IRS Audits Often Lead to the Discovery of Illegal/Criminal Activity. The "Eggshell Audit"?
Eggshell audits have two objectives. The main objective is to prevent a criminal investigation or keep the matter a civil examination. The lesser objective is to avoid civil fraud penalties.
One of many reasons taxpayers hire a tax attorney as representation during a tax audit is because the IRS’s use of audit techniques and authority are so broad and powerful that often other crimes (besides tax violations) are discovered during the course of the audit. Attorneys have dubbed this scenario as the “eggshell audit.” An eggshell audit situation requires an experienced tax attorney who is able to advise the taxpayer on how remain compliant when answering questions; comply with or fight summons for records; when and how to take the 5th Amendment privilege to avoid incriminating oneself; and more. Remember, the IRS is a federal agency and their investigations are very powerful government tools. Look at the Barry Bonds trial that resulted when he perjured regarding his steroid use - the whole question of his steroid use, and the subsequent lying to federal agents that led to his trial began as an IRS investigation of the pharmaceutical company BALCO.
Another example of an eggshell audit is as follows:
We represented a taxpayer who had several business entities disclosed on his individual income tax returns. The IRS believed there were several ‘badges’ of fraud, and as a result the IRS auditor was in communication with the CID unit of the IRS. The client had retained our counsel at the outset of the IRS audit, and we were accordingly able to anticipate several areas of questioning and investigation that we believed would be detrimental to our client. As anticipated, the IRS auditor issued summons for records. After careful consideration, we were able to legally address the summons for records without admitting to criminal and civil activity, or committing perjury, or obstruction of justice. Ultimately, the IRS did not refer the case to the CID for investigation. We were able to negotiate a favorable resolution to the IRS tax audit, while keeping the entire case civil, preventing criminal charges and other allegations from being brought forward.
In conclusion, tax attorneys are critical to individuals/entities potentially facing an eggshell audit. A tax attorney from Moskowitz LLP can help you to prevent issues from compounding or additional criminal liability from incurring.