If you are being audited, and have concerns that the IRS may discover that you committed fraud your tax return, don’t go at it alone. The stakes have become high – here are guidelines to help you make a decision on the best way to proceed:
1. Whatever you do, don’t represent yourself – hire a professional – whether a tax attorney, enrolled agent or C.P.A. – who has experiencing in defending potential IRS tax fraud cases. A significant benefit to hiring a tax attorney is the attorney-client privilege – your communications with your attorney – telephone calls, emails, meetings – discussing your case, developing the facts, formulating a defense strategy – are confidential and cannot be disclosed to the IRS.
2. You have the right to have your attorney handle all negotiations with the IRS for you. All calls, conversations, negotiations, route directly through your attorney, not you. You take a backseat in the negotiations. You are no longer dealing directly with the auditor. All conversations route through your attorney, who relays the information to you, with discussions to formulate responses. No knee-jerk responses in potential fraud cases.
3. If you have already met with the auditor, stop, and hire counsel. It’s not too late.
4. In potential fraud cases, it is best to distance yourself from the investigation. The IRS would not mind if you, alone, gave testimony. That is not recommended. Going at alone allows you to make misstatements of facts – even if with good intentions – that can be difficult to go back on. Nerves, anxiety, an over-eagerness to comply with the IRS – not too mention an unfamiliarity with the process – is a dangerous mix. Adding untruths to a fraud investigation fuels the IRS’s fire.
5. You have a Fifth Amendment right not to incriminate yourself. That means you do not have to testify to the IRS, or provide them any firsthand information. This is a tricky situation – you have the right to remain silent, but if you exercise it, the IRS often becomes more interested, more aggressive – something is clearly being hidden. Sometimes, it is better to talk – but that is a determination that has to be carefully reviewed, with all the facts considered.
6. Maybe we should fully disclose and admit to the problem, immediately. The disclosures are made by your attorney, not you. Chances are, the IRS is auditing your return because something on the return did not look right to them – remember, your tax return presents a financial portrait to the IRS. The audit letter you received likely already identified the trouble areas. The IRS already senses something is wrong – many times, the right amount of straight talk works with an auditor – and is appreciated. I have found that there is a lot to be said for taking the edge off, coming forward and disclosing the obvious – auditors want to close cases, and often appreciate their work being done for them. It is often the “a-ha” moment of auditor discovery that can doom a fraud case and turn it into more than negligence. This strategy is fact specific – but usually will result in a reduction of charges to negligence – no fraud.
7. If you already made misstatements on your tax return, don’t try to get around it with more creative accounting or explanations during the audit. Making a mistake on a tax return can be explained away as negligence (which does not equate to fraud) – but lying to an auditor cannot. Don’t pile it on.
8. You are not necessarily going to jail. There are different types of tax fraud – civil vs. criminal. Civil tax fraud is money only, no jail, no criminal investigation. The penalty is steep – 75% of the tax owed – but that beats a criminal investigation.
9. Your case may be simply negligence – where the penalty is 25% of the tax owed. The IRS has different standards of proof for tax negligence, civil tax fraud, and criminal tax fraud. Negligence is not fraud, and has no criminal repercussions. Here’s the level of proof for the IRS, from highest to lowest: (1) Criminal fraud, (2) civil tax fraud, (3) negligence. You may have done something wrong, but it may not amount to criminal charges – it could be simply negligence, which is money damages only.
10. IRS criminal indictment statistics are public record – and are instructive to the civil vs. criminal tax fraud concerns. In fiscal year 2014, for example, the IRS initiated 2,015 criminal investigations, which resulted in 1,663 recommendations for prosecution. 1,590 of those recommendations resulted in prosecution. The point: IRS is very selective in how it uses its resources to prosecute tax crimes – 2,015 investigations is serious, but a very small number spread over the population base. Few are prosecuted – the facts have to dictate the allocation of IRS resources. Many IRS criminal investigations are specific programs – employment tax fraud, return preparer fraud, money laundering/related criminal activities, and abusive tax schemes. But those who are prosecuted are usually convicted – IRS wants to win its criminal cases, and make them count. Criminal tax fraud is extremely serious, but your facts have to be put into perspective with what the IRS is looking for.
And I say this often: It is important to remember that an IRS audit is the beginning of a process, not an end. If there is disagreement with the IRS audit results, you have rights to an administrative review of the audit with the IRS Office of Appeals. If we cannot reach resolution in appeals, there are more rights – to file a petition to U.S. Tax Court, where a judge, independent of the IRS, will review our facts and law, compare to the IRS’s position, and give you an unbiased decision that is binding on the IRS.