In simple terms, an eggshell audit occurs when a taxpayer who’s being audited filed a fraudulent return in an earlier year. The fraud in question could be from understatement of income, overstatement of deductions or the use of credits that a taxpayer wasn’t entitled to use. Because the IRS auditor doesn’t know about the fraudulent return, the taxpayer has to take a lot of care to ensure that the auditor doesn’t find out. Eggshell audits get their name from the fact that a taxpayer is walking on eggshells to avoid bigger problems such as a criminal investigation.
The big difference between civil issues, which make up the majority of audits, and criminal matters, which this type of audit can become, is the amount of evidence that the auditor needs. Civil issues only require the IRS to find clear and convincing evidence of fraud. Criminal investigations require them to find enough evidence to prove it beyond a reasonable doubt.
Another difference is in the penalties. In the case of eggshell audits, if you’re found to have committed fraud by mere negligence, then you have to pay a 20% penalty on top of any back taxes you owe. If it’s considered deliberate civil fraud, then you’ll also have to pay any fines in connection with the case. Finally, if you’re found to have committed criminal fraud, then you can be sentenced to 3-5 years in prison and a 75% penalty upon conviction.
Sometimes, a person being audited may be the subject of a reverse eggshell audit. This occurs when someone is already in the midst of a criminal investigation alongside an audit, and IRS agents are collecting evidence for that investigation.
If you’re at risk of an eggshell audit, it’s best to hire a professional tax attorney. A professional can show you how they’ll attempt to keep this a civil matter. IRS auditors usually won’t tell you that an audit has shifted into a civil or criminal investigation, and they may start gathering evidence of fraud without your knowledge. A tax attorney can guide these examinations, and they can also try to limit the investigation’s scope. They’ll also make sure that you never speak to an IRS representative directly.
If the worst happens, such as the discovery of fraudulent activities, a tax attorney can work to mitigate the penalties of civil fraud and do their best to assist you should it become a criminal matter.
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