Got Audit. Help Please!!!

[Bees Knees]

Personally, I have not had a client that substantially under reported income that would fall within the tax evasion percentage. How many of those here that are proposing EA representation (without legal counsel) have experienced such cases?

Well I have. And my client was much more guilty of tax evasion than Emptyhead. Once I got involved with the client and the IRS understood that proper books were now going to be prepared by a professional, that’s all the further it went.

All they cared about was assessing a 100% penalty on the substantial under reporting. My client didn't even offer the info ahead of time. They found it through doing a bank deposit analysis.

Willfull tax evasion is a tough case to prove. IRS auditors are not going to go down that route unless you give them reason to. Every seminar I've ever been to on the subject said you don't need an attorney until you get a call from CI. Then you get an attorney. In the mean time, the EA is advised to cooperate and help the taxpayer by voluntarily reporting all mistakes that the auditor will obviously catch. There is no need to play games here. Cooperate with the auditors, and they will be happy just to collect their penalties.

[OldJack]

Willfull tax evasion is a tough case to prove. IRS auditors are not going to go down that route unless you give them reason to. Every seminar I've ever been to on the subject said you don't need an attorney until you get a call from CI. Then you get an attorney.

You have a right to your opinion but the taxpayer has a right to call the shots and should be so advised. Calling an attorney after the case is sent to CI division is like closing the door after the horse is out of the barn. I would say you had a reasonable IRS agent, you may not be so lucky next time. This is not a case where a simple error in bookkeeping explanation can make it all go away. This taxpayer made no effort to file a correct tax return. That is willfulness. You are correct this case is not a game to be played by a single player... you need a team including an attorney with tools/power that you don't have and never will have.

[Bees Knees]

This taxpayer made no effort to file a correct tax return. That is willfulness. You are correct this case is not a game to be played by a single player... you need a team including an attorney with tools/power that you don't have and never will have.

The taxpayer could easily plead ignorant, and claim he thought his estimates more than covered the correct income. The government has to prove that he willfully filed a return to under report his income. Proving he willfully filed an incorrect return based on estimates is not in itself enough.


From IRS CI division, http://www.irs.gov/irm/part9/ch01s03.html

IRC §7201 states in its entirety:

“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”


Under the definition of “Willfulness” it says:

“The attempt in any manner to evade or defeat any tax must be willful. Willfulness is defined as the voluntary, intentional violation of a known legal duty. Mere understatement of income and the filing of an incorrect return does not in itself constitute willful attempted tax evasion. Absent an admission or confession, willfulness is rarely subject to direct proof and generally must be inferred from the circumstances in the case. Willfulness may be inferred from any conduct, the likely effect of which, would be to mislead or conceal, such as that exemplified in Spies. “


The point being made here, substantial under reporting of tax is not in itself tax evasion. To go from civil to criminal, the government has to prove it was willful, as the mere existence of under reporting is not enough.

In the case of Spies v. United States, the Supreme Court provided illustrations of acts or conduct which may infer "the attempt to evade or defeat any tax," such as:
A. keeping a double set of books
B. making false entries, alterations, invoices, or documents
C. destroying books or records
D. concealing assets or covering up sources of income
E. handling one's affairs to avoid making records usual in transactions of the kind
F. any conduct, the likely effect of which would be to mislead or to conceal

It would seem to me that voluntarily pointing out the under reporting before an audit even begins would be action contrary to the elements above that indicate the person is trying to conceal something.

[OldJack]

Bees...I have no quarrel with anything that you cite, my disagreement is with your interpretation of the cites to fit your casual opinion when it is a serious tax case that could be a tragic result for the taxpayer. You obviously would accept the responsibility of the results of your actions since its not your neck at risk.

Sure it is a fact that attorneys usually charge more for their services than you do as an EA, but this taxpayer is going to pay a lot in tax, penalties, maybe court costs and years away from home, making the attorney fee possibly insignificant or well worth the money. An attorney is in a better position to argue this case as the auditor knows all agents in the appeals division are attorneys ready to negotiate the case rather than go to court. And yes I have had good experience at the appeals level without an attorney but also knew that my cases were not possible criminal or civil fraud.

This taxpayer should take all precautions to be protected under the law regardless of the cost. After the facts have all been disclosed to the agent (without counsel) you help build the auditors case and create a greater risk of the tragic outcome that is unnecessary.

This is not your normal tax case we routinely handle as tax preparers. There is no cite that exactly fits this case until the case is over and the results obtained. Its a facts case and the facts are not in the taxpayers favor.

