As a business owner, it is essential to understand the difference between an IRS audit and a criminal investigation, as the outcomes of each can have a significant impact on your business.
In this blog post, we will dive deep into civil and criminal tax investigations, discuss what triggers an IRS audit or a criminal investigation, and the importance of seeking legal representation. We will also provide you with information on finding a criminal tax defense attorney in San Diego or California.
Civil vs. Criminal Tax Investigations: Definitions and Key Differences
Civil Tax Investigations
A civil tax investigation is usually initiated when the IRS detects errors, omissions, or discrepancies on a taxpayer’s tax returns. These investigations are non-criminal in nature and are intended to identify if the taxpayer owes additional taxes, penalties, or interest. The IRS may also conduct civil investigations if a taxpayer fails to file their tax return or pay their taxes on time. In some cases, the IRS may conduct a civil investigation to verify if the taxpayer is complying with tax laws or regulations. It is important to note that the burden of proof in a civil investigation is lower than in a criminal investigation, meaning that the IRS needs to show only a preponderance of evidence rather than proof beyond a reasonable doubt.
Criminal Tax Investigations
A criminal tax investigation is a serious matter that can result in significant legal consequences, including fines and even imprisonment. The IRS initiates criminal investigations when it suspects that a taxpayer has intentionally committed tax fraud or tax evasion. In general, criminal tax investigations are conducted by IRS’s Criminal Investigation Division (CID) and are intended to prosecute individuals or businesses that have violated the tax code. IRS may also involve other law enforcement agencies, such as the FBI, in the investigation. The burden of proof in a criminal investigation is high, as the IRS needs to show proof beyond a reasonable doubt.
Key Differences Between Civil and Criminal Tax Investigations
The primary difference between civil and criminal tax investigations is their purpose. Civil investigations are designed to determine whether a taxpayer owes additional taxes, penalties, or interest, while criminal investigations are intended to prosecute taxpayers who have violated the tax code intentionally. Another key difference is the burden of proof required in each investigation. The burden of proof is lower in civil investigations than in criminal investigations, meaning that the IRS needs to present less evidence to establish a violation. Finally, the legal consequences of a criminal investigation are much more severe than those of a civil investigation, as a criminal investigation can result in fines, imprisonment, and other penalties.
What Triggers an IRS Audit?
There are several reasons why the IRS may decide to conduct an audit on a business owner. Here are some of the most common triggers:
Mismatch Between Tax Return and Third-party Documents:
When the information on the tax return doesn’t match with the information reported by third parties, such as banks, employers, or clients, it can raise red flags for the IRS.
High score in the IRS Audit Selection Process:
The IRS uses a scoring system to determine which tax returns are more likely to have errors or omissions. Tax returns with high scores are more likely to be selected for an audit.
The IRS also conducts random audits to maintain the integrity of the tax system and detect fraud or errors.
Questionable Tax Practices or High-risk Industries:
If a business operates in an industry that is known to have high instances of tax fraud or evasion, or if the business has a history of questionable tax practices, it may be more likely to get audited.
During an IRS audit, business owners should expect the agency to review their tax returns, financial statements, and other relevant documents to verify that they have accurately reported their income, deductions, and credits.
What Triggers a Criminal Tax Investigation?
A criminal tax investigation is much more serious than a civil audit and can lead to severe penalties, fines, and even imprisonment. Here are some of the most common reasons why the IRS’s Criminal Investigation Division (CID) may initiate a criminal tax investigation:
Intentionally failing to report income or underreporting income can be considered tax evasion and is a criminal offense.
Claiming False Deductions:
Claiming deductions that a business is not entitled to or inflating the value of deductions is considered tax fraud and can lead to criminal charges.
Failing to Report Taxable Income:
Not reporting all taxable income, such as income earned from illegal activities, can result in a criminal investigation.
Other Criminal Activities:
The IRS may also investigate businesses suspected of money laundering, identity theft, or other criminal activities related to tax fraud.
If a business owner is facing a criminal tax investigation, they should seek legal representation immediately to protect their rights and interests. A criminal tax defense attorney can advise on the best course of action, negotiate with the IRS, and represent the business owner in court if necessary.
The Importance of Legal Representation
Facing a civil or criminal tax investigation without legal representation can be disastrous for business owners. A criminal tax defense attorney can help protect your rights, navigate the legal process, and negotiate a plea deal or settlement. In the event of a criminal investigation, an attorney can provide legal advice and ensure that the investigation does not infringe upon your constitutional rights.
Finding a Tax Attorney in San Diego or California
Finding the right criminal tax defense attorney in San Diego or California can be challenging. Business owners should choose an attorney with experience in corporate tax evasion and business tax fraud cases. Reputable law firms or attorneys specializing in criminal tax defense can provide legal representation to protect your interests and negotiate with the IRS on your behalf.
Facing an IRS audit or a criminal tax investigation can be intimidating for business owners. However, by understanding the differences between civil and criminal tax investigations, what triggers an audit or an investigation, and the importance of legal representation, business owners can protect their rights and interests. If you are facing an IRS audit or a criminal tax investigation, contact a criminal tax defense attorney in San Diego or California as soon as possible to protect your rights and interests.
At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.
Interested in learning more? Read on to learn how to respond to an IRS audit.