Everyone who files a tax return is subject to being audited by the Internal Revenue Service (IRS). An IRS audit is time-consuming, can involve multiple meetings with an IRS agent, and is often unpleasant. The audit can and usually does lead to increased taxes, penalties, and interest. Some audits result in “NO CHANGE,” which means the IRS agent determines that the tax return was correct, and no additional taxes penalties or interest will be imposed. A more common result of an audit is that the IRS will find some errors that will increase the tax due.
On occasion, the IRS auditor may suspect that the taxpayer intentionally:
- Failed to disclose all income,
- Overstated deductions,
- Failed to report offshore accounts, or
- Provided false documents and information
When this happens, the IRS civil auditor will discuss the matter with his supervisor, and the case may be referred to the IRS Criminal Investigation Division. This branch of the IRS enforces criminal statutes concerning taxes and conducts investigations to determine whether a case should be referred to the Department of Justice for prosecution.
Reasons a Civil Audit Can Lead to a Criminal Prosecution
A civil audit may turn criminal for several reasons. During a conversation between the auditor and the taxpayer, a miscommunication can occur, or the IRS agent misunderstands what was said. Based upon that mistake, the auditor may think that the taxpayer is intentionally lying. When this happens, the risk of a criminal investigation increases.
Another reason that a criminal investigation can result from a civil audit is that the taxpayer admits to intentionally committing fraud. Many times, a criminal case would not have been brought if the admission were not made. The production of false or fabricated documents to justify deductions can also result in a criminal prosecution.
Making a Mistake Is Not Necessarily a Crime
A mistake in computing taxes or in disclosing all income does not automatically equate to a crime. The tax laws are hard to understand, and tax returns can be difficult to complete. Simply because there are incorrect entries on a tax return does not mean that the taxpayer committed a crime. The cornerstone of a criminal tax case is that the taxpayer must act willfully; that is, he or she must know that the tax return is false.
Factors than Can Trigger a Criminal Investigation
In our experience, the IRS civil agent and criminal agent, if confronted with answers that appear to be false or receive documents that appear to be false, will conclude that the taxpayer willfully violated the law.
When we represent individuals or companies under IRS audit or criminal investigation, one of our major goals is to ensure that IRS summons are completely and accurately complied with. It is also necessary to keep a copy of everything given to the IRS. We keep a duplicate copy to protect our clients from an accusation that a document was not produced.
It is also imperative that documents and electronic data provided comply completely with the IRS summons and that the documents and data have not been modified, changed, or falsely re-created.
A sure way to initiate a criminal tax investigation occurs when a taxpayer provides false documents. From this act alone, the IRS auditor, criminal investigator, and the Department of Justice prosecutor will often infer criminal intent.
A Department of Justice Office of Public Affairs release dated September 2, 2020, gives an example of what not to do when providing documents to the IRS during an audit. An attorney who specialized in tax law was representing a client who owned medical clinics. The IRS auditor requested bills of sale of clinical equipment subject to depreciation to support the deductions.
The documents provided, however, falsely inflated values of the equipment. The attorney also provided lower valuation information to third parties on the same equipment. The IRS discovered the lower values during the audit. Ultimately, the attorney pled guilty to corruptly endeavoring to impede and obstruct the IRS.
The Department of Justice Tax Division press release shows the importance of providing truthful and accurate documents. The fact that an attorney provided false documentation to the IRS resulted in the attorney’s being convicted and sentenced to prison, as well as his client.
Whenever a taxpayer utilizes an attorney, CPA, accountant, or tax return preparer, the taxpayer has the right to rely on the advice given concerning the preparation of tax return and production of documents to the IRS. In the case discussed above, the doctor was involved with the attorney in knowingly presenting false information and submitting false tax returns.
The Right to a Lawyer in Tax Matters
Anyone under IRS audit has the right to be represented by an attorney. When dealing with IRS agents who may be overly aggressive, consideration should be given to exercising the right to an attorney when dealing with the IRS.