Every year, many U.S. citizens and U.S. businesses prepare their tax returns properly and honestly and are nonetheless become subjected to invasive IRS audits on a random basis. Most, however, are subjected to audits based on errors or discrepancies on their tax returns that the IRS choses to investigate because of deviations identified by statistical analysis of similarly situated returns. These errors can be willful or accidental.
Sometimes, the IRS is not totally upfront with you about the reasons for the audit, and you may be concerned about whether they discovered something serious during their review of your returns that could lead to a high-stakes audit and a potential criminal tax referral to the IRS criminal investigation division (C.I.). At the Tax Law Offices of David W. Klasing, our Tax Attorneys and CPAs have decades of experience successfully assisting clients with audits. We understand what to look out for in the audit process that might suggest that the IRS has referred or is considering referring the case for criminal investigation. It is important to note that if your audit is referred to C.I., C.I. has over a 90% criminal tax conviction rate.
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Reasons the IRS Might Audit You
As noted above, sometimes the IRS conducts audits on a completely random basis. However, sometimes it is possible for a random audit to turn up unintentional errors that could end up costing you. Even if you believe the audit is random in nature, it is best to retain a skilled tax attorney to assist you with the process and protect your rights.
Other times, the IRS audits you because of something that they noticed when reviewing your tax returns. Sometimes, these could be simple math errors or unintentional mistakes by you or your tax preparer that will not land you in criminal trouble but could still subject you to civil fines. It could also be due to something intentional you did, such as underreporting your income, claiming too many charitable donations, reporting too many losses on Schedule C, or deducting too many business expenses. IRS agents are also known to be highly suspicious of returns containing too many nice, neat, round numbers.
The consequences of the IRS finding willful, criminal wrongdoing in an audit can be quite severe. However, the keyword in that description is “willful.” The IRS will almost never pursue a criminal investigation post-audit unless they believe that the taxpayer acted willfully to defraud the system. Be aware that willfulness can include the concept of “willful blindness,” where a taxpayer should have known something even if they actually did not.
Types of Audits
There are three major types of audits conducted by the IRS. The first type is known as a correspondence audit. Correspondence audits are conducted entirely through the mail, over the phone, and electronically. The auditor will request certain records and documents related to the information on your tax returns that they would like to review to confirm the accuracy of what you reported. You will then send these documents to the auditor through the mail for their review.
The second type of audit is an office audit. This is similar to a correspondence audit except that you are asked to bring the requested documents and records into an IRS office for the auditor to review in person. You should always have a skilled tax lawyer like those at the Tax Law Offices of David W. Klasing help you prepare for this meeting and appear with you at the meeting. The final type of audit is a field audit, where IRS agents come straight to your home or business to review your financial records themselves. This is the most serious type of audit and can be indicative that the IRS is considering criminal charges in your case. Contact a skilled tax lawyer as soon as you learn a field audit is to occur.
Types of Audits that are Likely to be High Stakes from the outset:
- Audit involving undisclosed cash sales.
- Audit involving padded, over deducted, and unsubstantiated expenses or tax credits that the taxpayer does not qualify for.
- Audit involving undisclosed foreign financial accounts and unreported offshore income/inheritances.
- Audit involving captive insurance company deductions.
- Audit involving listed transactions
- Egg shell audits
- Reverse eggshell audits
- Audit involving unreported cryptocurrency transactions
- Audits involving unreported revenue
- Audits involving non filed returns
Warning Signs of a Criminal Referral
Aside from the audit being a field audit, there are other warning signs to watch out for during the audit process that can indicate that the agent has referred the case to the criminal investigation unit or intends to do so. Other potential warning signs include the following:
- Agent summonsing and photocopying all your bank account information
- Agent asking you questions about your “lifestyle” and certain lavish expenditures
- Agent requesting information related to your assets at the beginning and end of last year (this may suggest that they believe your books do not reflect your actual income)
- Agent asks you to submit to an interview under oath
- Agent will not give information about the status of the audit or when the audit will potentially conclude
An experienced tax attorney will be able to spot these and other warning signs that your case is being considered for criminal investigation. We focus on whether the agents seem to be suggesting willful conduct. If we believe a criminal referral is likely, we will work to negotiate with agents and try to mitigate any damage before the matter is taken to the next level.
If You Are Concerned About an IRS Audit, Call Our Skilled Tax Attorneys Today
While audits are never pleasant, most are likely to end at the civil stage, especially with the assistance of an experienced tax attorney like those at the Tax Law Offices of David W. Klasing. However, if the agents suspect you of willful, dishonest behavior, they may refer the case for potential criminal prosecution. Our lawyers can look for warning signs that the case may be referred for criminal prosecution and work to mitigate any potential damage before it gets that far. To schedule a consultation, call our office today at (800) 681-1295.
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In addition to our main office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento. During the COVID-19 pandemic, our staff are working from home, but have full virtual meeting capability.
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