Criminal Defense Lawyers

Signs Your IRS Audit Has Turned Into a Criminal Investigation

The most dangerous moment in an IRS audit isn’t when the questions get harder. It’s when they stop entirely. When a Revenue Agent who was calling you every week suddenly goes silent – cancels the next appointment, stops returning calls, disappears for weeks – most people feel relief. They shouldn’t. That silence is the sound of your case being referred to the Criminal Investigation division. It’s the sound of your civil tax problem becoming a federal crime.

Welcome to Spodek Law Group. Our goal is to help you recognize the warning signs that a routine IRS audit has crossed into criminal territory – before it’s too late to protect yourself. Todd Spodek has represented clients who were completely blindsided when Special Agents showed up at their door, not realizing that their “civil audit” had been a cover for a criminal investigation for months. The IRS Criminal Investigation division maintains a conviction rate above 90%. If your case has already been referred, the clock is ticking.

This isn’t paranoia. This is how the system actually works. And understanding it could be the difference between paying penalties and going to prison. If any of these warning signs sound familiar, stop reading and call us immediately at 212-300-5196.

The Most Dangerous Sign is Silence

Heres what most people dont understand about IRS audits. The agent contacting you constantly is annoying, but its a good sign. It means your in a civil examination. Civil means they want money – taxes, penalties, interest. Civil dosent mean prison.

The moment that agent goes quiet? Thats when you should panic.

When a Revenue Agent discovers what the IRS calls “firm indications of fraud,” they are required by internal procedure to suspend the civil audit. They cannot continue. They cannot tell you why. They just stop. The audit goes on hold while the case is evaluated for criminal referral.

This is what happens: the agent identifies something – maybe a pattern of unreported income, maybe documents that dont match, maybe answers that contradicted the records. They consult with whats called a Fraud Technical Advisor. The FTA reviews the evidence. If the FTA agrees there are badges of fraud, the agent prepares a form called the 2797 – the “Referral Report of Potential Criminal Fraud Cases.”

At no point during this process does anyone tell you whats happening. The government has no legal duty to inform you that matters from your civil audit could be used in a criminal investigation. They dont have to warn you. They wont warn you. One day you have an aggressive auditor on your case; the next day, silence. And in that silence, your future is being decided.

The suspension can last weeks or months. During that time, Criminal Investigation is reviewing whether to open a formal investigation. If they decline, the civil audit resumes and you never know how close you came. If they accept, Special Agents take over – and by then, they already have everything the civil auditor gathered.

What an “Eggshell Audit” Really Means

Theres a term tax attorneys use for a very specific and very dangerous situation: the eggshell audit.

An eggshell audit is when a taxpayer has filed a fraudulent return – they know it, but the IRS auditor dosent. Yet. The taxpayer is walking on eggshells, trying to get through the audit without the agent discovering the fraud. Every question is a potential landmine. Every document request could be the one that exposes everything.

The problem with an eggshell audit is that you cant invoke your Fifth Amendment rights. Not yet. Your not under criminal investigation – at least not officialy. If you suddenly refuse to answer questions or start pleading the Fifth in what appears to be a routine audit, you might as well hang a sign around your neck saying “I committed fraud, please investigate me.”

But heres the trap: if you keep answering questions, you might say something that triggers the referral. Or provide a document that contradicts earlier statements. Or explain something in a way that sounds like consciousness of guilt. Every word you say in a civil audit can be used against you if the case turns criminal.

This is why eggshell audits require extremly careful handling. You need an attorney – specifically a criminal tax attorney, not your regular accountant or tax preparer. And heres the critical part that most people dont realize: your original tax preparer should never represent you in an eggshell audit. They have no attorney-client privilage. Everything you told them when preparing the return can be subpoenaed. They can be called as a witness against you.

At Spodek Law Group, we see clients all the time who made this mistake. They brought there accountant to the audit becuase the accountant knew the numbers. Then the case went criminal, and the accountant was forced to testify about every conversation they ever had.

The Reverse Eggshell – When They Already Know

If an eggshell audit is dangerous, a reverse eggshell audit is catastrophic.

A reverse eggshell audit is when the IRS is conducting a civil audit that is actualy a cover for an ongoing criminal investigation. The civil auditor is gathering information that will be passed directly to the Criminal Investigation division. You think your in a normal audit. Your not. Your being investigated for a federal crime, and no one has told you.

