IT started with a dreaded letter from the IRS. Your tax return has been selected for examination. Lately, the agent has been asking about cash transactions, safety deposit box, foreign bank accounts and even showed up with a second agent. At your doorsteps! Something is wrong. Does the agent suspect fraud? Are you being referred to CID (Criminal Investigation Division)? If so, you need help. In a hurry! It would be foolish not to set up an adequate defense. Pronto! Let me give you some indicators of a fraud audit and what you should do about it.
What are warning signs that you may have been referred to CID?
1. The agent requests detailed information about your life style and spending habits.
2. The agent asks about offshore bank accounts.
3. The agent asks about safety deposit boxes and other bank deposits.
4. The agent performs a cash deposit analysis and finds that deposits materially exceed reported income.
5. The agent begins requesting copies of every document that you show him.
6. The agent begins to contact third parties regarding payments made to you or received from you.
7. The agent insists on meeting with you despite your having a representative.
8. The agent insists on meeting in your place of business or home instead of your representative’s office.
9. Suddenly, it is difficult to communicate with the agent who stops working on your case.
10. You are visited by two special agents (the second agent’s role is to provide corroborating testimony).
What should you at this time?
1. Verify the identity of any agent who comes to your premises. Get a business card.
2. Do not talk with or write to any IRS personnel anymore.
3. Hire a CPA or criminal tax lawyer to represent you.
4. Execute a POA (Power of Attorney) and an engagement letter with your rep immediately.
5. Keep a copy of both POA and engagement letter at home, your office, and with you at all times.
6. Refer all calls for documentation or explanation to your tax representative.
7. Do not provide any more documentation directly to the agents. Go through your rep.
8. Provide the good, the bad and the ugly to your rep so he can develop strategies to counter any threat.
9. Prepare written memoranda of all meetings, dates, people, questions and responses.
10. List and copy each page that you provide to the IRS.
Word of Advice: Do not take fraud cases lightly. As soon as one or a combination of these red flags appears, hire a representative—preferably a tax attorney or seasoned CPA. This is not the time to be cheap. Defend yourself properly.
Word of Caution: Do not innocently offer discounts for services or goods to an agent. Such discounts are considered bribes. IRS personnel are clean—the cleanest among civil servants. The Service has zero tolerance for bribery. An innocent offer can lead you to CID.
Development: Beware—Criminal investigations increased 8% the other year. Over 90% of indictments resulted in convictions. Traditional tax evasion cases make up 50% of cases. IRS hopes to increase time spent on unreported income to 70%. Scary stuff.
A Sigh of Relief: If you receive Form 4549 RAR (Revenue Agent Report), you can breathe a sigh of relief. It means that you were not referred to the CID.
Informant? You may have a nagging suspicion that you may have been referred by an informant—a vengeful employee, ex-husband, girlfriend, or jealous competitors. Auditors are reluctant to reveal this info but I’ve found a way to get a hint: when an auditor responds by saying that “I’ll ask my manager,” you have been referred. If auditor says “I can’t tell you” you have been referred.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].
