Signs that the matter is no longer civil
A routine audit is conducted by revenue agents who examine returns and propose adjustments. Criminal tax investigations are run by special agents, who carry badges and are building a case for prosecution. A civil audit that abruptly goes silent, or an examiner who stops asking questions partway through, can mean the case was referred for criminal review. Federal criminal tax cases are prosecuted by the Justice Department, whose structure for handling them has been reorganized, while New York's Department of Taxation and Finance has its own criminal investigators for state taxes. The civil fraud penalty is a separate track that can apply even without a prosecution. Knowing which of these you face shapes every next step.
Willfulness and the evidence around it
Most tax fraud defense work centers on willfulness: whether the person knew of a legal duty and deliberately violated it. A wrong return, even a badly wrong one, is not a crime by itself. Prosecutors look for patterns that suggest intent, such as income kept off the books, false records handed to a preparer, or assets placed in other names. The defense often looks at what the person was told by advisors, how complicated the issue was, and whether records were kept openly. Conversations with your accountant are generally not privileged in a criminal tax case, so the accountant may become a witness; when accounting help is needed for the defense, the usual approach is to have your lawyer retain it.
What to hold off on while the case develops
Do not file amended returns, make large payments to the IRS, or move assets without talking to a lawyer first, because each of these can have consequences that are hard to undo. The IRS has a voluntary disclosure practice, but it is generally not available once the government has started an investigation or has received information about you. If agents contact you, you can politely decline to answer and refer them to counsel, and it is wise to avoid discussing the facts with employees, family members, or your preparer in the meantime. Preserve your records rather than reorganizing them. When we first meet, we usually want to understand which years and taxes are involved, who prepared the returns, and what contact the government has made so far.
