If you are preparing for an Internal Revenue Service (IRS) income tax audit or are already involved in the examination, it is important to understand how a routine tax audit can evolve into a criminal tax matter and what circumstances under which the assistance of a criminal tax attorney may be necessary.
Signs a Civil Tax Audit May Be Turning Criminal
Civil tax audits can be random or prompted by inaccurate information or math on your tax return, like business losses, deductions, or other factors. If you have prepared thoroughly for the audit, you should be aware of any items in your return or schedules that could draw the attention of an IRS examiner. In more complex cases, advance planning and careful responses help manage audit risk and prevent misunderstandings from escalating.
However, if you are facing an eggshell audit, meaning you are aware of serious inaccuracies or misrepresentations in your tax return, do not proceed without first consulting and being represented by an experienced criminal tax attorney.
Approximately 22 percent of tax audits are field audits, which generally take place at a business location, residence, or an IRS field office. During an audit, it is important to remain alert for signs that an examiner may have concerns about tax evasion or other indicators of criminal tax fraud. Consider the following warning signs:
When Silence is Not Golden
While it is common for an examiner to identify errors in a return, it is far less common for an examiner to encounter apparent intent to deceive or evidence of fraudulent returns. If an auditor pauses or abruptly ends an audit without explanation and stops returning calls, you should consult your tax attorney promptly. The examiner may be referring the matter for criminal tax investigation.
Badges of Fraud
Certain indicators often referred to as badges of fraud include suspicious accounting practices, gaps in documentation, discovery of hidden transactions or a second set of books, evidence of underreporting, or complete failure to file. The presence of these indicators increases the likelihood that a civil tax audit may be referred for criminal tax evasion.
Contact From the IRS
If your audit is ongoing and the tone or nature of questions changes, responses may take on greater legal significance. A visit from an IRS Special Agent, rather than a revenue agent, generally reflects a shift away from routine examination. At that stage, statements made or documents provided may be evaluated in a criminal context rather than a civil one.
Expanded IRS Contact
If the IRS begins contacting business associates, family members, friends, or financial institutions, it may indicate that the scope of the examination is expanding beyond routine activity. Such outreach often reflects heightened scrutiny and may signal a transition toward a more serious enforcement posture.
Tax audits can sometimes result from random selection. In other cases, audit developments may suggest broader compliance concerns that warrant careful attention before further interaction with an examiner. For additional background on the audit process, read our guide, "A Tutorial on IRS Audits."
Concerned about criminal tax exposure?
When a civil audit raises questions about intent or disclosure, experienced legal guidance can clarify next steps. At Robert J. Fedor, Esq., LLC., we advise individuals and businesses facing complex IRS examinations and potential tax crime issues. Contact our legal team at 440-250-9709 to discuss your situation. We serve clients in Northeast Ohio, Chicago, and New York City, as well as internationally from our offices in Cleveland and Chicago.
