By David W. Klasing, Esq.
Many taxpayers engage a tax preparer—whether a CPA, an enrolled agent, or another paid professional—trusting in their expertise to navigate complex federal and state tax regulations to keep their tax affairs in compliance. However, few realize how devastating it can be if the IRS Criminal Investigation Division (IRS-CI) or another enforcement unit suspects that this preparer is orchestrating, contributing to, or enabling tax fraud across multiple client returns.
An IRS criminal tax investigation of a preparer can rapidly escalate a routine federal civil tax audit of a taxpayer’s own returns into an exponentially more intense inquiry, with potential felony charges if the government concludes the taxpayer “knew or should have known” about inflated deductions, falsified income, or other material misrepresentations. The consequences may include significant civil and criminal tax penalties, restitution orders, and the severe negative public attention that accompanies a criminal tax prosecution.
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Below is a detailed look at why your preparer’s legal troubles place you at risk, what signs might indicate they are under scrutiny, and which immediate steps you can take to protect yourself from civil and criminal tax exposure.
Why a tax preparer under investigation puts you in danger
Tax preparers are subject to various federal laws and regulations. For those who are attorneys, CPAs, enrolled agents, and other authorized professionals, IRS Circular 230 mandates rigorous standards of accuracy, ethical conduct, and disclosure in the preparation of tax returns. For example:
- 26 U.S.C. § 6694 imposes standards of return preparation, penalizing preparers who disregard due diligence or push fraudulent returns.
- 26 U.S.C. § 6695 details signature and disclosure obligations.
- 26 U.S.C. § 7206(2) makes it a felony to willfully aid in preparing a false return.
- 26 U.S.C. § 7701(a)(36) clarifies the broad definition of a tax “preparer,” encompassing “any person who prepares for compensation … any return.”
From the government’s perspective, focusing enforcement on a single preparer suspected of fraudulent submissions can multiply the potential tax-loss figure across many client returns, turning the matter into a priority criminal tax investigation rather than a run-of-the-mill civil tax compliance check.
For the taxpayer, the peril is that they remain ultimately liable for any false information on their return—even if they did not personally orchestrate the fraudulent details.
When the IRS or Department of Justice suspects that your tax preparer has engaged in deliberately inflating deductions, manufacturing bogus credits, or otherwise filing false returns on behalf of multiple clients, the repercussions for you can be downright frightening. Investigators may re-examine your returns, concluding that you “should have recognized” these glaring entries—especially if deductions were unusually high, inconsistently supported, or overtly unrealistic. Simply pleading ignorance or insisting “I didn’t know” may fail to protect you if the government deems that the red flags (see below) were too obvious for a reasonable person to overlook.
In such circumstances, what begins as a routine federal civil tax audit can transform into a high-risk eggshell or reverse eggshell audit and quickly pivot to a criminal tax investigation if the IRS discerns willful conduct or willful blindness. That shift carries profoundly dire consequences: felony prosecution under various federal tax statutes, crippling fines, restitution orders for unpaid taxes, the severe negative public attention stemming from an indictment, and a permanent criminal record that can inflict irreparable harm on your career and personal life. The stark reality is that incarceration, while not guaranteed, remains a very real possibility if the government can prove your knowing or reckless complicity in the fraudulent acts orchestrated by your preparer.
Red flags: Indications that your preparer’s troubles may affect you
Although the IRS generally does not publicize its investigations, certain warning signs can suggest that your preparer has attracted attention from IRS-CI—potentially ensnaring you in a high-risk civil tax audit or even a criminal tax inquiry. Watch for the following indications that your preparer may be under scrutiny:
- Abrupt re-filings or amendments: Sudden, unexplained revisions to previously filed tax returns that promise larger-than-anticipated refunds or drastically lowered liabilities, often lacking legitimate receipts or documentation. Such amendments might focus on inflated Earned Income Tax Credits, invented business expenses, or other unsubstantiated claims—behavior that can raise immediate red flags for IRS special agents.
