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What you need to know about eggshell audits

On Behalf of | Dec 27, 2022 | IRS, Tax Evasion

If your tax returns have sufficient indications of fraud, the IRS will conduct a civil examination to uncover the truth, commonly known as an eggshell audit. As the name suggests, you must take great care to avoid facing criminal consequences.

For instance, you may have understated your income or overstated your tax deductions and therefore paid less tax than what you owe the IRS. When this happens, the IRS will want to know if you did so by mistake or if you were intending to evade taxes.

The potential outcomes of an eggshell audit

As mentioned, an eggshell audit is a civil audit with the potential to turn criminal. If the IRS finds that negligence, rather than criminal intent, was the reason for the tax issues, you may face a negligence penalty of 20% of the understated tax.

However, if the audit uncovers fraud like the omission of income, substantial overstatements or fictitious items, it will likely lead to a criminal referral. The stakes are much higher here, and you could be arrested and charged with tax evasion following criminal investigations into your tax issues.

The importance of proper legal representation

It helps to know what to do during this and any other audit by the IRS. Your responses to the investigating officer’s questions may determine the conclusion of the eggshell audit. 

Remember, an eggshell audit is not a criminal audit, and the IRS does not have credible proof that you intended to evade taxes or break the law. Do not disclose more information than necessary, but at the same time, do not lie or provide incorrect data.

Knowing what to expect and how to carry yourself when facing an audit can help avoid common pitfalls and ensure you protect your interests.