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How to Handle an IRS Audit that Could be a Clandestine Criminal Tax Investigation

Table of Contents

    The Internal Revenue Service (IRS) routinely uses multiple civil and criminal tax enforcement avenues to identify perpetually delinquent / fraudulent taxpayers and collect taxes it deems are owed & simultaneously create a deterrent to others though highly publicized criminal tax prosecutions. Typically, auditors and collection officers will notify the subjects of their audits / collection actions. On the other hand, IRS criminal tax investigators will complete their investigation as secretly as possible and then perform unannounced visits to preserve the element of surprise and will ask lots of questions they already know the answers too to hopefully document the taxpayer trying to lie their way out of trouble. Unfortunately, lying to a federal officer is an additional felony in and of itself.

    Note: To get the most out of this article. Double Click on any highlighted text for additional on point & helpful information.

    If you are the subject of an IRS audit that could be a clandestine criminal tax investigation, it is imperative that you hire legal representation as quickly as you can. The team at our law firm can help review your case and determine the appropriate course of action. Furthermore, we will fight to protect your rights and interests, net worth, and your very liberty. See my content on how to survive an audit where I cheated on the federal or state returns being audited HERE

    Seek help from our experienced Dual-Licensed Civil and Criminal Tax Defense Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or clicking HERE to schedule a reduced rate initial consultation.

    Understanding the Enforcement Arms of the IRS

    To alleviate anxieties related to unexpected IRS visits, it’s essential to understand the different civil and criminal enforcement arms of the IRS. These include the Audit, Collection, and Criminal Investigation divisions of the IRS. Our Dual-Licensed Civil and Criminal Tax Defense Lawyers & CPAs can help deal with each of these enforcement arms and navigate the complexities of your specific case.


    An IRS audit is a review conducted by the Internal Revenue Service (IRS) to examine and verify an individual’s or business’s tax return for accuracy and compliance with tax laws. During the audit, the IRS assesses the taxpayer’s financial records, transactions, and deductions to ensure proper reporting and payment of taxes.

    The IRS typically initiates contact with taxpayers under audit through advanced written notices delivered by mail. Contact is never initiated via email or phone, as these are likely scams.

    The two most risky audits you could be faced with are an Eggshell or Reverse Eggshell audit. In and Eggshell audit the client committed criminal acts in evading their tax obligations that are at risk of being discovered by the IRS during the seemingly civil tax audit. A Reverse Eggshell Audit is a disguised IRS criminal tax investigation posing as a civil audit. An IRS technical fraud advisor or agent with the IRS criminal tax division can be pulling an auditor’s strings attempting to develop evidence for a subsequent criminal tax prosecution without putting the taxpayer or their representative on notice.


    Collection refers to the process the IRS employs to pursue unpaid taxes from taxpayers who have not fulfilled their tax obligations. It involves various enforcement actions, such as issuing notices, levying assets, and arranging payment plans, with the aim of recovering the owed taxes.

    The IRS Collection arm also communicates via written notices when initiating collection actions unless exigent circumstances dictate otherwise.

    Collections can become criminal in nature where a taxpayer has earned taxable income but has a history of failing to report that taxable income as earned. This can be prosecuted as misdemeanor or Felonies depending upon the facts and circumstances of each case. Actions taken by the taxpayer that illegally hinder the collection efforts of the IRS can also lead to criminal tax prosecution for evasion of payment

    Criminal Tax Investigation

    Meanwhile, IRS Criminal Investigation agents often visit taxpayers unannounced to maintain an element of surprise, ensuring genuine responses and reducing the possibility of rehearsed answers. These agents are specially trained to investigate criminal violations of the tax code, including tax evasion, tax fraud, money laundering, public corruption, organized crime, identity theft, healthcare fraud, and corporate fraud.

    Statistically, if the IRS Criminal Investigations targets you, you have a 90% chance of being criminally prosecuted and serving jail time. If the profession you are in has moral character requirements a conviction can end your career. Doctors, Lawyers, Engineers, Security Brokers, Insurance Agents, Real Estate Agents, to name a few have moral character requirements.

    What to Do When You Are Contacted by the IRS

    Being investigated for tax evasion or financial crimes can have severe consequences, including prosecution and incarceration. If faced with a visit from an IRS criminal investigator, it is crucial to verify their identity by checking their credentials, including inspecting a law enforcement badge and photo identification with an domain email address. You can also contact the IRS through a central phone number to confirm the agent’s employment.

