If you are under criminal investigation by the IRS, you have the right to legal representation. Anything you say or do can be used against you by the IRS. This could lead a criminal investigation into a criminal prosecution for tax evasion, tax fraud, failure to file a tax return, failure to collect employment taxes or failure to pay collected taxes to the IRS. The government has the burden of proof beyond a reasonable doubt to obtain a criminal conviction in a tax case.
Generally, tax investigations begin as a civil matter. However, if a civil investigation discovers badges of fraud of the taxpayer, the case may be referred to the IRS Criminal Investigation Division (CID) and assigned to IRS Special Agents. The following are common badges of fraud: unfiled returns, two sets of books or no books at all, unreported income or overstated deductions, and suspicious taxpayer conduct. A taxpayer selected for an IRS tax audit examination who has substantially underreported income or overstated deductions is in a sensitive or “eggshell” situation. This taxpayer should stop communications with his or her accountant and retain legal counsel because accountant-client privilege does not apply to criminal cases. Thus, an accountant could be forced to testify to everything said by the taxpayer. Attorney-client privilege prevents the government from compelling the attorney to disclose confidential communications related to legal advice.
The following are three common red flags that a criminal investigation has begun:
- The Revenue Agent who has been auditing the tax return ends the investigation without issuing a final report.
- The Revenue Officer responsible for collecting tax debt stops pursuing the taxpayer.
- The taxpayer or a related party is contacted by an IRS Special Agent.
It is best to resolve an eggshell tax investigation as a civil matter with legal representation. This can reduce the taxpayer’s exposure to a criminal investigation.