What is an Eggshell Audit?

 Posted on March 23, 2018 in Tax Audits

A tax audit can be a frightening situation. The United States tax code is complex, and many taxpayers are unfamiliar with its intricacies and the potential consequences that they may face if they have committed a violation. In some cases, taxpayers may face what is known as an “eggshell audit,” which is a civil audit that may potentially result in criminal charges. While this is an informal term, it refers to the care that must be taken in these situations as taxpayers seek to minimize their tax liabilities and civil penalties while avoiding criminal prosecution.

Potential Consequences of an Eggshell Audit

Eggshell audits occur because a taxpayer filed a fraudulent tax return. The taxpayer may have underreported the income he or she earned or claimed improper deductions or credits. The end result is that the taxpayer paid less taxes than he or she would have owed if he or she had filed an accurate tax return. Moreover, a return is considered fraudulent if a taxpayer deliberately intended to evade paying the full amount of his or her taxes or if he or she willfully submitted false statements or documents.

The risks in an eggshell audit involve whether a fraudulent tax return will result in civil or criminal penalties. In addition to being required to pay taxes owed and any applicable interest, possible civil penalties include the following:

• If the fraudulent return was filed because of negligence by the taxpayer, or because he or she disregarded rules or regulations, then he or she will be subject to a 20 percent penalty;
• If the value of property was incorrectly reported on a tax return (known as a gross valuation misstatement), the taxpayer will be subject to a 40 percent penalty; and
• If the taxpayer was found to have committed tax fraud, he or she will be subject to a 75 percent penalty.

In addition to these civil penalties, a taxpayer may face criminal charges for tax fraud. This is a felony charge, and a conviction can result in a maximum fine of $100,000 (or $500,000 for corporations) and up to five years in prison.

A civil audit and criminal investigation can occur at the same time, and taxpayers can face both civil and criminal penalties when they file a fraudulent return. The primary difference between civil and criminal investigations is the degree of proof that is required. To demonstrate civil fraud, an investigator must provide clear and convincing evidence. Therefore, the investigator must prove that it was highly probable that the fraud occurred. For criminal tax fraud, prosecutors must prove beyond all reasonable doubt that the fraud occurred.

Contact a San Jose, CA Tax Audit Attorney

If you are facing a civil tax audit involving a fraudulent tax return, it is essential to contact an attorney before speaking to an auditor. Statements made in a civil audit may be used as evidence in a criminal investigation. Everyone has the right to avoid incriminating himself or herself, and communications with an attorney are subject to attorney-client privilege.

At John D. Teter Law Offices, we will ensure that your rights are protected during an audit and work with you to minimize your tax liabilities and penalties while avoiding a criminal conviction for tax fraud. Contact our San Jose civil tax audit lawyer today at 408-866-1810.

Sources:

https://www.forbes.com/sites/robertwood/2017/05/15/how-irs-audits-can-become-criminal-investigations/#52f74d2d37c4

https://www.irs.gov/irm/part25/irm_25-001-001

https://www.irs.gov/irm/part20/irm_20-001-005