    IRS Criminal Investigation Agents will inform you whether the investigation is administrative or a grand jury investigation. In the latter case, the stakes are higher, indicating the case has progressed further.

    Identifying your role in the investigation—whether as the target, subject, or witness—is vital. If labeled as the target or subject, seeking legal representation is crucial to protect yourself from self-incrimination. Even if they claim that you are merely a witness, obtaining representation before speaking with them is crucial if you potentially have dirty hands in regard to the illegal activity that is being investigated. 

    Avoid contacting your accountant during the investigation, as communications are not privileged and may expose you to risk. If identified as a witness, cooperation may be necessary if served with a summons or subpoena. Your accountant has a conflict of interest with you if they were involved in the activity that is underlying the criminal tax investigation and may throw you under the bus to protect themselves. They are very likely to become government witness number one against you and therefore should be avoided at all costs.

    Finally, you should not attempt to navigate an IRS criminal tax investigation without hiring legal representation. Understanding your rights and seeking legal advice, when necessary, can help you navigate potential challenges during a criminal tax investigation.

    Examples of Tax Evasion that You Can Be Investigated for

    Tax evasion refers to either the intentional fraudulent underreporting of tax due and owning (Evading Assessment) or taking illegal actions to avoid payment of legally assessed tax obligations (Evasion of Payment). The IRS is continuously improving its technology and data analytics and is beginning to employ Artificial Intelligence (AI) to detect and combat illegal tax behavior. If you engaged in any of the following forms of tax evasion, then you may be subject to a criminal tax investigation, audit, eggshell audit, or reverse eggshell audit:

    Underreporting Income

    Underreporting income is one of the most prevalent forms of tax evasion. Taxpayers intentionally fail to report some or all of their income to the IRS. They may do this by not reporting cash transactions, omitting income from side jobs or freelance work, or using undisclosed offshore financial accounts & income generating businesses or investments to hide U.S. taxable income. Unreported Cryptocurrency Income is also a huge exposure issue at present. 

    Overstating Deductions

    Taxpayers may exaggerate deductions or claim patently false expenses to reduce their taxable income illegally. This can involve inflating expenses for business-related deductions, charitable contributions, or personal expenses not legitimately qualified for tax deductions and claiming false schedule C losses.

    Offshore Tax Evasion

    Using offshore accounts to hide income or assets is a sophisticated form of tax evasion. Taxpayers may create shell companies or accounts in tax havens to move money and evade income reporting requirements. Offshore entities make it challenging for tax authorities to trace funds, making it an attractive method for the wealthy to conceal wealth and taxable income.

    Fictitious or Ghost Employees

    In employment tax evasion schemes, business owners may invent fictitious employees or “ghost employees” and report their salaries on tax forms. These fake employees don’t exist, but the business owner embezzles the reported salaries for personal use while avoiding payroll taxes on those funds. See other forms of employment tax crimes here.

    Unreported Cash Transactions

    Some individuals and businesses may deal primarily in cash to avoid leaving a paper trail. By keeping transactions unreported and off the books, they aim to evade taxes on unaccounted income. See audits of cash intensive businesses here.

    Tax Shelter Abuses

    Tax shelters are investment strategies that provide illegitimate / illegal tax benefits. However, in tax evasion cases, taxpayers misuse these shelters to shelter more income than allowed or to create artificial losses to offset legitimate taxable income. See content on the difference between tax avoidance and tax evasion here.

    False or Altered Documents

    Taxpayers may forge or alter documents, such as receipts, invoices, or financial statements, and utilize fictitious payees to support false deductions or claims on their tax returns.

    Failure to File Tax Returns

    Intentionally not filing tax returns is another form of tax evasion. Some individuals may ignore their tax obligations to evade paying taxes altogether.

    What to Do If you Know for a Fact you have Criminal Tax Exposure and Wish to Come into Compliance Without Facing Criminal Tax Prosecution.

    If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

    Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

    It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides 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!

    Call Our Dual-Licensed Civil and Criminal Tax Defense Lawyers & CPAs with Help with Your Tax Exposure Issues

    Get assistance from our experienced Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295 or clicking HERE to book a reduced rate initial consultation.

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