Criminal Tax Audits

The Internal Revenue Service’s recent expansion in the number of its revenue agents, tax compliance officers, and revenue officers likely portends a corresponding uptick in its compliance efforts, including an increase in “eggshell audits.” Through the use of proper strategic planning, the eggshell audit may present an opportunity for the taxpayer to avoid potential criminal liability, and prevent an unpleasant situation from becoming exponentially worse. The Los Angeles tax specialists at the Ben-Cohen Law Firm possess the expertise of both an attorney, certified by the State Bar of California Board of Legal Specialization as a Taxation Law Specialist, and a licensed Certified Public Accountant (CPA). We have the tools and techniques to effectively handle eggshell audits, and reduce the chances of criminal action by the IRS.

An eggshell audit is a civil IRS examination where potential underlying criminal issues also exist. In the course of an eggshell audit, one of three outcomes will most likely occur: the agent discovers no criminal issues; the agent discovers criminal issues but is persuaded not to initiate the criminal investigation process; or the agent discovers criminal issues and decides to make a referral to the IRS’s Criminal Investigations Division (CI).

If you become the subject of an eggshell audit, you should not utilize your tax return preparer to represent you at the audit. Instead, you should retain an attorney experienced in these types of proceedings. The attorney may then contract an accountant subject to the terms of a Kovel agreement. These agreements, established by United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961), are unique arrangements that allow the attorney-client privilege to extend from your legal representatives to accountants. It is essential that the accountant be subject to a Kovel arrangement, because it may be necessary to share highly sensitive and potentially harmful information with the accountant, which must be kept within the confines of the attorney-client privilege.

Our goals for clients facing eggshell audits are twofold. Our primary objective is to keep the audit as a civil examination and avoid a referral to the IRS’s Criminal Investigations Division. Secondly, we seek to minimize tax exposure and avoid civil fraud penalties imposed by the IRS. Section 6663 of the Internal Revenue Code imposes a 75% penalty on that portion of an underpayment that the IRS deems attributable to fraud.

In addition to representing clients during their eggshell audits, we also provide vital assistance during the important time of preparation leading up to the audit. As a client facing an eggshell audit, you may have possession of documents that could, if disclosed to the IRS, potentially expose you to significant civil penalties or criminal prosecution. In order to prepare the best defense for you, we work with you to identify this information and make sure it is protected. Again, it is essential to partner with legal counsel on this matter, not your tax preparer, to ensure that the disclosures of sensitive information fall under the umbrella of the attorney-client privilege.

Understand that, for us to best represent you, we need to have detailed and accurate information to assess your exposure, where the sensitivities are, and what mitigating facts we can use to offset the risk. We may need to conduct detailed forensic analyses of your accounting records. This process can be essential to prepare for your audit and to devise a plan to prevent the audit from becoming a criminal investigation.

Eggshell audits are potentially dangerous matters for you and your business, as the ability to minimize the scope and context of the IRS’s investigation may mean the difference between a manageable civil penalty and criminal charges or fraud-related penalties. Our firm has the knowledge and experience regarding eggshell audits to offer our clients the best representation in these matters. If you have concerns about your audit, contact the Los Angeles tax attorneys at the Ben-Cohen Law Firm.