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How Likely Is an IRS Audit to Be Followed by an IRS Criminal Tax Investigation and Prosecution?

An IRS audit, in and of itself, can be a terrifying and exhausting experience for taxpayers to go through. However, things get exponentially worse if the results of that audit suggest you are guilty of some sort of fraud or other intentional wrongdoing and your case is referred to the IRS’ criminal investigation (C.I.) division for investigation and possible prosecution. C.I. has a 90% conviction rate!

Especially for those who have no prior experience dealing with an IRS audit, you may be unsure of how likely criminal charges are to flow from an audit that shows fraud and you may not know what best steps to take during the audit to mitigate potential damages. At the Tax Law Offices of David W. Klasing, our experienced Tax Attorneys and CPAs can assess the potential liability you are facing and work to prevent the situation from escalating from a civil matter to a criminal tax matter.

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How Does an IRS Audit Work?

Audits by the IRS can occur for a multitude of reasons, including due to statistically detected issues with underreporting of income, claiming unsubstantiated expenses, or claiming tax credits you do not qualify for. They on rare occasions can also be completely random. Typically, auditors can look back at up to 3 years of tax returns, but sometimes they can go further into the past. If fraud is determined to have occurred the statute of limitations opens back to the dawn of time.  If a 25% understatement of taxable income occurs a six-year statute opens and if a return contains a Net Operating Loss or Capital Loss carryforward the years that generated it and or absorbed it can be opened no matter how many years back.

There are three different types of IRS audits. The first is a correspondence audit, which is conducted entirely remotely through mail or e-mail. The auditor will request that you send records and documents to verify the information on your tax returns. The second type is an office audit, which is similar to a correspondence audit except that you take the requested documents and records to an IRS field office where they are reviewed by an auditor in person and you will be subject to an in-person interview. The final type is a field audit, where agents come to your home or place of work to review these files themselves and you will be subject to an in-person interview and the auditor will ordinarily want to tour your business facilities to plan the audit to identify likely misstatements. The last two audits described are incrementally higher risk tax audits.

Audit Questions the IRS Asks Online Business Owners

If you learn that any of these types of audits is going to occur to you, the first thing you should do in to contact an experienced tax lawyer like those at The Tax Law Offices of David W. Klasing. We can work and ensure that you are not providing unnecessary information to the auditor that could lead to the IRS bringing criminal charges. For example, sometimes, when suspected fraud is a reason for the audit, the auditor will be assisted in the background by an IRS Fraud Technical Advisor (FTA). An attorney can appear with you at any interviews and prep you to ensure that you are not answering questions in a manner that could provide the IRS agent and the FTA with cause to refer your audit to C.I. for a full-blown criminal tax investigation.

When Will an IRS Audit Lead to Criminal Investigation and Prosecution?

Anytime that an auditor finds firm signs of wrongdoing or deception, called “badges of fraud” when reviewing your returns, it increases the likelihood that the case will be referred to the criminal investigation division, or at least to an FTA for consultation and potential further fraud development. The main thing that the criminal investigator will be looking for in terms of whether to proceed with the case is whether there is evidence of willfulness. Willfulness is a necessary component of every criminal tax felony, including tax evasion. However, willfulness can sometimes be shown through such legal concepts as “willful blindness” especially in the realm of unreported foreign accounts and related taxable offshore income.

In deciding whether to proceed with a case, the criminal investigator will also consider the amount of the tax loss involved. If the amount is not enough under federal sentencing guidelines to result in a prison sentence for the taxpayer, the case is unlikely to proceed. A tax loss as low as $30,000 could qualify for a sentence of incarceration, however.

Penalties for Tax Crimes

The penalties for tax crimes will vary depending on the particular crime with which you have been charged, and of course, will be higher for the most serious charges. However, even for the most “minor” tax crimes, the penalties can be quite severe, including large fines, restitution, and a significant prison sentence. For example, a single charge of tax evasion can result in a prison sentence of up to 5 years. Ordinarily, 5 to 6 tax years are investigated because of the statute of limitations and multiple tax crimes can apply to a single tax return.

It goes without saying that you should never fight a battle against the IRS alone, especially when it has proceeded to the point of a potential or actual criminal tax matter because the stakes are too high. It is worth emphasizing that most tax professionals, especially the original preparer (even if an attorney) not only do not have attorney-client privilege but may have their own exposure in the situation and worse yet may be forced to testify as to all communications with you in a subsequent criminal tax investigation or prosecution.  Having an experienced tax lawyer like those at The Tax Law Offices of David W. Klasing fighting for you can be the difference between spending years in jail and walking away with a slap on the wrist.

If You Are Worried about Criminal Tax Liability, Call Our Experienced Tax Lawyers Today

It is highly recommended that you have an experienced tax lawyer and a staff of Kovel accountants like those at The Tax Law Offices of David W. Klasing representing you at the outset in a high-risk audit and not once your case has been referred for a criminal tax investigation. We are most effective when we can work to reach a potential civil settlement with the IRS before any criminal tax charges are filed. If charges have already been filed, we can reach out to the prosecuting attorney and try to negotiate on your behalf for the charges to be dismissed or downgraded.

The IRS takes willful conduct to deceive them by underreporting income, claiming deductions you are not entitled to, a pattern of non-filing or simply not paying what you owe with attempts to evade collection very seriously. If potential criminal conduct is spotted during an audit, it is likely that the matter will be referred a TFA for development for a handoff to the criminal investigation unit for investigation. Anytime you are concerned about criminal tax liability from the IRS, you should contact an experienced Criminal Tax Lawyer and staff of Kovel Accountants like those at The Tax Law Offices of David W. Klasing. We can work to settle the matter as quickly and positively as possible and to mitigate any potential civil or criminal ramifications. Call us today at (800) 681-1295 to schedule a reduced-rate initial consultation.

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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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