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When an IRS Audit Triggers a Criminal Tax Fraud Investigation

May 31, 2023


Audits conducted by the Internal Revenue Service (IRS) can have a variety of outcomes. In some cases, they can simply confirm taxpayers’ compliance with the Internal Revenue Code. In others, they can lead to liability for back taxes, interest and penalties; and, in others still, they can trigger criminal tax fraud investigations.

Not all violations of the Internal Revenue Code constitute criminal tax fraud. In fact, the majority of taxpayer mistakes do not come close to warranting criminal prosecution. But, if a taxpayer’s mistake involves willfully or intentionally attempting to mislead the IRS rather than inadvertently underreporting tax liability, then revenue agents may determine that further scrutiny is warranted.

Understanding the Varying Risks of IRS Audits and IRS CI Investigations

Tax audits are civil in nature. This means that audited taxpayers are not at risk for prosecution, and prison time is not on the table. However, if an audit triggers a criminal tax fraud investigation, all of this changes. If Special Agents at IRS Criminal Investigation (IRS CI) collect sufficient evidence of criminal tax fraud, they can engage the U.S. Department of Justice (DOJ) to seek an indictment, and, if indicted and convicted, taxpayers can face both criminal fines and federal imprisonment.

With this in mind, while taxpayers always need to take IRS audits seriously, taxpayers must be especially careful if there is a risk that an audit could lead to further scrutiny. If it is too late to avoid a criminal investigation, audited taxpayers must promptly engage experienced tax counsel to deal with IRS CI on their behalf.

What to Do When an IRS Audit Leads to a Criminal Tax Fraud Investigation

Let’s say you’ve been audited by the IRS. Let’s also say that following the audit, you have been contacted by a Special Agent from IRS CI. At this point, what are your next steps?

When dealing with any type of criminal tax matter, there are several steps you need to take promptly. While each individual circumstance is unique, generally speaking, the steps involved in responding to a criminal tax fraud investigation include the following:

  • Engage Experienced Tax Counsel Promptly – At this point, you need to engage experienced tax counsel, and you should do so right away. You need to ensure that you are making informed decisions based on the advice of counsel, and you will want to have your lawyer deal with IRS CI on your behalf. Trying to deal with IRS CI directly can be extremely risky, and if you aren’t careful, you could easily end up making mistakes that compromise your ability to execute a successful defense.
  • Work with Your Tax Counsel to Assess Your Risk – Working with your tax counsel, you should promptly gauge your risk in the investigation. This involves conducting a comprehensive and unbiased review of the relevant facts and circumstances, with a focus on discerning what (if anything) Special Agents may find that could warrant criminal prosecution. By conducting this review with your tax counsel, the process and the outcome will be covered under the attorney-client privilege, and you will be able to make confident and strategic decisions about how best to handle the investigation.
  • Weigh Your Options for Resolving the Investigation – After assessing your risk in the investigation, you can work with your counsel to weigh your options moving forward. Do you have a reasonable chance of resolving the investigation without charges or liability? Is it in your best interests to negotiate a settlement? Or, do you need to be thinking about how to approach a potential grand jury indictment and federal criminal trial? The answers to these types of questions will determine how you and your tax counsel approach the investigation.
  • Rely on Your Tax Counsel to Communicate with IRS CI on Your Behalf – Once you engage counsel to represent you, you should rely on your counsel to communicate with IRS CI on your behalf. Unless advised otherwise, you should not communicate with Special Agents directly, and if you receive a search warrant or subpoena, you should contact your tax counsel immediately.
  • If You Choose to Cooperate, Understand the Risks Involved – In some circumstances, the best approach will be to cooperate with IRS CI’s investigation. Before choosing to cooperate, however, you need to be very careful to ensure that you understand the risks involved. Cooperating before you have protections in place, unnecessarily disclosing information voluntarily and attempting to be overly cooperative can all have unintended (and undesirable) consequences).

These are just examples, and, again, the specific steps you need to take will depend on the unique circumstances of your criminal tax fraud investigation. Once you engage experienced tax counsel to represent you, your counsel will walk you through what you need to do to protect yourself to the fullest extent possible.

What Not to Do When an IRS Audit Leads to a Criminal Tax Fraud Investigation

Just as there are several steps you need to take when facing a criminal tax fraud investigation, there are also several mistakes you need to avoid. For example, generally speaking, when facing a criminal tax fraud investigation you should not:

  • Allow the investigation to move forward unchecked and without your involvement
  • Attempt to deal with IRS CI Special Agents on your own and without the advice of counsel
  • Voluntarily provide access to any records, computers or other devices unless advised otherwise by your tax counsel
  • Pursue a settlement until you know what prosecutors will be able to prove to the grand jury and at trial
  • Make any uninformed decisions that could potentially increase your risk of facing prosecution and sentencing in federal district court

Speak with a Criminal Tax Fraud Lawyer at Brown Tax, P.C. in Fort Worth

We represent high-income and high-net-worth taxpayers in federal criminal tax fraud matters. If you are facing scrutiny from IRS CI following a federal tax audit, we encourage you to contact us promptly to discuss your case in confidence. Call 888-870-0025 or contact us online to schedule an appointment with a criminal tax fraud lawyer at Brown Tax, P.C.