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The first thing C.P.A.s, accountants, enrolled agents and tax preparers need to understand when a client is under criminal investigation for tax fraud is THERE IS NO ACCOUNTANT CLIENT PRIVILEGE!  Unlike the attorney-client privilege, communications between an accountant and their client are not protected and are discoverable by the IRS. 

If an accountant is approached by an IRS criminal investigator asking questions about a client, the account should not discuss the criminal inquiry with their client. Conversations and communications between accountants and clients are not privileged and you could be compelled to disclose the substance of these conversations at a later date.

Accountants should also not provide any tax return or tax return information to an IRS criminal investigator or federal prosecutor without a subpoena or court order.  Accountants may be subject to criminal and civil penalties for unauthorized disclosures of tax return and tax return information under 26 U.S.C. § 7213, 26 U.S.C. § 7431 and 26 U.S.C. § 6103. 

See https://www.irsvideos.gov/Governments/Safeguards/ProtectingTaxInformation for a link to an IRS video explaining the disclosure process. 

You and your client may not know that the client is under criminal investigation by the Internal Revenue Service until criminal charges have been filed. 

The IRS does not typically conduct parallel civil and criminal investigations. Revenue Agents and Officers work with “Fraud Referral Specialists” that assist in the development of cases and provide advice as to when a case should be referred to the Criminal Investigation Division. If your client’s civil tax investigation is suddenly suspended or the Revenue Agent stops returning your phone calls, it may mean the Revenue Agent has made a fraud referral and IRS criminal investigators are evaluating whether to recommend charges against your client.

You may also be tipped off that a criminal investigation is ongoing if:

• “Eggshell Audits”: The IRS may select a taxpayer for a civil audit if there is evidence of one or more false returns being filed (e.g., reported income is less than amounts reported on 1099s) to develop evidence that may be used to bring criminal charges.

• An IRS agent wants to interview you.

• Your client’s bank records, credit card statements, or phone history are summoned. The IRS is required to provide the taxpayer with notice when it issues administrative summons to third parties for such records.  

The IRS investigates criminal cases through administrative investigations and grand jury investigations.  Administrative investigations are conducted solely by the IRS without the assistance of the U.S. Attorney’s Office or other federal law enforcement agencies.

The Internal Revenue Service Criminal Investigation Division investigates alleged violations of:

• Criminal Tax Statutes
• Tax Evasion 26 U.S.C. § 7201
• Payroll Tax violations 26 U.S.C. § 7202
• Failure to file a tax return 26 U.S.C. § 7203
• Making or Subscribing a False Return 26 U.S.C. § 7206(1)
• Aiding and Assisting in the Submission of a False Return 26 U.S.C. § 7206(2)
• Conspiracy to Impede and Impair the IRS 18 U.S.C. § 371 (Klein Conspiracy)
• Obstruction of the Internal Revenue Service 26 U.S.C. § 7212(a)
• The Bank Secrecy Act
• Money Laundering Statutes

In a civil case, the burden of proof is on the taxpayer to establish that the information reported on a tax return is true and correct.  In a criminal case, the burden of proof is on the government. Methods of proof used in a criminal case include:

• Specific Items Method of Proof – IRS establishes that a tax return is false, or a tax is due and owing, by identifying specific items of unreported income or improper deductions.
• Net Worth Method of Proof – IRS establishes that an increase in a taxpayer’s net worth was caused by unreported taxable income.
• Expenditures Method of Proof – IRS establishes that a taxpayer’s expenditures in a given year exceeded reported taxable income.
• Bank Deposits Method of Proof – IRS establishes that deposits made into bank accounts controlled by the taxpayer exceeded reported taxable income.

In a civil case, the IRS usually has three years after a taxpayer files a return to conduct an audit. In a criminal case, the IRS has six years to investigate and bring criminal charges. 

• Unlike the civil statute of limitations, criminal tax statues are subject to a six-year statute of limitations.
• The statute of limitations is triggered by the last affirmative act of tax evasion for a particular tax year.
• In false return cases, the statute of limitations runs from the date the return was filed or the statutory due date if the return is filed early.
• The statute of limitations is extended if the taxpayer files an extension of time to file.

When your client is under investigation for a tax crime, you should recognize how you can and cannot help your client and what the ramifications may be for you and your practice.

• Do not talk to your client about the criminal investigation.
• Federal law does not recognize an accountant-client privilege – conversations you have with your client may be subject to discovery.
• Do not assume that you know the full scope of the investigation or that your client has disclosed to you all of the relevant facts.
• Advise your client to consult with counsel and maintain all of the relevant documents and email communications.
• The IRS may use evidence developed during an audit to prosecute a taxpayer.
• You may be a key witness (or even a defendant) in a criminal case.
• Consult your own counsel and, if appropriate, have your counsel notify the IRS and the U.S. Attorney’s Office that you are represented by counsel.
• Determine whether you should continue working for the taxpayer.