IRS AUDITS are usually uneventful. Auditors ask taxpayers to produce receipts, canceled checks and similar documentation to verify deductions and other facts and figures. When taxpayers come up with the required substantiation, examiners move on to other audits. In fact, the feds frequently close cases without exacting extra taxes—and sometimes they even authorize refunds.
But things aren’t always so friendly.
Be concerned when an IRS investigator walks in unannounced at your home or office and asks to see your records. Odds are, that sort of surprise audit means the agency suspects you filed returns that are fraudulent.
If you’re targeted for what looks like an out-of-the-ordinary audit, be sure to find out the official designation of the person with whom you’re suddenly chatting. Is the Sherlock a revenue agent with the Examination Division or a special agent with the Criminal Investigation Division?
The difference isn’t academic. Revenue agents conduct routine examinations of dependency exemptions, business expenses and similar items. Ordinarily, special agents are assigned exclusively to investigate suspected criminal violations of the tax laws.
Also, be on guard when you receive advance notice of an audit, but it turns out two examiners show up to scrutinize returns. Both may be revenue agents—one a veteran and the other a rookie who’s along merely to get some on-the-job experience—which is less worrisome.
The appearance of two examiners, however, often means that a special agent and a revenue agent are teamed together on a “joint investigation”—the bureaucratic euphemism for what goes on when the agency accumulates evidence for a criminal prosecution.
The penalties for tax evasion are severe: a stay at Club Fed of as much as five years and/or fines of as much as $100,000 for each fraudulent return. Those fines are on top of the hefty civil penalties for fraud. You’ll also be dinged for the back taxes and interest that the IRS routinely exacts from cheaters who are spared criminal prosecution.
The IRS sets strict guidelines for its special agents on what they can and should do when they drop in—with or without notice. They’re supposed to identify themselves as special agents and to advise individuals of their constitutional rights. The ones that most concern you are “the right to remain silent and to be advised by an attorney.”
What should you do if you become aware that you’ve been singled out for a criminal investigation? Your options immediately dwindle to one: Get the advice of an attorney knowledgeable about criminal investigations before you hand over any records or make any statements to special agents. Such disclosures can come back to haunt you when they’re pieced together and repeated on the witness stand by government sleuths.
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous articles include Stepping Up, Give and Receive, and Hitting Home. Information about his books is available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.