So what is an “eggshell audit”? The term refers to the possibility that the subject of a civil audit could, under pressure, crack open and provide information leading to a referral for criminal investigation. The goal of the attorney advising a client facing an eggshell audit is clear: resolution of the audit without a referral by the civil examiner to the IRS’s criminal investigation division (CID). Reaching that goal can be difficult, complex, and perilous—for both the client and the attorney.
This article explores four key aspects of representing a client undergoing an eggshell audit:
- How civil IRS audits arise and the steps you should take as counsel to prepare for the audit;
- Recognizing when your client is facing an eggshell audit and how to recognize whether your client might have committed criminal tax fraud;
- Techniques to employ when representing an eggshell audit client and the signals to look for when evaluating whether a civil investigation has turned criminal; and
- Steps the subject of an eggshell audit can take after a criminal investigation has started to lessen the possibility of referral for prosecution.
AUDITS AND PREPARATION FOR AUDITS
Causes of audits
- The IRS examines tax returns to determine whether taxable income has been accurately reported on the tax return. The IRS’s authority to examine the books and records of a taxpayer, and to interview the taxpayer directly, is codified at Code sections 7602 and 7605. A number of factors may trigger an IRS examination including, but not limited to:
- Excessive deductions in relation to income;
- IRS receipt of conflicting information from a third party (e.g., a 1099 or K-1 which does not match the amounts reported on a taxpayer’s return);
- Whistleblower complaints;
- Tips from disgruntled employees or ex-spouses;
- Taxpayer participation in a particular transaction or type of transaction that the IRS has flagged for review (e.g., a tax shelter);
- Information obtained by the IRS from a John Doe summons;
- The expansion of a previously limited audit.
The Practical Tax Lawyer
CLICK HERE to read the full article, which was originally published in ALI CLE’s The Practical Tax Lawyer.