How does this happen? Sometimes the IRS receives information from a whistleblower or informant that suggests criminal activity. They open a criminal investigation, but they want more evidence. So they initiate what looks like a routine civil audit. The civil auditor asks questions, requests documents, examines records – all of which feeds the criminal case.

The taxpayer has no idea. They cooperate fully becuase they think cooperation will make the audit go faster. They answer every question honestly becuase they think honesty is the best policy. Meanwhile, every word they say is being documented and shared with Special Agents building a prosecution.

Heres the legal reality: the government has no outright duty to inform you that your civil audit is connected to a criminal investigation. As long as they dont use “deceit, trickery or misrepresentation” to extract incriminating information, they can run the investigations in parallel without telling you.

Todd Spodek has seen these cases. A client comes in after the audit is “resolved” – maybe they even paid some additional taxes and thought it was over. Then, months later, Special Agents show up. Everything from the audit is already in the criminal file. The client is stunned. How did this happen? It happened becuase the audit was never realy a civil audit. It was an evidence-gathering operation for a criminal case that was already underway.

The Badges of Fraud

The IRS trains its agents to look for specific indicators – what they call “badges of fraud.” These are patterns and behaviors that suggest intentional wrongdoing rather than honest mistakes. When enough badges are present, a fraud referral becomes almost automatic.

Understanding these badges is critical, becuase they determine wheather your audit stays civil or goes criminal.

Heres what the IRS is looking for:

• Omissions of income – especialy patterns of omission. Missing one 1099 might be a mistake. Missing income from the same source year after year suggests intent. And heres a number that should terrify you: an income omission greater then $10,000 in a single year triggers an automatic referral to a Fraud Technical Advisor. Not discretionary. Automatic.
• Inability to explain large items – if you have significant increases in net worth or large deposits that you cant explain, agents see that as hiding something.
• Substantial overstatement of deductions – claiming business expenses that are obviusly personal, or deductions that are wildly disproportionate to your income.
• Multiple sets of books – maintaining two sets of records, one accurate and one for tax purposes.
• False or altered documents – providing documents that turn out to be fake or modified.
• Inadequate records despite substantial income – claiming you dont have records for transactions that should absolutly have been documented.
• Destruction of records – especialy if it happens after the audit starts. This is extremly damaging.
• Dealings in large sums of cash – the IRS is suspicious of cash transactions precisly becuase they’re harder to trace.
• Consistent pattern of failure to report income – underreporting isnt an accident if it happens every year.

None of these badges alone proves fraud. But when an agent sees several of them together, the case starts looking criminal. And once the agent believes there are “firm indications of fraud,” they must suspend the examination and refer it for criminal review.

The Form They Fill Out Without Telling You

When a Revenue Agent concludes that your case has criminal potential, they prepare Form 2797 – the Referral Report of Potential Criminal Fraud Cases.

You will never see this form. You will never be told it exists. The agent fills it out, submits it through there chain of command, and your case enters a review process that could result in criminal prosecution. All of this happens in complete secrecy.

The form documents the badges of fraud the agent has identified. It describes the evidence of willful intent. It estimates the tax loss to the government. It explains why the agent beleives this case warrants criminal attention rather then civil penalties.

After the form is submitted, theres a conference. The Revenue Agent, there group manager, a Fraud Technical Advisor, and a Special Agent from Criminal Investigation meet to review the evidence. They decide wheather CI should accept the case.

If CI accepts, they take over. The civil audit is suspended indefinately. Special Agents begin there investigation – which often includes interviewing witnesses you never knew they were talking to, subpoenaing records you didnt know they could access, and building a case against you while you sit in the dark.

If CI declines, the civil audit resumes. But heres the thing: you still have no idea any of this happened. The agent comes back, maybe with a few more questions, and you think everything is normal. You never know that you came within one meeting of a criminal prosecution.

How Long You Have Before They Decide

One of the most frustrating aspects of this process is not knowing the timeline. When your audit goes silent and you suspect a criminal referral, how long until you know what happens?

The answer is: it varies, but it can take months.

After a Revenue Agent submits Form 2797, the Criminal Investigation division has to evaluate wheather the case is worth pursuing. CI dosent accept every referral. They look at factors like the amount of tax loss, the strength of the evidence, the likelihood of conviction, and wheather the case serves there enforcement priorities.

This evaluation can take 60 to 90 days or longer. During this time, the civil audit remains frozen. You hear nothing. Your attorney (if you have one) may reach out to the IRS and get vague responses about the audit being “on hold” or “under review.” No one will tell you that a criminal referral is being considered.

