the IRS.
• All information on the tax return was correct, and the taxpayer does not owe or is owed money by the IRS, which is incredibly rare.
• Sufficient badges of fraud were identified in the audit so that the civil auditor is procedurally required to hand off the case to the criminal investigation division of the IRS for the potential development of the case for criminal tax prosecution.

Note: Never lie when facing a fraud charge. In situations of uncertainty, it’s always better to remain silent. The Fifth Amendment provides the right against self-incrimination, allowing you to stay silent in front of the IRS, especially if there’s a risk of criminal tax charges. Making false statements to an IRS official could lead to a felony conviction, potentially resulting in up to three years of imprisonment and fines up to $100,000.

Navigating Complex Audits: Legal Strategies and Compliance

Filing an amended return after a tax audit or criminal tax investigation has begun doesn’t negate the intentional/fraudulent conduct present when filling out the original return. However, it may influence the decision against criminal tax prosecution under certain circumstances or demonstrate a lack of willfulness. It’s crucial to remember that any tax return, including an amended one, is a sworn statement under penalty of perjury and can be used as evidentiary admission against the taxpayer, sometimes even reducing the need for other, potentially more challenging, to obtain evidence in a criminal case.

During an audit or a covert criminal tax investigation, the obligation to file the current tax return remains. Intentional/fraudulent failure to file, especially when the new return highlights errors in previous tax filings, is a criminal offense. Tax representatives must inform clients of this requirement under Circular 230, along with the associated risks and civil and criminal tax penalties for non-compliance. In most circumstances, obtaining an extension of the deadline would be wise. This will not only help in buying time but also help in understanding the nature and focus of the tax audit. Filing a nominal “Fifth Amendment return” may sometimes be necessary. This must be approached carefully as the privilege is asserted on specific items rather than the entire return. Incorrect filing of such a return can lead to severe consequences, including penalties for frivolous returns or criminal tax charges for intentionally failing to file a tax return.

How to Avoid an IRS Tax Audit in California, the United States, and Offshore

No taxpayer wants to be on the receiving end of an IRS tax audit. Statistics have shown that higher-income individuals are more prone to being audited by the IRS because of the complexity of their returns and likely additional tax penalties and interest to be assessed. However, limiting the amount of money you earn is probably not the solution you want to use to avoid a tax audit. Luckily, some quick tips could save you from an IRS audit in the future.

Report All Income

Reporting all your income from all sources is incredibly important.  All it takes is for an IRS auditor to identify $10,000 of unreported income during an audit, and they may be required to associate a civil fraud advisor with your case.  This highly trained and specialized agent’s sole job is to assist the auditor in developing the audit for potential handoff to the criminal investigation division of the IRS for potential development of the case for criminal tax prosecution.   If you have utilized a check cashing outfit to hide cash receipts, had checks cut to a nominee entity, failed to deposit all cash receipts /skimmed cash, did not report the revenue deposited in all of your bank accounts, reported less income than the sum of your 1099’s indicate you should have, have unreported cryptocurrency revenue of investment gains, deposited unreported revenue in undeclared foreign accounts or failed to report all of your revenue in any way you are at very high risk of facing criminal tax charges if you do not hire a properly trained Criminal Tax Defense attorney to get you through your eggshell, reverse eggshell audit without facing criminal tax and foreign reporting fraud prosecution or a civil fraud penalty.

Do Not Claim Deductions You Cannot Fully Substantiate or That Are Personal in Nature

The auditor will consider every deduction nondeductible personal unless you can prove it was business related.  For that reason, you must be able to prove how you paid for an expense, (by check or credit creates the best trail) exactly what was paid for via valid receipts and how what was paid for was an ordinary and necessary expense for your business.   Fraudulently inflating deductions or claiming personal expenses as business expenses, utilizing fictitious payees, and simply being unable to substantiate the expenses you claim will be viewed as badges of fraud in your audit and can lead to criminal tax prosecution.  An egregious pattern of claiming deductions is a common way to raise a red flag to the IRS that there may be severe problems with your return. Getting caught attempting to support bogus deductions with forged substantiation is a surefire way to get criminally prosecuted for tax fraud.

What are the Most Common Badges of Fraud?

