April 28, 2023
Tax Preparers and Promoters (and Their Clients) Are Facing IRS Scrutiny
The Internal Revenue Service (IRS) has recently issued multiple notices and proposed regulations focused on combating tax preparer fraud and cracking down on abusive tax schemes facilitated by promoters. IRS Criminal Investigation (IRS CI) has recently issued multiple press releases highlighting its efforts to target tax preparers and promoters as well.
While these efforts present risks for tax preparers and promoters, they also present risks for taxpayers who rely on tax preparers and promoters when making decisions about their tax mitigation strategies. Although good-faith reliance can serve as a defense to criminal tax evasion charges, all taxpayers must pay the full amount they owe—even if they have fallen behind on their federal tax obligations as a result of relying on a tax preparer’s or promoter’s bad or self-serving advice.
Facing an IRS Audit or Investigation Involving Tax Preparation Services or Tax Planning Promotion
The IRS’s Office of Promoter Investigations is responsible for leading the agency’s efforts to “detect and deter abusive tax promotions and abusive return preparers, including those who enable abusive tax promotions.” It targets tax preparers and promoters who are suspected of facilitating fraudulent and abusive tax avoidance strategies, including (but not limited to) those listed on the IRS’s “Dirty Dozen.” It also works with IRS CI and other divisions of the IRS to target high-income taxpayers who work with fraudulent tax preparers and promoters—whether intentionally or not.
For 2023, some of the abusive tax schemes on the IRS’s “Dirty Dozen” that are most relevant to high-income taxpayers include:
- Deductions related to fake charities
- Fraudulent Employee Retention Credit (ERC) claims
- Fraudulent fuel tax credit claims
- Schemes targeting high-income taxpayers (including charitable remainder annuity trusts and monetized installment sales)
- International tax avoidance schemes (including the use of offshore accounts, foreign captive insurance schemes and Maltese individual retirement arrangements)
- Other fraudulent tax avoidance strategies (including micro-captive insurance arrangements and syndicated conservation easements)
Given that these are among the IRS’s top enforcement priorities, tax preparers, promoters and high-income taxpayers who are targeted for their alleged participation in these schemes must be prepared to defend themselves effectively. Along with the possibility of civil enforcement action, allegations of facilitating or taking advantage of an abusive tax scheme can also lead to criminal allegations. With this in mind, when facing scrutiny from the IRS—or when concerned about facing a federal tax audit or tax fraud investigation—tax preparers, promoters and taxpayers should:
1. Promptly Engage Experienced Federal Tax Counsel
Any time you have concerns about facing scrutiny from the IRS (or IRS CI), your first step should be to engage experienced federal tax counsel. At this point, you need to be making informed decisions, and you need to be taking steps toward executing a strategy focused on protecting you to the fullest extent possible. Experienced federal tax counsel will be able to promptly assess your situation, evaluate your options and help you choose the most advisable path forward.
2. Conduct an Attorney-Client Privileged Risk Assessment
Working with your federal tax counsel, you should gather all relevant records and conduct an attorney-client privileged risk assessment. Whether you are currently facing IRS scrutiny or you have concerns about being contacted by the IRS, you need to know what (if anything) revenue agents or investigators may be able to uncover. Once you have an accurate understanding of your risk, then you can focus on determining your next steps and, if necessary, building your defense.
3. Address Any Enforcement Risks Proactively, if Possible
If you have not yet been contacted by the IRS, proactively remedying any tax law violations (to the extent possible) could mitigate your risk significantly. While taxpayers and others have options for reducing their potential liability resulting from tax law violations, many of these options go off of the table once the IRS initiates an audit or investigation.
4. Rely on Their Counsel to Deal with the IRS
Whether you are seeking to proactively resolve any tax-related issues or you are currently facing IRS scrutiny, you should rely on your counsel to deal with the IRS on your behalf. If revenue agents or investigators contact you directly, you should refer them to your counsel, and you should avoid answering any questions or providing any records to the IRS directly.
5. Formulate and Execute a Targeted Defense Strategy
Based on the circumstances at hand, you will need to formulate and execute a targeted defense strategy focused on the specific statutory and regulatory allegations that the IRS has (or is likely to) put forth. To deal with the IRS effectively, you need to know exactly what you need to defend against, and you need to formulate your defense based on a comprehensive understanding of the relevant facts and legal authority.
6. Pursue a Settlement if Warranted
While it will be possible to avoid both civil and criminal liability in many cases, in some cases, it won’t. If an IRS audit or investigation appears likely to lead to civil or criminal enforcement, it may be in your best interests to target a settlement. There are various ways to approach settlement negotiations with the IRS; and here too, an informed and proactive strategy is key.
7. Be Prepared to Defend Against Civil or Criminal Tax Fraud Allegations if Necessary
Finally, if settling is not in your best interests and the IRS is unwilling to drop its inquiry, then you may need to be prepared to defend against civil or criminal tax fraud allegations. For tax preparers, promoters and taxpayers alike, presenting a successful defense in court presents numerous challenges, and it is imperative to have experienced tax counsel on your side.
Request a Confidential Consultation with a Federal Tax Lawyer at Brown Tax, P.C.
At Brown Tax, P.C., we represent high-income and high-net-worth clients in civil and criminal tax fraud matters involving the IRS and IRS CI. If you need experienced federal tax counsel, you can call 888-870-0025 or contact us online to arrange a confidential initial consultation.