Eggshell Audit: IRS High Risk Examination & Criminal Exposure: With an eggshell audit, the taxpayer is at a high risk for a potential IRS willful violation, tax fraud, and even a criminal investigation by the IRS. An eggshell audit is a situation in which the Taxpayer may have incriminating evidence that the agent is not yet aware of (unless the agent is aware, and it turns into a Reverse Eggshell Audit). This can get even more dangerous, when offshore penalties are at risk. In recent years, the Internal Revenue Service has taken an aggressive position on matters involving foreign accounts compliance. The combination of tax fraud and willful FBAR penalties can lead to financial devastation.
The biggest risk with the eggshell audit, is that the taxpayer will self-incriminate. First, there is no 5th amendment right in a civil setting. So, let’s a take situation in which the taxpayer has offshore accounts.
The IRS is auditing the taxpayer for an unrelated issue. The taxpayer receives a first IDR (Information Document Request) and the IRS requests several documents, but nothing specific to unreported income. Therefore, the Taxpayer does not provide the information about the offshore accounts.
When the Taxpayer is sitting (hopefully with experienced counsel) during the audit, the auditor is asking several questions, but none directly addressing unreported income.
Common terms and phrases associated with Eggshell Audits include:
- Eggshell Audit
- Reverse Eggshell Audit
- IRS Eggshell Audit
- IRS Reverse Eggshell Audit
- Criminal Tax Investigation
- IRS Special Agent Investigation
Protection Against Self-Incrimination
On the one hand, the taxpayer is required to answer all questions honestly and accurately. On the other hand, the taxpayer is not required to self-incriminate himself or herself. If the taxpayer makes intentional misrepresentations or omissions, it can lead to a criminal investigation.
BUT, if the agent never asks questions involving offshore accounts, is the taxpayer required to just volunteer the information? Key issues will involve: unreported income; tax exposure, etc.
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.
Golding & Golding (Board-Certified Tax Law Specialist)
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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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 FBAR Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
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Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.