Your clients’ chances of being audited by the IRS are, by many estimates, nearing historic lows. But that does not mean what happens if it is actually audited will be similarly benign. CPAs, finance and accounting professionals, accounting and tax firms and for-profit businesses in joint ventures with non-profits should pay close attention to the types of tax crimes the IRS investigates and what steps they should take if the IRS comes calling on your clients, including individuals and small businesses.
According to tax attorney Robert E. McKenzie, who regularly holds audio conferences on tax issues for Eli Financial, the IRS conducted more than 3,300 criminal investigations in 2016, with 2,700 taxpayers being sentenced—and 80 percent of those serving prison time.
Chance of an Audit? Less Than 1 in 100
This spring, CNBC reported that the number of Americans audited by the IRS in 2016 was just about 1 million—a figure that dropped for the sixth year in a row. Why the drop? The IRS budget has been cut repeatedly, and since 2010 the agency has lost more than 17,000 employees, including almost 7,000 enforcement officers.
“In 2016, the number of people audited by the IRS dropped by 16 percent from the year before. Just 0.7 percent of individuals were audited, either in person or by mail. That’s the lowest audit rate since 2003,” CNBC reported. “The higher your income, the more likely you are to be audited. The IRS audited 1.7 percent of returns that reported more than $200,000 in income. Agents audited 5.8 percent of returns that reported more than $1 million in income.”
But while an audit is just a review, a criminal investigation means the agency suspects something is up.
“The ultimate goal of an IRS Criminal Investigation prosecution recommendation is to obtain a conviction—either by a guilty verdict or plea,” according to the IRS. “Approximately 3,000 criminal prosecutions per year provide a deterrent effect and signals to our compliant taxpayers that fraud will not be tolerated.”
When Professional Help Is Needed
Defending your clients against the IRS, either in during an audit or a subsequent criminal investigation, won’t be cheap. Not only may your client end up owing the government money, but your services as an attorney, CPA or other tax professional can cost hundreds of dollars an hour.
Some clients may be tempted to go it alone, but that should be discouraged. “Audited taxpayers may benefit significantly from securing professional representation before the IRS,” notes Investopedia. “While the taxpayer doesn’t always win, a tax expert can often reduce—if not eliminate—the additional tax the IRS wants to levy. In some cases he or she can even secure an unexpected refund by finding unclaimed credits and deductions after examining previous years’ returns.”
Tell your clients you can also help with the following:
- Avoid self-incrimination
- Keep the audit’s scope from expanding
- Save time
- Help them act rationally, not emotionally
Steps That Can Aid in Their Defense
Attorneys at Barnes Law in Los Angeles offer more basic tips for clients:
- Keep your mouth shut
- Hire a lawyer
- Learn about the IRS criminal investigation process
- Settle in for the long haul
- Keep fear at bay
Calming your clients’ fears is important. Tell your clients: “Whatever your spiritual guidance or psychological orientation, don’t let the fear of the process or the fear of what an IRS criminal investigation can feel like or threaten to hurt you take away from your freedom right now, including your freedom from fear,” advised attorney Robert Barnes. “Fear will lead to mistakes; fear will hurt you right now. Forfeit the fear and you can seize the power to protect yourself and protect what you care about from the greedy and leery lurches of the IRS criminal investigation process.”
Tax attorneys Hider & Associates in Dallas offer another tip: Help your client try to find out who or what tipped the IRS off. Many IRS investigations, the office says, come from a tip made by a former spouse, a disgruntled employee or an upset business partner. This could help you investigate the allegations. Remind your client not to contact anybody, though. That should be up to you.