Civil Examination vs. Criminal Investigation
Criminal Tax Audit: Technically, a civil audit by the IRS cannot turn into a criminal tax audit. Before a civil audit turns criminal, the IRS agent must first refer the case to the Special Agents to launch a criminal examination.
When a taxpayer is audited, and their tax returns are under examination, there is always a risk.
There is a risk the agent may turn up previously unreported income, assets, investments and more. More often than not, the audit will end without any issue of potential criminal liability (Revenue Agents/Examiners have no right to inquire about criminal related issues.) The main concern is if the agent believes you committed a fraud, they have the right to refer the case to the Special Agents — and the Special Agents may recommend further investigation and/or indictment.
Are You at Risk?
Two main types of IRS Audits that have the potential to expand to a criminal investigation are the eggshell audit, and reverse-eggshell audit.
An Eggshell Audit is a tough situation to be in. Worse yet, a reverse Eggshell Audit can be even more dangerous. And, beyond the fear of being referred to the IRS Special Agents for a Criminal Investigation is the fact that when it involves international law (aka Offshore Disclosure, Foreign Account Reporting, income from abroad or money from overseas) the stakes are higher.
That is because the penalties are worse, and ever since the Internal Revenue Service has made international offshore compliance a key enforcement priority, the IRS auditors and agents are on the lookout for any indicia of possible offshore or foreign income/reporting violations.
With an Eggshell Audit, the IRS is simply auditing you – BUT, you have a secret. You know you committed a Tax Crime(s). And, you have to walk the fine line during the audit to:
– Not make any Intentional Misrepresentations
– Not make any Intentional Omissions (within the scope of the questions)
– Avoid Getting Scared and Pleading the 5th Prematurely
In all reality, you and your Attorney (Never go to an IRS Audit when you know you committed a Tax Crime without counsel) may be the only ones who know about the crime (Read: Poker Face).
You need an Attorney, because you need to be able to rely on the confidentiality of the Attorney-Client Privilege.
Reverse Eggshell Audits
These suck. They are probably not even legal, but they happen. The IRS agent Knows or is Pretty Sure you committed a Tax Crime. With that said, the IRS Agent dances around the issues in order to collect as much financial and other background as he or she can, couching it in the fact that it is required to support a civil audit case against you — when in all reality, the Agent/Examiner is mounting a criminal case against you.
This is nearly always illegal. Why? Because if you are ever in a Civil Audit and Auditor/Examiner suspects Tax Fraud or another Tax Crime, he or she must immediately cease the audit. You have the absolute right against self-incrimination and it is illegal to couch a criminal investigation in a civil audit.
The Problem: It may be hard to prove it was Criminal Investigation couched as a Civil Audit.
IRS Criminal Tax Investigations
At Golding & Golding, we try our best to break down complex legal concepts for individuals so they have a better idea, in real world terms what legalese really means.
Since eggshell audits are becoming a lot more prevalent, especially in the realm of international tax law, we are going to provide a summary of what these two different terms mean.
In all reality, if you are facing an actual audit or think you may be prone to a reverse eggshell audit it is crucial to utilize experience international tax counsel with audit defense and criminal tax experience.
Pleading the 5th
This is a concept which may be misconstrued and used improperly by inexperienced counsel. The question is whether a person can claim the Fifth Amendment a.k.a. the right to silence during the civil audit.
In all reality, if the taxpayer claims the Fifth Amendment the auditor is going to cease the audit at this time. But, it is important to note that by pleading the fifth, the taxpayer is all but telling the auditor that he or she committed a crime. As a result, more likely than not the auditor is going to recommend a criminal investigation to his or her supervisor/manager.
By telling the auditor you are pleading the fifth, your are telling the auditor that you committed a crime.
In nearly all scenarios, this is not the best strategy.
Intentional Misrepresentation vs. Truth
This is a very fine line to walk. With that said, a person should never, in fact – absolutely never – make any intentional misrepresentations or omissions to the auditor. On the flip-side, the individual should never volunteer any information which was not asked to him or her.
Question: “What kind of car do you drive?”
Answer: “Porsche Carrera”
This is a perfectly valid answer to the question.
This is different than the following:
Question: “What kind of car do you drive?”
Answer: “A Blue Porsche Carrera that I paid for in cash because I hate carrying loans.”
In the first answer, the taxpayer answered the question. If the auditor wants to know how the taxpayer paid for the car, he or she should have to ask. If the auditor wants to know why the taxpayer purchased $110,000 ride in cash, he or she should have to ask.
