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What to do if you are under investigation by the IRS

Last year the IRS audited 1.2m individual income tax returns, a decline of 16% on the previous year and a drop of more than one-third since 2011. The overall audit rate for individual tax returns stands at 0.7%, the lowest in over a decade.

Correspondence audits or those conducted through the mail made up the greatest part at 71%. These types of audits usually result from incorrect calculations or unreported income and are often resolved by sending more documentation or a check for the shortfall to the IRS. Interestingly, more than 37,000 audits resulted in a refund to the taxpayer, totalling more than $6.5bn.

Evidently, audits don’t have to give you sleepless nights if the information on the return is accurate and there is documentation supporting the deductions and credits claimed. However, criminal tax investigations are serious business and the IRS conducts thorough investigations to discover whether tax evasion or tax fraud have occurred.

A standard audit

“Being selected for an audit doesn’t always mean that there’s a problem with the return as you can be chosen randomly, via computer screening or because you are involved with taxpayers whose returns were selected for audit” comented Mike Smith from Company Debt. “Losses from year to year, false statements, unusual and excessive deductions and unreported income are factors that could trigger an audit, which in certain situations can quickly rise to the level of an IRS criminal investigation.”

Whether the audit is conducted by mail or in an interview situation, it’s important to take a positive approach and clarify any disputed items. As a result, the auditor may be more inclined to accept oral testimony, rather than supporting documentation to prove other disputed areas.

If you don’t agree with the audit’s outcome, like 29,000 other taxpayers last year, you can request a meeting with an IRS manager or have your case reviewed by the Appeals Division.

How audits turn into criminal investigations
An audit is very different from a criminal investigation. With an audit the IRS finds out whether you calculated your tax liability correctly whilst a criminal investigation involves the agency building a case against you for criminal prosecution.

When an audit reveals something suspicious or questionable, the auditor may notify the IRS’ Criminal Investigation Division (CID), which conducts investigations into alleged violations of the Internal Revenue Code and other statutes. It’s important to understand that a criminal investigation is serious and the findings may be referred to the Department of Justice for recommended prosecution.

The IRS will scrutinise your financial data and use other techniques in gathering evidence, including witness interviews (from family, friends, employees or business partners), surveillance and search warrants. After the evidence is reviewed, the agent and his or her supervisor decide whether to close the investigation as the evidence fails to show any criminal activity or whether the evidence supports a recommendation of prosecution. In the latter case, the agent prepares a report, detailing the findings of the investigation, which is reviewed by management. Each level of the CID determines whether the findings support criminal charges and if you should be prosecuted. However, there are around 3,000 criminal prosecutions each year.

Be prepared

If you receive a letter from the IRS, informing you that you or your business is going to be investigated, it’s important to start preparing for your defence regardless of whether there is any truth to the allegations. Here’s what to do:

1. Contact an experienced tax attorney who will work on your case and decide how best to move forward

2. Stay calm as anything you say or do can be used against you. Talk to your attorney first before agreeing to an interview or making any statements to the IRS. Be careful what you say to family and friends as they may be interviewed by the IRS. This also applies to your accountant as he or she may testify against you to save him or herself
3. Investigations can be launched because of a tip from a disgruntled employee, rejected spouse, etc. Consider whether there is anyone who would report you as this could help your attorney to investigate the allegations
4. If the allegations are true and there is evidence to support this, consider making a voluntary disclosure to avoid criminal charges
5. Listen to your tax attorney as he or she will give you professional guidance that will help you to achieve the best outcome.

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