Introduction.

In many cases, a taxpayer with an IRS audit may have exposure to potential criminal charges in addition to potential increased tax liability, penalties and interest. Cases that have potential criminal exposure are often referred to as “eggshell” or “sensitive issue” audits.

Part One of this article will describes potential tax crimes and why the tax practitioner-client privilege is inapplicable to criminal cases.

Part Two of this article discusses the duties imposed on taxpayer representatives by IRS Circular 230 can create liability for incriminating discloses by the taxpayer.

Part Three of this article describes signs to help a taxpayer representative recognize when a criminal investigation is ongoing and the article concludes with a description of remedies to protect both the taxpayer and the representative in "eggshell" audits.

PART ONE

Criminal Tax Matters. There are a broad number of potential actions that can get a taxpayer in criminal trouble. Some common tax related crimes are:

Tax Evasion Failure to Collect Taxes Failure to Pay Over Taxes Collected to the IRS Failure to File a Return Failure to Supply Information to the IRS Failure to Pay Tax Owed False Returns Submitting False Documents Attempts to Interfere with Administration of Internal Revenue Laws False Statements False Claims Perjury Mail Fraud Money Laundering Conspiracy to Commit Any of the Above Aiding and Abetting the Commission of Any of the Above

Tax Practitioners that are not attorneys need to be extremely careful in representing clients in “eggshell” audits. Statements made by the taxpayer to the representative in the course of the audit may be subject to forced disclosure to the government. Many practitioners are aware that some communications by the taxpayer to the representative are protected from disclosure. Specifically, the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L.105-206) added a “tax practitioner-client privilege”. In summary this privilege applies when:

Tax advice is sought, from a federally authorized tax practitioner in his/her capacity as such, and the communications relate to that purpose. Further the communications must be made in confidence by the client. These communications are then permanently protected (at the client’s insistence) from disclosure by the client or by the federally authorized tax practitioner, unless the protection is waived.

However, this privilege only applies to "TAX" matters and does not apply to "CRIMINAL" matters. Therefore if the “eggshell” audit turns into a criminal investigation, the taxpayer’s representative could be required to disclose all communications that he or she had with the taxpayer. In short, the tax practitioner could become the government’s star witness against the tax payer. On the other hand, tax practitioners that are attorneys do have an attorney-client privilege that extends to criminal matters. Additionally, the tax practitioner privilege likely does not apply in civil suits or non-tax administrative hearings. Again this puts the practitioner in the undesirable position to adversely testify against his or her client. Obviously, a taxpayer is not going to be happy about is representative testifying against him. But can a taxpayer sue a tax practitioner for not taking steps to protect them in an “eggshell” audit? How can a tax practitioner tell when a taxpayer may have potential criminal exposure? What can a tax practitioner do to protect themselves? The remaining parts of this article will explore these questions.