In other words, the taxpayer is not required to volunteer any additional information beyond a direct and truthful answer to the question. In the second answer, the Taxpayer is nearly begging the IRS Auditor to follow-up and probe more deeply into his answer.
Right Against Self-Incriminating Statements
We all have the right against self-incrimination. In the above referenced example, the reality is the taxpayer used offshore money that had been earning income and transferred to an account under his girlfriend’s name. This is an example of offshore tax fraud and evasion.
But, since we all have the right against self-incrimination, the taxpayer is not required to divulge all of this information to the auditor – unless directly asked. Rather, the taxpayer is required to answer all questions from the auditor truthfully. In the above referenced example, if the auditor really just wanted to know what type of car the taxpayer drove, then the taxpayer has answered the question truthfully.
Conversely, if the auditor wants to begin digging deeper or further into the purchase, the auditor will ask follow-up questions. Thus, it is not the taxpayers responsibility to provide any information beyond what the auditor is asking. Moreover, if it begins to smell like a criminal investigation or the client may self-incriminate, it is time for the Attorney to try to resolve it.
Unreported Foreign Income
This is a very complex issue that arises during the audit. With the enforcement of offshore penalties such as FBAR, FATCA, 5471, 8621, 8865, etc. many of the IRS agents are much more in tune with questions involving foreign or offshore income.
As a result, it is more common these days for an IRS agent to ask about unreported foreign income or any income during an audit. And, if the auditor asks the taxpayer this direct question, the taxpayer must answer truthfully. This is where it helps to have experienced international tax litigation counsel.
The idea is to try to maneuver the audit so that the auditor doesn’t think to ask that type of question. Still, you can never lie during the audit.
If the auditor asked straight out “do you have any income you did not report?” The taxpayer cannot lie; whichever strategy he or she chooses to either answer the question or avoid the question is up to the taxpayer and counsel.
Proactive Duty to Disclose
This is another very complicated issue. The taxpayer has a proactive responsibility to disclose any information that may help the auditor during the audit. On the flip-side, the taxpayer has a right against self-incrimination. Moreover, a civil audit is not a criminal investigation.
The taxpayer is not read his or her Miranda rights (or even in part as required by the special agents who represent the criminal faction of the IRS). As a result, the auditor is prohibited from delving into any criminal investigation of the taxpayer during the audit, since in any criminal setting, the taxpayer has the right against self-incrimination.
Reverse Eggshell Audit
Not to be bound by rules and laws, the IRS seems to be taking a different position in moving forward in situations in which they believe a person may have committed a criminal act – the reverse eggshell audit.
In a typical actual audit, the taxpayer knows that he or she has unreported foreign income and is trying to dance around the audit without making any intentional or reckless misrepresentations or omissions during the audit.
In a reverse actual audit, that agent already knows that the taxpayer has unreported income or is pretty sure. The agent is asking questions which are indirectly probing potential criminal liability – which is prohibited by the IRS. This is a very, very tough scenario and the taxpayer must really be astute, prepared, and in tune with counsel.
That is because if the auditor is trying to ask criminal type questions in a civil setting, the attorney has to be cautious not to call him or her out, but at the same time experienced enough to help the client stayed poised, truthful, and responsive.
Direct vs. Indirect Questions
If the auditor begins to ask direct questions, the taxpayer should not make any intentional misrepresentations.
For example, if the auditor asks whether the taxpayer has any unreported income and the taxpayer is aware that he or she does, then the taxpayer should answer the question as practiced and prepared with counsel.
Alternatively, if the auditor is digging for information but not asking pointed direct questions, the taxpayer should be cautious not to volunteer any unnecessary information.
Getting Into Compliance
Once a person is under auditor examination, they are typically prohibited from entering any of the offshore voluntary disclosure programs. But, that does not mean the taxpayer is without strategies for avoiding monsters penalties.
For example, the taxpayer was preparing to amend the returns and enter OVDP but was audited before he or she had a chance to submit, that may help bolster the taxpayer’s position and reduce penalties.
Moreover, if the taxpayer and his/her counsel can work with the IRS Agent to facilitate a global resolution wherein the taxpayer is willing to pay money penalties up front, it could bring a faster resolution and avoid criminal investigation.
Why? Because even IRS agents are human. And, if the IRS agent believes that he or she will get the opportunity to collect large penalties, close the case up quickly, and move onto the next case — then the IRS agent will look great in front of his or her supervisor, have a case closed and off the desk, and collect substantial penalties — which the IRS loves.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.