Don’t Get Sued! Protect Clients from Providing Incriminating Information in IRS Audits. - Part 3

Copyright 2005 David Jacquot

Introduction.

In many cases, a taxpayer with an IRS audit may have exposure to potential criminal charges in addition to potential increased tax liability, penalties and interest. Cases that have potential criminal exposure are often referred to as “eggshell” or “sensitive issue” audits.

Part One of this article will describes potential tax crimes and why the tax practitioner-client privilege is inapplicable to criminal cases.

Part Two of this article discusses the duties imposed on taxpayer representatives by IRS Circular 230 can create liability for incriminating discloses by the taxpayer.

Part Three of this article describes signs to help a taxpayer representative recognize when a criminal investigation is ongoing and the article concludes with a description of remedies to protect both the taxpayer and the representative in "eggshell" audits.

PART THREE

How Can a Tax Practitioner Tell When a Case Contains Criminal Exposure?

Just because a client doesn't think that they have committed a crime does not mean that the IRS will not institute a criminal investigation. Many people charged with tax crimes don't believe they have done anything wrong. Furthermore, many people charged with tax crimes are found to be not guilty. Therefore, even if a client believes that you have done nothing wrong, practitioners need to be on the look-out for signs of a criminal investigation. Some situations that should raise concern about the possibility of a criminal investigation are:

1. The client, the practitioner or anyone the client knows are visited by an IRS Special agent, FBI Agent, or other law enforcement officer. These individuals are likely investigating a tax crime. No matter what they say, they are likely NOT part of any routine audit.

2. The practitioner discovers evidence that indicates that the return contains false or fraudulent information. This is especially true if the practitioner has evidence that the client knew the return information was false. IRS auditors are trained to refer cases to Criminal Investigation Division (CID) when they discover false or fraudulent information on a return.

3. The client has not been filing returns. This is true even if the client believes that they have paid the all the tax owed through withholding by an employer or otherwise. Willful failure to file a return is a criminal offense.

4. A grand jury subpoena is served on the practitioner, or the client’s accountant, bank, employer, employee, customers, or any other person which seeks information related to the client. A grand jury’s sole purpose is to determine whether sufficient evidence exists to indict a someone for a crime. If a grand jury is seeking information about a client, a client’s tax return, or a client’s financial affairs, the client is likely a target of a criminal investigation.

5. The client has had trouble with state tax authorities. Often the IRS and state tax authorities have information sharing agreements. Therefore, if a client has had trouble with state tax authorities, it is likely that the IRS is aware of the situation and will likely look into the matter.

6. A CID summons is served on the practitioner or the client’s accountant, bank, employer, employee, customers, or any other person which seeks information related to you. The CID’s sole purpose is to gather evidence related to a crime. If the CID is seeking information about the client, the client’s tax return, or the client’s financial affairs, the client is likely a target of a criminal investigation.

7. The client has any indication of a non-tax criminal investigation that involves money or property. Many criminal tax cases begin as investigations into some other criminal matter, especially cases that involve money, drugs, or property. Since taxpayers owe taxes on all their income, both legal and illegal, tax cases often evolve from these other types of criminal investigations. In fact, often it is often easier to prove the tax case than the underlying crime.

What Can a Tax Practitioner Do to Protect Themselves?

There are three simple actions that a practitioner can do to limit exposure to liability. These are: •

Disclose. All practitioners should disclose the limits of the tax practitioner privilege to all of their clients. A good way to do this is to include it in your written engagement agreement. This matter should also be discussed with the client at the onset of the engagement and at any time during the engagement that the practitioner suspects there may be a potential criminal investigation. In addition to disclosing the limits of the privilege, it is likely that “best practices” would require the practitioner to disclose one or both of the following potential remedies to the limitations of the tax practitioner privilege. •

Associate. Tax practitioners in “eggshell audits” should consider associating with an attorney. If this arrangement is done properly, all communications should be protected by the attorney-client privilege. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). This arrangement is often more beneficial to the client than an outright referral (see below). This arrangement allows the practitioner to continue in the case often at a lower rate than the attorney. For this arrangement to be effective, the attorney should engage the practitioner via written agreement. This engagement agreement should indicate that:

1. The tax practitioner is acting under the direction of counsel in connection with counsel's rendering of legal services to the client;

2. Communications between the practitioner and the client are confidential and are made solely for purposes of enabling counsel to provide legal advice;

3. The practitioner's work papers are held solely for counsel's use and convenience and subject to counsel's right to demand their return; and

4. The practitioner is to segregate their work papers, correspondence and other documents gathered during the course of the engagement and designate such documents as property of counsel.

Refer. The last remedy is for the tax practitioner to step out of the situation and simply refer the client to appropriate tax/criminal counsel.

What Type of Attorney Should the Practitioner Associate With or Refer To?

Clients facing an IRS criminal investigation or charged with a tax crime need an attorney with specialized skills. This attorney needs to be competent in both tax issues and criminal issues. A tax lawyer won't do and a criminal lawyer won't do. They need a lawyer that has experience in BOTH criminal trials and tax law.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com