Decisions you make during a tax audit can rapidly transform a simple examination into a full-blown CID criminal tax investigation. Lying or being evasive, intentionally delaying, rude and non-respectful, nervous body language, and sweating can all be interpreted as indicators of tax fraud during a civil examination. These indicia, more commonly referred to in the profession as “Badges of Fraud,” are covertly and mentally tallied by civil tax examiners in determining whether to make a referral to the Criminal Investigation Division of the IRS or in a decision to access a civil fraud penalty. These include but are not limited to the following:

• Omitting specific items while similar ones are included;
• Not reporting entire sources of income or intentionally underreporting income;
• Unexplained significant net worth increases;
• Inadequately explaining significant currency dealings;
• Excessive dealings in cash;
• Failing to file tax returns, especially over several years with evidence of substantial income;
• Claiming false or greatly exaggerated deductions, including personal expenses as business deductions;
• Providing altered or false documents;
• Keeping multiple sets of books or false records;
• Inadequate record-keeping, including prematurely destroying records;
• False book entries, back-dated documents, or fake invoices;
• Discrepancies between tax returns and books;
• Using secret bank accounts or transacting under false names;
• Making false statements or obstructing the examination;
• Not fully disclosing information;
• Holding assets in others’ names;
• Consistently failing to report income across multiple years;
• Claiming fake dependents or falsely claiming credits, and
• Arranging affairs solely for tax avoidance without economic substance.

It would not be a stretch to say that the most dangerous part of a civil tax audit is the genuine possibility that the IRS civil tax auditor, upon suspecting that fraud may have occurred, because of his assessment of the Badges of Fraud that suspects are present, might request a consultation with a fraud referral specialist whose sole job it is to covertly assist the examining agent in working up your case for referral to CID.

Signs that a Civil Tax Audit Has Gone Criminal 

Most reported convictions in criminal tax cases involve taxpayers who cooperated entirely early in the civil examination without properly trained tax counsel and either lied or made damaging admissions to civil examiners or, worse yet, to CID special agents. Multiple indicators hint that a tax audit might have escalated to a criminal tax investigation. These include a revenue officer making extensive copies of documents or preferring original documents. An auditor’s focus on “intent,” such as querying the taxpayer’s knowledge or reasoning behind deductions, is a crucial sign. Other indications are an unusual interest in sensitive transactions, efforts to collect information from third parties instead of directly from taxpayer records, multiple meetings with the taxpayer, demands for sworn affidavits, conducting numerous third-party interviews, and probing into the taxpayer’s lifestyle and financial standing. A definitive indicator of a civil audit transitioning to a criminal tax investigation is a visit from the IRS-CI’s special agent.

At the Tax Law Offices of David W. Klasing, our dual-licensed Criminal Tax Defense Attorneys and CPAs are renowned for adept handling of sensitive high-risk tax audits due to our specialized skillset and knowledge base. Our team is adept at preemptively identifying potential issues and understanding procedural rights to create effective strategies. We stay vigorously alert to subtle signs throughout the audit process, identifying opportunities to positively influence the audit’s direction that best suits our client. Alongside our deep understanding of the foundational principles and administrative processes, we are committed to upholding the utmost standard of ethical and legal obligations, ensuring the best possible outcome for our clients.

The subject of a completed CID investigation has a 90% probability of being criminally charged and, if charged, a similar likelihood of being convicted. The fallout of tax investigation and conviction extends beyond the punishment in the criminal case. Adverse collateral consequences typically result merely from being the subject of a CID criminal investigation, and significant legal disabilities always result from criminal conviction—whether by plea or after trial. The stigma of being under an IRS criminal tax investigation is challenging to discount. When you contact the Dual Licensed Criminal Tax Defense Attorneys and CPAs at the Tax Law Offices of David W. Klasing, you get a dedicated, resourceful partner in pursuing retribution for the tax crimes you’ve been accused of. To learn more about our services, call us at (800) 681-1295 or schedule a reduced rate initial consultation online here.

Do Not Claim Tax Credits You Are Not Entitled Too

A credit is a dollar-for-dollar reduction in the tax you would otherwise owe.  Fraudulently or mistakenly claiming dependents, earned income credits, business credits, education credits, energy credits, etc., is another surefire way of drawing an audit or, in egregious cases, facing criminal tax exposure.

