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Why is a reverse egg shell audit dangerous for a taxpayer?

Because of recent changes in IRS internal policy, parallel investigations are on the rise and are rapidly becoming a favorite tool of the IRS. The advantages to the government in utilizing reverse egg shell audits is that the ample investigatory tools available to the average civil auditor such as third party subpoenas to banks and witnesses can be utilized without the taxpayer having the opportunity to utilize the constitutional protections of the due process clause, the fourth amendment privilege against unreasonable searches and seizures, and the fifth amendment right not to self-incriminate which are the most powerful tools available to criminal defense counsel

Ordinarily an IRS civil revenue agent’s primary concern is supposed to be determining the correct civil tax liability for the tax years at issue, while an IRS Special Agent from the Criminal Investigation Division is primarily concerned with gathering evidence to prove criminal violations have occurred and to prove it at trial if need be. CI Special Agents are required to advise taxpayer’s of their constitutional rights against self-incrimination and of the taxpayer’s right to have an attorney present during an interview via a non-custodial reading of their rights which states that anything they say may be used in a subsequent criminal prosecution for tax crimes. Because of this requirement, the initial interview with the special agent will often be delayed while the investigated taxpayer obtains legal counsel. To avoid granting the investigated taxpayer this tactical advantage in a reverse egg shell audit, initial contact is often made via a civil revenue agent to avoid putting the investigated taxpayer on notice that they are under criminal investigation while the civil examiner continues to collect information and conduct interviews with the taxpayer (and more importantly their often unseasoned representative) is none the wiser.

Reverse egg shell audits therefore present grave danger to less informed taxpayers who often tragically employ less sophisticated & often less expensive tax representatives, (i.e.CPAs & E.A.’s) that lack attorney client privilege and usually have a conflict of interest with the client because they prepared the original returns at issue and thus need to protect their own reputation with the taxing authorities. These less sophisticated representatives will often blindly cooperate with the auditor under the misconception that the taxpayer is merely complying with a standard civil audit and thus unwittingly waive the taxpayer’s constitutional rights that experienced criminal tax defense counsel would have exercised if they suspected their client was facing a criminal investigation.

Moreover, Reverse egg shell audits / parallel investigations often involve cooperating federal agencies (such as the SEC, FBI, DEA, ABC and the DOJ) and the civil and criminal investigation functions of the IRS. This flavor of egg shell audits additionally carries the added risk that the examination conducted by the IRS will advance the criminal investigation of the cooperating federal agency.

Lastly, revenue agents commonly continue to collect information after the discovery of firm indications of fraud, and thus procedurally go off the reservation by effectively conducting their own personal reverse eggshell audit. The continued investigation by the revenue agent without proper notice to the taxpayer and their representative that subsequent statements made and information provided will likely be used in a subsequent criminal investigation and prosecution violates the taxpayer’s constitutional rights that would exist if they were approached by the criminal investigation division directly and received a Miranda like reading of their rights.