What Happens When Your Client is Under IRS Criminal Investigation and You Prepared the Return?

Robert P. Brennan, a CPA who was an IRS agent for 13 years, provides MTCO with a comprehensive look at how to handle your client being investigated by the IRS. During an audit, criminal intent can come to light, which moves a case to the fraud division of the IRS. As the accountant or tax preparer involved in the case, it’s important that you know how to react and what your rights are.

1. Initial Phase: Client Calls You After IRS Shows Up At His Door

First thing’s first - a special agent showing up is not a good thing! Prior to their arrival, an IRS agent will have already completed a pre-investigation inquiry. They are now looking for an admission of guilt. Their goal is to confirm Indicia of Fraud.

Before you help your client, refer to the IRM (Internal Revenue Manual) Part 4: Examination Procedures and Part 9: IRS Criminal Investigation Procedures.

An Indicia of Fraud is an intentional understatement of income or overstatement of expenses over the course of years and in the amount of at least $10,000.

The IRS is going to try to catch your client off-guard, and they are never there to help. The agent may arrive at the client’s home, in the evening, and try to force the client into an immediate interview. Typically, the agent has to listen to your client if they request a meeting at a later time. Very rarely, they already have a search warrant in place for their home. As the accountant or tax preparer, you will want to know if your client pins everything on you and your preparation of the tax return. IRM Part describes a client’s right to not talk to a special agent. A client should call their lawyer before sitting down with the IRS Special Agent for an interview.

2. What Rights Do You and Your Clients Have During a Criminal Investigation?

Your client should immediately call their attorney, not their accountant, once they are contacted by the IRS Special Agent. The accountant should not talk to their client after the IRS contacts or interviews them.

Your client could admit guilt to you, and it’s critical that you remember there is NO Accountant-Client privilege. Always recommend that your client speak with their attorney instead of you.

You can potentially become a Coval Accountant and join your client’s attorney’s team, which would create Attorney-Client privilege. Only then would it be safe for your client to confide in you.

Does the accountant need an attorney? If the client engaged him, then yes. Production of the accountant’s workpapers should be negotiated by the accountant’s attorney. IRS Section 6103 covers disclosures of client information.

Make sure that you know the preparer obligations under Circular 230 and AICPA Standards of Statements in a Tax Service.

Take the time to prepare for your interview with the IRS. Review all notes and workpapers. Answer all questions in the most simple and direct way possible. Both the client and the accountant should have their attorneys present at their IRS interviews.

3. How to Determine Whether You, the Accountant, Will Be a Target of the Investigation with Your Client

If a Special Agent of the IRS comes to your office, you can consider that to be highly unusual. Immediately ask if you are the subject of an investigation, and get an attorney involved on your behalf.

Ask to see the client’s case file under IRS Section 6103(e). It’s unlikely that the agent will show it to you, but it is possible they will - it also shows your understanding of your rights.

Remember, the client says that you saw the return as it was filed. Also remember that the IRS wants YOU - the most credible witness - for their case.

4. What to Expect If You’re Called as a Government Witness

All communications, workpapers, notes, and conversations are not protected in a Criminal Tax Case, and all of these documents will be used in court.

You will most likely be called as a Fact Witness, not an Expert Witness.

5. Should You Help Your Client During the Investigation? Will the Accountant Need an Attorney?

No! No! No! Do NOT talk to your client. Any information that is discovered by speaking with your client must be presented in court. It is best to stay away from the client entirely.

In most cases, the accountant will not need an attorney, but you must consider the circumstances on a case-by-case basis.

6. IRS Circular 230

If a taxpayer’s position regarding income or expenses is unusual, irregular, and suspicious, then the accountant should seek clarification.

The preparer is not an auditor, but due diligence is required. Conscious omission is not good enough. Follow up with your clients and ask for proof of all claims.

There is more emphasis on a Preparer’s penalties by the IRS than ever.

7. Tax Crimes and Defenses

The statute of limitations is generally 6 years in criminal cases, and intent is required in most tax crimes.

Be sure you are familiar with:

  • IRS Section 7201 Evasion
  • IRS Section 7203 Willful Failure to File
  • IRS Section 7206(1) False Returns and Preparers of False Returns
  • IRS Section 7207 Submitting False Documents

Make sure that you are protecting yourself from filing a potentially fraudulent claim. If you do not feel comfortable with the information that the client is providing to you, decline to work with them. Do your research and know your rights.