Eggshell Audits and Criminal Tax Investigations

An eggshell audit, though not a formal term, describes a situation where a taxpayer undergoing a civil tax audit faces the potential risk of a criminal tax prosecution. This risk emerges if the revenue agent conducting the audit suspects the filing of a false tax return. Even without a criminal tax prosecution, the associated civil tax fraud penalties can be substantial. The delicacy of this situation requires careful navigation, akin to walking on eggshells, to resolve the audit without triggering criminal tax consequences. 

Engaging in an IRS eggshell audit is a high-risk endeavor. When questioned about a delicate matter, it’s crucial to refrain from dishonesty with the IRS. Even if the agent is unaware of any potential tax fraud you might be concealing, providing false statements can exacerbate the situation. Hence, caution is essential in any dealings with the IRS. If your business or personal finances have questionable elements, handling an audit on your own can be overwhelming, leading to untruths or unwarranted complete disclosures. It would be wise to understand that the primary goal is to prevent the revenue agent from making a referral to the IRS Criminal Investigation Division (CID). If there are any dubious elements in your tax records, it’s imperative to consult with a knowledgeable attorney before interacting with the IRS. 

At the Tax Law Offices of David W. Klasing, our dual-licensed Criminal Tax Defense Attorneys and CPAs will assist you in lawfully responding to queries during an eggshell audit to avert additional criminal tax charges such as “making a false statement.” Our guidance will cover whether to adhere to or contest a summons for records and the appropriate instances to invoke your 5th Amendment right against self-incrimination. We will diligently monitor for any indications that the IRS revenue agent is collaborating with the Fraud Technical Advisor (FTA). This includes being alert to signs that could suggest a shift towards assessing civil fraud penalties or a referral to the Criminal Investigation Division (CID). We will thoroughly examine our client’s tax returns and financial records and meticulously prepare for all interactions with the IRS. Our focus is to ensure that communications and conduct during these sensitive audits are managed effectively, thereby minimizing the risk of exacerbating the situation. 

Should I Use My Original Tax Preparer?

Given the risk of criminal tax investigations, it would be wise to seek help from a Tax Attorney rather than an accountant or tax preparer. Accountants may be compelled to disclose information to the IRS in a criminal tax investigation. However, communications with a tax attorney are protected by attorney-client privilege, allowing for confidential discussions. During the eggshell audit, our dual-licensed Criminal Tax Attorneys and CPAs guide clients on lawfully responding to questions, managing summons for records, and exercising the 5th Amendment right against self-incrimination. This careful approach is essential, as the IRS has broad authority, and its investigations can uncover tax crimes and other violations. Additionally, the auditor is unlikely to inform you if the civil examination escalates to a criminal tax investigation or if they are collecting evidence for a parallel criminal investigation.

Importance of Attorney-Client Privilege

In the context of eggshell audits, understanding applicable privileges and client interactions is crucial. With the IRS intensifying its traditional audit focus, the frequency of eggshell audits, where clients may face potential civil fraud or criminal tax violations, has increased. The first step involves identifying and preserving Attorney-Client Privilege. Only a criminal tax defense attorney experienced in criminal and civil tax law should represent clients in these matters. Any statements made to non-attorneys, like CPAs and Enrolled Agents, may be utilized to support the IRS-CI’s case against you. Any discussions or documents exchanged with individuals other than an attorney are permissible in court, and the IRS has the authority to call upon any non-attorney advisor to testify against you. 

At the Tax Law Offices of David W. Klasing, our dual-licensed Criminal Tax Defense Attorneys and CPAs have the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire, whose privilege under Code Sec. 7525 or state law does not extend to criminal tax investigations, from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent high-risk Eggshell audit, investigation or prosecution. 

What is a Kovel Agreement?

Utilizing a Kovel agreement, we can involve an accountant who was not involved with the audit to date or the original return to assist in the audit process, extending the attorney-client privilege to protect sensitive discussions and documents from IRS access. Under a Kovel arrangement, as established in the case of United States v. Kovel, the accountant operates under the attorney’s supervision, with all documents remaining the attorney’s property. This structure affords the “Kovel accountant” the same attorney-client privilege protections, allowing the client to share sensitive data and crucial documents with the accountant freely. This arrangement safeguards these communications and documents from being accessed by the IRS through administrative summons or grand jury subpoenas. An accountant who has already been in discussions with the client about the tax return and related matters before the involvement of an attorney is not ideally suited for a Kovel agreement. This is because a Kovel agreement has no retroactive effect and cannot safeguard communications that occurred before the agreement was established.