Why would you object to a tax attorney being on the case with you?

[Bees Knees]

You make two interesting statements:

And yes I have had good experience at the appeals level without an attorney but also knew that my cases were not possible criminal or civil fraud.

Why would you object to a tax attorney being on the case with you?

I might ask you. In your appeals level case, why did you think there was no possible criminal or civil fraud involved? Isn’t every dispute with IRS based on whether or not the tax was correct? If appeals had ruled the tax was not correct, then why wouldn’t it have been a crime? Why didn’t you call in a tax attorney, if there was a possibility the tax would be under paid?

You have tried, convicted, and sentenced this person because you believe substantially under reporting your tax means a crime was committed. Yet, to take this person at his word, he says it was a mistake. It was not willful. Without reading between the lines, there was no willful attempt to evade tax because the taxpayer believed at the time of estimating his tax liability, the tax was correct, or at least enough. Whether or not that is true, it would be something the government would have to overcome if they try to claim there was a crime.

The EA wants to file amended returns with the auditor. Some people on this board, including an ex-IRS auditor, have said that will only muck things up. I disagree. Yes, the auditor may prefer not to have amended returns filed, but there is no crime committed when an amended return is filed on time to correct a previous under reporting of tax. The amended return could be viewed as an indication this is not a willful attempt to evade taxes. Tax evaders don’t file amended returns to pay additional taxes. They do things to conceal the income. The EA saying the taxpayer should file an amended return could be think along those lines – that filing an amended return removes any possibility of the government wanting to turn this into a crime.

[Black Bart]

I'm right here and

Personally, I have not had a client that substantially under reported income that would fall within the tax evasion percentage. How many of those here that are proposing EA representation (without legal counsel) have experienced such cases? Where is Black Bart and his polls when we need him?

I don't happen to think this is an appropriate subject for a poll. An amateur's internet poll is just that -- an internet poll; which is usually an unscientific, statistically insignificant, and generally unreliable survey of prevailing opinion from whoever happens to be online at the moment. It's as meaningless as your poll from a few months ago that you got mad at Bees about. I posted one a few threads back about the founder of accounting. It got twelve responses. There are several hundred people on this board. I don't think my poll is an accurate measurement of boardmembers' level of knowledge.

EH asked for advice. I don't have any experience at it, so I've nothing to say. You, Bees, and others do and gave opinions -- nothing wrong with that. As you said, it's a serious matter and EH is going to have to make the call on who to call. I don't see how a popular vote should have any bearing on that.

[OldJack]

BB I was only joking when calling for a poll. I agree that a poll on this forum is meaningless as has been proved with prior poll results. By the way I did vote on your last poll and was clearly wrong with my selection. And again BB I was not mad at Bees now or before although it may have appeared that way. We are only expressing our opinions and that is what this forum is all about. If more members would voice their opinions we would have an even better discussion rather than it just ending up with me and Bees arguing picky details. Come on lighten up like you usually are.

[OldJack]

I might ask you. In your appeals level case, why did you think there was no possible criminal or civil fraud involved? Isn’t every dispute with IRS based on whether or not the tax was correct? If appeals had ruled the tax was not correct, then why wouldn’t it have been a crime? Why didn’t you call in a tax attorney, if there was a possibility the tax would be under paid?

Gees Bees... you sound like you think everything not correct on a tax return is a crime. You know better than that. As I said before I have never had a case that would possible fall within the level of a criminal case and therefore have not had the need for my client to call in a tax attorney. Most of my experience at appeals level had to do with the IRS disallowing major items such as a horse racing business with huge losses. As a matter of fact I have argued successfully cases that the clients tax attorney would not saying there was no case and the IRS was correct. I have worked with tax attorneys mainly regarding estate planning and estate tax cases with good results proving that a team effort can be very beneficial for the client.

You still did not answer my question as to why you object to working with a tax attorney? Its unfortunate that you refuse to acknowledge that a tax professional should do what is in the best interest to protect the taxpayer rather than forge ahead with a position that I am a tax expert and can handle this all by myself.

edit: Since when does the IRS take taxpayers "at their word". Really now, do you believe that?

[Bees Knees]

You still did not answer my question as to why you object to working with a tax attorney? Its unfortunate that you refuse to acknowledge that a tax professional should do what is in the best interest to protect the taxpayer rather than forge ahead with a position that I am a tax expert and can handle this all by myself.

