Where a civil tax problem turns criminal
Most tax disputes are civil: an audit, an assessment, penalties, and perhaps an appeal. Tax fraud and tax evasion enter the picture when the government believes an underpayment was intentional rather than a mistake, and willfulness is usually the central issue in a criminal tax case. Signs that a matter may be heading toward a criminal referral include an auditor who suddenly suspends the examination, questions focused on cash or offshore accounts, and contact from special agents. Charging decisions are made by Justice Department prosecutors, and the department's structure for tax prosecutions has been reorganized recently. The same conduct can also lead to a heavy civil fraud penalty even when no charges are filed.
What to stop and what to keep
Hold off on filing amended returns, moving assets, or giving agents a detailed explanation until you have advice, even if you want to clear things up. Agents often arrive unannounced and ask friendly questions, and what you say can be used later; you can politely decline to answer and ask for a card. Keep your records intact and gather the returns, bank statements, and correspondence for the years in question. Conversations with an accountant are not protected in a criminal tax matter the way conversations with a lawyer are, so a lawyer may need to engage the accountant directly to preserve privilege. Your preparer may also become a witness.
Options that depend on timing
The path available often depends on whether the government already knows. Before an investigation begins, the IRS has a voluntary disclosure practice that may allow some taxpayers to come forward and resolve matters civilly, but eligibility generally ends once the IRS has opened an examination or investigation or received information about the taxpayer from certain outside sources. After contact, the focus shifts to understanding the government's theory, protecting your rights, and evaluating whether a civil resolution is still possible. Our starting point is the notices you have received, the years involved, and who else has already been contacted.