At the Tax Law Offices of David W. Klasing, our uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys and KovelCPAs provide a one-stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

Conducting a Shadow Audit

We conduct a “shadow audit” that involves a meticulous review of the tax return, assuming the role of a forensic accountant. The process includes analyzing bank statements, canceled checks, and questioning unusual financial activities. Additionally, understanding specific issues and industries is vital, as is interviewing the client’s return preparer to anticipate what the revenue agent might uncover. Preparing for potential problems before the revenue agent’s discovery is vital, and often, new areas of concern may emerge during this thorough examination.

Navigating the Examination and Responding to IRS Actions

At the Tax Law Offices of David W. Klasing, our dual-licensed Attorneys and CPAs provide expert guidance in handling complex tax audits, including high-risk eggshell audits and criminal tax investigations. According to the IRS, about 75% of tax fraud is committed by individuals, predominantly middle-income earners, with the remaining primarily by businesses. Cash-heavy businesses and service providers are frequent violators, ranging from self-employed handypersons to doctors. The primary form of cheating involves intentional underreporting of income, known as tax evasion, the most common tax crime. A study revealed significant underreporting among self-employed individuals in various sectors, including restaurants, clothing stores, and car dealerships. Telemarketers, salespeople, doctors, lawyers, accountants, and hairdressers are also notable for this. 

At the Tax Law offices of David W. Klasing, we leverage our deep knowledge of specific issues and industries such as car dealerships, dentists, veterinarians, attorneys/legal Industry, doctors/medical industry, real estate professionals, cash-intensive businesses, etc., among many others, to anticipate the actions of revenue agents. Our approach includes promptly interviewing the client’s return preparer to understand potential areas of focus for the revenue agent. We conduct thorough shadow examinations of tax returns to uncover potential tax fraud before the revenue agent does, ensuring our clients are not unprepared. This proactive strategy is crucial in identifying and addressing problematic areas early on.

During high-risk tax audits, we advise against voluntary meetings with revenue agents. Our dual-licensed Attorneys and CPAs, adhering to the highest ethical standards, ensure that facts are represented accurately, avoiding any obstruction or interference with the California state and Federal tax laws. We maintain the confidentiality of privileged communications and make strategic decisions about disclosing information. If faced with administrative summons, we guide clients on whether to comply or assert their Fifth Amendment rights based on their case’s unique facts and circumstances.

We also manage logistics, like scheduling business tours strategically to minimize client exposure. Our vigilant approach includes identifying tell-tale signs of a sensitive tax audit potentially escalating to a criminal tax investigation and preparing accordingly. At every step, our team at the Tax Law Offices of David W. Klasing is dedicated to protecting our clients’ interests, ensuring their rights are preserved, and providing the best possible defense against any California state and Federal tax challenges.

Incorrect Employee Versus Independent Contractor Classification Issues or Failure to Remit Employment Taxes

Making a mistake or fraudulently classifying employees as independent contractors and failing to remit required employment taxes and federal and state income tax withholding are surefire issues that could bring a federal or state employment tax audit or criminal tax investigation to your front door. When utilizing employees, make sure that you collect and remit the proper employment taxes and federal and state withholding from their paychecks. Extreme caution, especially in California following the passage of AB5, when classifying a worker as an independent contractor.

Surviving a Tax Audit

Seeking professional help from a dually licensed California Tax Attorney and CPA would certainly ease your stress about the possibility of being audited if your returns were properly filed in the first place and the documentation to support them if they happen to be audited were kept in order. Very few of our ongoing compliance clients have ever been audited because we file returns that make sense.

If you do happen to receive an audit notice and know you cheated on the return under audit, do not contact the original preparer. They are likely to be government witness number one against you if the government figures out the truth and chooses to prosecute.  In addition, anything you say to them can be compelled from them when they are forced to take the witness stand against you under the government’s contempt of court powers.   Hire our firm to get you through the audit and make sure the audit is just about money and not criminal tax prosecution.

