You’ve known for several years that this day could come, but you’ve managed by convincing yourself that “I’m not really doing anything much different than plenty of other taxpayers,” and besides, the odds of actually being audited are pretty small. Now that the audit notice has come through, the “everybody else is doing it” defense doesn’t seem so great anymore, and all the nightmare scenarios you had successfully managed to repress are now nearly all you can think about. The IRS examiner will discover the fraud, refer the case to Criminal Investigations, and the next contact you receive is from two Special Agents carrying badges and guns who are thinking about nothing for you except a federal prison cell.
The good news is, this scenario doesn’t have to lead to a nightmare outcome. It certainly can – but doesn’t have to. Over the years, I’ve seen nearly every type of criminal tax fraud imaginable resolved civilly without referral for criminal prosecution.
The first rule to successfully avoid the nightmare outcome is don’t make it worse. That means, don’t lie to or mislead the examiner – or urge others to do so on your behalf, and don’t conceal, alter or destroy records that evidence the original wrongdoing. I’ve watched taxpayers over the years do all of these things (sometimes with the help of an accountant or an attorney). And while I have to concede that I know of a few instances where they succeeded in concealing the fraud from the examiner, in the vast majority of cases, they only ended up making things worse for themselves by killing any chance for a civil resolution. Moreover, I’ve watched several prosecutors use evidence of the cover-up to prove criminal intent in the original fraud. I should add that even the few taxpayers who concealed the fraud from the examiner – for now – found it difficult to get a good night’s sleep for the next few years.
The second rule: don’t try to do this by yourself. Consult with a reputable criminal tax attorney experienced in civil audit and criminal tax referrals and investigations. If they know what they’re doing, they won’t let you violate the first rule, and they’ll work with you to develop the best plan of action to convince the examiner to resolve the case civilly.