If CI declines the case, the civil audit resumes – often without any explanation for the delay. The Revenue Agent picks up where they left off. You might never know that you were one meeting away from federal prosecution.

If CI accepts the case, everything changes. Special Agents take over the investigation. The civil audit dosent resume – it stays frozen while the criminal investigation proceeds. This can take another 12 to 24 months. And during all that time, you may have no idea your being criminaly investigated.

Some taxpayers find out when Special Agents show up unannounced. Others find out when there bank calls to say records have been subpoenaed. Some find out when a business associate mentions the FBI asked about them. By the time you know, the investigation may be nearly complete.

This is why the warning signs matter so much. The earlier you recognize that something has changed, the more time you have to prepare a defense. Once Special Agents are at your door, you’ve already lost months or years of potential preparation time.

Civil vs Criminal – The Line You’ve Already Crossed

Most people dont understand the fundamental difference between civil tax matters and criminal investigations.

In a civil audit, the IRS is trying to determine if you owe more money. The stakes are financial – additional taxes, penalties, interest. Revenue Agents handle civil matters. They dont carry guns. They cant arrest you. The burden of proof for civil fraud is “clear and convincing evidence.”

In a criminal investigation, the IRS is trying to put you in prison. Special Agents handle criminal matters. They carry guns. They can arrest you. The burden of proof is “beyond a reasonable doubt” – higher than civil, but not as comforting as you might think when your looking at a 90% conviction rate.

Heres the irony that destroys people: being cooperative in a civil audit can provide all the evidence needed for criminal prosecution. You answer questions honestly becuase you think honesty helps. You provide documents voluntarily becuase you think cooperation matters. Then the case goes criminal, and everything you said and gave becomes evidence against you.

The civil audit is governed by rules that favor the IRS. You have to produce records. You have to answer questions. Failure to cooperate can result in penalties and adverse inferences. So you cooperate.

But that cooperation has no Fifth Amendment protection if the case turns criminal. Everything you said in the civil audit – every document you provided, every explanation you gave – can be used against you in a criminal prosecution. The IRS didnt violate your rights by using civil audit material criminaly. You gave that evidence voluntarily.

This is why the moment you suspect your audit might have criminal implications, you need to stop cooperating and get a criminal tax attorney. Not next week. Now.

What to Do If You Recognize These Signs

If your reading this article becuase your IRS auditor has gone silent, or becuase your noticing questions that focus more on “why” then “how much,” or becuase your accountant told you the IRS Criminal Investigation division contacted them – you need to act immediatly.

First, stop talking to the IRS. Stop providing documents. Stop answering questions. Tell your representative (if you have one) that all communications should go through your attorney from this point forward.

Second, do not destroy any documents. This is absolutly critical. Destruction of evidence after you know theres an investigation is obstruction of justice – a seperate federal crime. Leave everything exactly where it is.

Third, contact a criminal tax attorney. Not your CPA. Not your regular tax preparer. Not a civil tax lawyer. You need someone who specializes in IRS criminal investigations and knows how to interface with the Criminal Investigation division. This is federal criminal defense, not tax preparation.

Fourth, do not discuss the situation with anyone except your attorney. Not your accountant (no privilage). Not your business partner (can be subpoenaed). Not your spouse (spousal privilege has limits). Anything you say to anyone other then your attorney can potentialy be used against you.

The good news is that not every case referred to CI results in prosecution. CI declines many referrals becuase the evidence isnt strong enough for criminal charges. But you cant count on that. You need representation that understands how to communicate with CI, how to present your case in the most favorable light, and how to minimize the risk of prosecution.

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle federal criminal tax investigations nationwide. If you suspect your IRS audit has taken a criminal turn, call us at 212-300-5196. The consultation is free. The mistake of waiting isnt.

Remember: that 90% conviction rate means the IRS almost never loses when they decide to prosecute. Your only real chance is to intervene before charges are filed – while theres still time to affect the outcome.

Todd Spodek has helped clients navigate this terrifying process – some who caught the warning signs early and were able to prevent prosecution entirely, and some who came to us later and needed aggressive criminal defense. The difference in outcomes between those two groups is dramatic. Early intervention saves careers, families, and freedom. Waiting until Special Agents are at your door means fighting a battle the government has spent years preparing to win.

Dont wait for the silence to break on there terms. If you recognize these signs, break it on yours. Call a criminal tax attorney today.