If you have stopped sleeping at night because you are worried that you could face criminal tax prosecution over a pattern of fraudulent returns you have filed in the past, call our office to discuss the possibility of making a domestic or offshore voluntary disclosure.  We can get you a guaranteed pass on criminal prosecution in exchange for accepting the program terms that limit your potential civil liability.

Why Was I Audited?

There are an array of reasons as to why a taxpayer gets audited. However the bulk of audits are due to automatic DIF scoring. If you fall outside of the acceptable statistical range, you will be scored according to how severe your differential is from the norm. The IRS will proceed to audit those taxpayers falling outside of acceptable ranges starting with the worst and working towards those with lesser DIF scores until the yearly audit budget is exhausted.

There are an array of other reasons why a business or an individual might raise red flags for an audit. One such reason is due to a 1099-K audit. The 1099-K shows electronic transactions processed by credit card companies, banks, and debit card processors. The IRS can compare the total income you report versus the amount they calculate from the sum of all your third-party 1099-Ks. Consider for instance a restaurant that reports $1.2 million in income but has 1099-Ks indicating just over $1 million in electronic receipts. This ratio is highly unlikely for a cash intensive businesses like a restaurant and gives rise to a potential inference that the restaurant is skimming cash or otherwise underreporting. Since a mere $10,000 of unreported income can result in referral to a fraud analyst who may decide to pass your matter to IRS criminal investigations, a scenario of this type is particularly frightening for a tax payer or a business owner.

Why am I being audited?

The IRS likely found a discrepancy in your return versus what was statistically feasible, based on statistically similar returns, especially in the same industry, based on information provided by third parties or based on your financial habits.

What if The IRS Wants to Come to My Home or Business?

An IRS auditor who wants to come to your home or business often signifies a very significant problem. If they are asking to come into your home or workplace it is most likely to take a visual inventory of your assets and belongings. They may be looking for expensive art work, luxury furniture, fancy cars, expensive technical or computing equipment, or anything that would significantly inflate your net worth beyond what can reasonably be expected for your historical reported income. They may provide a cover story of “wanting to measure your home office” if you took home office deductions, but do not believe their claims. There are other means you can use to prove the information they are seeking without opening your doors to a wholesale audit of your belongings.

What if My Books and Records Are a Mess?

If the IRS agent decides that your books and records are in such a state that it is impossible for the audit to proceed, some tax payers might mistakenly consider this a good thing. Unfortunately a situation like this is only likely to create significant problems for the taxpayer  and set up an uphill battle. Rather than reconstructing your records, the agent will simply assess you on any and all income that was deposited into your bank account. Next, they will disallow all expense that you claimed as non-provable. In any case, this will significantly increase the amount of taxable income you have and result in a much larger tax bill. If you wish to overturn this determination, the taxpayer must prove that stated expenses are allowable and present a set of books that can withstand significant audit scrutiny.

When Surviving a Tax Audit, Remember:

Nothing good can come from you sitting down with the IRS!If the taxpayer wishes to fight the determination, reconstructive accounting by a financial professional is typically necessary. An amended tax return filing may even be necessary if the difference between the original and new return is significant. In any case, the burden of proof is always on the taxpayer. In many cases, only a reputable and experienced team of tax professionals can satisfy an auditor that whatever mess existed with the original accounting that caused the original return to be misstated, has been corrected in the revised accounting, and that ultimately the revised return position is in the correct position.

Will I Know I Am Under CID Investigation?

Determining if you’re under investigation by the IRS Criminal Investigation Division (CID) can be challenging. You may not be aware until formal charges are brought against you. However, hints of an investigation might come indirectly through acquaintances like friends, employees, or professional advisors whom the IRS may contact. These individuals are not legally bound to keep the investigation confidential.

You could send a nominal tax payment for a suspected year of investigation to gauge if you’re being scrutinized. If there’s an ongoing inquiry, your fee might be placed in a suspense account, signaling a freeze on your records. This tactic involves understanding the use of Form 4135, Criminal Control Notice by the IRS in investigations.