And you didn't get my point. Why didn't you use a tax attorney at your audit?

Because you felt there was no need for one, as in your opinion, a crime was not committed.

Sure, I would call in a tax attorney if I felt a crime was committed. Now do you get my point?

[jainen]

a particular address

I've had two criminal cases. In one, the IRS kept phoning me with some really odd questions. The client refused to sign a power of attorney so I never found out what happened, but before they hung up the investigators took pity on my curiousity and admitted I was lucky to get out of it because they were following currency violations from the Russian mafia.

One day two nice guys asked for an appointment as new clients. Then they slapped a grand jury subpoena on me. I said, why didn't they just ask me honestly but they said they don't work that way. I never found out what happened with that one either--all the questions seemed to be about whether my client actually lived in a mobile home at a particular address.

[OldJack]

Sure, I would call in a tax attorney if I felt a crime was committed. Now do you get my point?

I get your point and you miss my point that its the client/taxpayer that is important and how you feel about it is not important. Do you get my point that calling for an attorney after referral to CI divisions is sometimes to little and to late as a lot of damage has already been done. I think most would say this case has a high risk for the taxpayer and you in your wisdom don't think so. That is your professional opinion and it is then up to the taxpayer to judge if you should handle the case with the auditor. This is probably a good example of why a taxpayer should seek a second opinion form tax professionals when there is a serious tax problem.

I would expect that the IRS is very interested in auditing internet businesses as some such taxpayers (on another forum I participate) seem to think they don't have to report everything since it is a "worldwide" activity. It would seem likely, in my opinion, that the IRS will treat this case as tax evasion and to proceed with that in mind would be the important thing for this taxpayers protection. Hopefully you are correct that a crime has not been committed.. but I would not bet my client/taxpayers freedom on it.

[Bees Knees]

Do you get my point that calling for an attorney after referral to CI divisions is sometimes to little and to late as a lot of damage has already been done.

I disagree that there is anything the EA can do that will make matters worse for the client by not calling in a tax attorney.

EAs and CPAs are not attorneys. Our job is not to act like ones. We do not have client attorney privilege on tax preparation services. Unlike attorneys, our job is to advise clients to prepare the correct return. Attorneys have the job of trying to keep scum from going to prison. No thanks, but that’s not what my job is.

You of all people should know that your CPA license is a license to represent BOTH the client and the public. You have a duty to the public to protect it from criminals, as well as to perform legitimate services for your client. You are not licensed to shield your client from criminal prosecution.

Helping this client prepare a correct amended return for the audit is our job. Nothing we do as a result of preparing correct tax returns is going to do any further damage than what has already been done.

If the client is a crook, then let the client pay the price by going to jail. The EA is not causing any damage by trying to correct the matter. If damages were done, that was done prior to the EA being engaged to correct the matter.

Sure, a client is always within his rights to get legal counsel. Our job is not to protect taxpayers from criminal prosecution. Our job is to perform the service of preparing a correct tax return. If you want to go to school, become a lawyer, and keep criminals out of prison, that is your business. I have no intention of trying to help criminals from going to prison.

[OldJack]

Bees your last post is absurd and not worthy of more discussion.

[Unregistered]

I disagree that there is anything the EA can do that will make matters worse for the client by not calling in a tax attorney.

EAs and CPAs are not attorneys. Our job is not to act like ones. We do not have client attorney privilege on tax preparation services. Unlike attorneys, our job is to advise clients to prepare the correct return. Attorneys have the job of trying to keep scum from going to prison. No thanks, but that’s not what my job is.

You of all people should know that your CPA license is a license to represent BOTH the client and the public. You have a duty to the public to protect it from criminals, as well as to perform legitimate services for your client. You are not licensed to shield your client from criminal prosecution.

Helping this client prepare a correct amended return for the audit is our job. Nothing we do as a result of preparing correct tax returns is going to do any further damage than what has already been done.

If the client is a crook, then let the client pay the price by going to jail. The EA is not causing any damage by trying to correct the matter. If damages were done, that was done prior to the EA being engaged to correct the matter.

Sure, a client is always within his rights to get legal counsel. Our job is not to protect taxpayers from criminal prosecution. Our job is to perform the service of preparing a correct tax return. If you want to go to school, become a lawyer, and keep criminals out of prison, that is your business. I have no intention of trying to help criminals from going to prison.

I've got to agree with Bees on this one.

[peggysioux]

Dyne, you stated

all tax preparers should study the IRS's indirect methods - where can we go to study those indirect methods?