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An egg shell audit is a civil audit in which the return(s) under examination contain a material understatement of income, material overstatement of deductions or credits were claimed that the taxpayer was not entitled to, the end result of which was that the taxpayer showed less tax liability than they would have owed had a true, complete and accurate return been filed. These errors can be caused by mere negligence, which may result in a 20% negligence penalty on any additional income tax found to be owed under audit, or via willful intent which would indicate underlying criminal issues with the tax filings under audit, which may result in 3 to 5 years in jail and or a 75% fraud penalty.