If the IRS Criminal Investigation Division (CID) is compiling a case against you, it’s typical for you to be the last one they interview. By that stage, CID agents might have already examined thousands of documents and spoken to numerous potential witnesses, like bankers, ex-spouses, accountants, and former employees, gathering insights into your financial dealings. If the CID reaches out to you after such extensive groundwork, it’s a strong indicator that a recommendation for criminal tax prosecution might be imminent. Their aim of interviewing you at this point is primarily to obtain a confession, the document you are trying to lie your way out of it, or obtain other damaging admissions, which would serve as a decisive element in their case.

What Does It Mean If the IRS Contacts My Family and Friends?

CID investigations start with interviews of those close to you and may extend to a wide circle, including family, colleagues, and even service providers. They are notably thorough, often exceeding a year, focusing on building a solid case for criminal tax prosecution. During this time, the IRS may monitor your mail (without opening it) and seek detailed information from various sources, including phone and credit card companies. In some cases, they might even resort to phone taps authorized by court orders. It’s important to note that even trusted advisors, like accountants, may be compelled to share information with the IRS. The CID’s approach can be subtly intimidating, making it difficult for those questioned to withhold cooperation.

When IRS special agents contact your acquaintances regarding someone else’s investigation, caution is vital. If you have any link to the person being investigated, such as a business associate or employee, it’s prudent to refrain from responding to their questions. The term “connected to” should be interpreted broadly. For instance, if you’re a manager in a business owned by the individual under scrutiny, you might not be a suspect initially, but the possibility exists.

Should you learn that the IRS has contacted someone about an investigation concerning you, avoid advising them on what to say. Instructing someone to provide false information to the IRS constitutes a separate offense. Furthermore, resist the impulse to inquire directly with the CID about the investigation. It is advisable to consult with a tax or criminal attorney and let them communicate with the IRS on your behalf.

What if I Know I Cheated on My Taxes and the IRS Wants to Speak With Me?

If you know that you made misstatements or engaged in inaccurate reporting methods on your taxes and have been contacted by any agency including the IRS, California Board of Equalization (BOE), California Franchise Tax Board (FTB), or the California Employment Development Department do not face the audit alone. All too often taxpayers think that they can fix their tax problems by making additional inaccurate or implausible statements to the examining agency. Other taxpayers may think that they can talk their way out of a situation. Unfortunately, the taxpayer forgets that the auditor does this for a living, and implausible statements made on the basis of charisma or confidence simply won’t carry the day. Rather, the taxpayer is more likely to compound their liability and trigger a criminal investigation due to the presence of one or more badges of fraud.

If the taxpayer knows that there are tax filing errors and potential improprieties on their tax form, the most prudent thing they can do is to establish a layer of separation between themselves and the auditing agent. A tax attorney can serve as a buffer and prevent the examining agent from obtaining criminal admissions from your conduct and statements. Since the most difficult element regarding criminal tax penalties for the IRS to prove is intent, taking the taxpayer out of the equation eliminates the possibility that you may provide the evidence their audit is designed to find. Aside from circumstantial evidence of intent, the only direct evidence they can obtain that you intentionally cheated will come from your own mouth.

Circumstantial evidence is the only other way the IRS and other agencies can prove criminal intent regarding taxes. Circumstantial evidence includes the information contained in your tax records and books, things your employees may say, and evidence that may arise from a third party. Luckily, circumstantial evidence is typically seen as less persuasive than direct evidence. While you cannot control the circumstantial evidence the IRS may find, you can prevent providing direct evidence to agents and auditors. Remember, no matter how smart you are, you are outgunned and fighting against the resources of an entire agency.

Will I Know I Am Under CID Investigation?

Determining if you’re under investigation by the IRS Criminal Investigation Division (CID) can be challenging. You may not be aware until formal charges are brought against you. However, hints of an investigation might come indirectly through acquaintances like friends, employees, or professional advisors whom the IRS may contact. These individuals are not legally bound to keep the investigation confidential.

You could send a nominal tax payment for a suspected year of investigation to gauge if you’re being scrutinized. If there’s an ongoing inquiry, your fee might be placed in a suspense account, signaling a freeze on your records. This tactic involves understanding the use of Form 4135, Criminal Control Notice by the IRS in investigations.

If the IRS Criminal Investigation Division (CID) is compiling a case against you, it’s typical for you to be the last one they interview. By that stage, CID agents might have already examined thousands of documents and spoken to numerous potential witnesses, like bankers, ex-spouses, accountants, and former employees, gathering insights into your financial dealings. If the CID reaches out to you after such extensive groundwork, it’s a strong indicator that a recommendation for criminal tax prosecution might be imminent. Their aim of interviewing you at this point is primarily to obtain a confession, the document you are trying to lie your way out of it, or obtain other damaging admissions, which would serve as a decisive element in their case.

What Does It Mean If the IRS Contacts My Family and Friends?

CID investigations start with interviews of those close to you and may extend to a wide circle, including family, colleagues, and even service providers. They are notably thorough, often exceeding a year, focusing on building a solid case for criminal tax prosecution. During this time, the IRS may monitor your mail (without opening it) and seek detailed information from various sources, including phone and credit card companies. In some cases, they might even resort to phone taps authorized by court orders. It’s important to note that even trusted advisors, like accountants, may be compelled to share information with the IRS. The CID’s approach can be subtly intimidating, making it difficult for those questioned to withhold cooperation.

When IRS special agents contact your acquaintances regarding someone else’s investigation, caution is vital. If you have any link to the person being investigated, such as a business associate or employee, it’s prudent to refrain from responding to their questions. The term “connected to” should be interpreted broadly. For instance, if you’re a manager in a business owned by the individual under scrutiny, you might not be a suspect initially, but the possibility exists.

Should you learn that the IRS has contacted someone about an investigation concerning you, avoid advising them on what to say. Instructing someone to provide false information to the IRS constitutes a separate offense. Furthermore, resist the impulse to inquire directly with the CID about the investigation. It is advisable to consult with a tax or criminal attorney and let them communicate with the IRS on your behalf.

What Can I Do if I am Facing an IRS Tax Audit?

First of all, if you are facing or suspect an IRS audit, you should not discuss your behavior with anyone. Do not tell your neighbor, best friend, or even your priest that you think you may have cheated on your taxes. These individuals have a financial incentive to report you and serve as a government witness through the whistleblower bounty program.

Furthermore, if you are facing an IRS tax audit, the type of tax professional you seek assistance from is extremely important. Some taxpayers and businesses owners are tempted to go back to their original accountant. Others may consider speaking to a CPA. However, this decision is fraught with consequences that can exacerbate your situation further should the IRS or state tax agency decide to subpoena your accountant or CPA and compel them to testify under the threatened penalty of contempt of court. In other words, what you tell an accountant or a CPA is generally unprivileged and subject to discovery in court. That means anything you disclose to these individuals regarding possible criminal intent can come out in court. Since you do not want to create government witness #1 against you in a criminal tax matter, you must take a different approach.

In contrast to the weak and unevenly recognized accountant-client privilege, attorney-client privilege is robust and recognized in all state and federal courts. Nearly anything that you disclose to a tax lawyer is protected and confidential and cannot be used against you provided that the attorney-client privilege is maintained and protected. The attorney-client privilege permits a taxpayer to speak frankly regarding mistakes, error, and other acts so that the tax attorney can prepare a defense to the audit techniques and other tactics you are likely to face. Furthermore, if you work through a tax attorney, consulting accountants can receive derivative attorney-client privilege and confidentiality through what is known as a Kovel letter.

Can I argue that my filing mistakes were unintentional?

Taxpayers under audit ordinarily have little credibility. A tax attorney with good credibility with the tax authorities is often necessary to make this case on your behalf.

When Do I Need an Experienced Tax Lawyer and CPA?

David W. Klasing is a dual credentialed attorney and CPA with Master’s degree in taxation. David is also a former public accounting auditor who managed a staff of 15 while dealing with sophisticated audits including private placements, IPOs, employee benefit plans, non-profits and for profit entities. David understands the auditing methodology and process utilized by the IRS. Often times, he can anticipate and prepare for where the auditor is attempting to take the investigation before the auditor actually takes it there. Using his educations, training, knowledge and experience he can stay several steps ahead in the audit process and mitigate the civil and criminal consequences you may face.

If you are facing an IRS, FTB, BOE, or EDD audit going it alone is simply not a prudent course of action. You may compound your liability and furthermore, these agencies share information and may trigger a subsequent audit by a different agency. Contact the Tax Law Offices of David W. Klasing by calling 800-681-1295 or contact us online.