- Evasive or cryptic communication: Unusually defensive or dismissive responses when you ask about large, unexplained deductions or puzzling credits, including reluctance to provide documentation. If your preparer discourages you from reviewing the underlying figures or becomes hostile when you question their methods, it may signal deeper misconduct that they are attempting to conceal.
- Rumors or direct hints of special agent contact: Indications that IRS criminal tax investigators (rather than regular revenue agents) have reached out to your preparer or that your preparer has received a summons for records beyond a typical civil tax examination. Even informal talk of IRS-CI involvement implies a more serious inquiry, suggesting that fraudulent activity may be widespread across multiple client returns.
- Demands for cash payments or altered documents: Requests for untraceable, cash-based fees or instructions to modify, backdate, or fabricate source records—such as invoices or receipts—are among the most glaring signs of potential tax fraud. The IRS treats any concerted attempt to obscure money trails or falsify transactional evidence as a strong indicator of willful misrepresentation, raising the possibility of felony tax charges against both the preparer and any complicit client.
Cutting ties: Essential actions if the IRS is investigating your tax preparer
When the above or similar red flags arise, it would be wise to immediately sever ties with a preparer under an IRS criminal tax investigation to safeguard your own financial and legal well-being. Preparers who become targets of IRS-CI often represent substantial tax loss due to fraudulent activities spread across numerous clients, making each return they handle a potential risk point for the IRS.
For instance, if a preparer is systematically overstating charitable contributions or misclassifying personal expenses as business deductions to secure larger refunds, these deceptive practices can draw intense IRS scrutiny not only on their work but also on yours. Continuing to rely on someone engrossed in their own defense efforts can inadvertently associate you with their suspected malfeasance, especially if the IRS concludes that you “should have recognized” the irregularities on your returns. In such scenarios, the preparer might prioritize their own legal protection over your interests, potentially blaming you for complicity to mitigate their liability.
The most prudent action is to consult with a qualified dual-licensed tax attorney and CPA who can help you evaluate your risks, understand your rights, and formulate a strategic plan to minimize potential civil or criminal tax exposure. Even if you only need a short initial consultation, taking that proactive step can help you gauge whether you face a mere civil audit or a possible criminal tax exposure, enabling you to keep a safe distance from both the suspect preparer and the IRS agent’s crosshairs.
Three practical steps to shield yourself if your tax preparer is under scrutiny
1. Gather all records: Collect your filed returns, engagement letters, communications, and any receipts or worksheets that the preparer used to compile your filings. Such documentation can demonstrate you acted in good faith and followed what appeared to be professional advice, or it can pinpoint precisely where the preparer inserted dubious figures. Retaining a paper trail can make the difference between establishing innocent reliance versus facing allegations of complicity in tax fraud.
2. Seek a dual-licensed criminal tax defense attorney–CPA: When facing a tax audit or criminal tax investigation, you may be inclined to turn to the person who initially prepared your taxes. However, that is a horrible idea. Here’s why:
- Your conversations with a non-attorney accountant or tax preparer are not confidential or privileged. If called upon in a subsequent legal tax proceeding, they must disclose any incriminating information you shared. When a preparer is under investigation, they may be more inclined to shift blame onto unsuspecting clients to protect their own license, reputation, or livelihood. This vulnerability is particularly acute if the IRS or Department of Justice deems that you “should have recognized” suspicious items on your returns—be they overblown deductions, questionable credits, or manipulated income figures.
- Only an attorney-client relationship can offer the robust protection and confidentiality you need in the face of a high-risk civil tax audit or a criminal tax inquiry. Unlike tax preparers, attorneys are bound by attorney-client privilege and the attorney work-product rule, safeguarding any admissions or disclosures you make while seeking legal counsel. This layer of secrecy is critical once the IRS begins probing a suspected preparer’s entire client roster, seeking potentially incriminating evidence across multiple returns.
- A tax attorney offers advantages that surpass what a conventional accountant or enrolled agent can provide. First, an attorney can enlist consulting accountants under a Kovel letter, effectively extending attorney-client privilege to those accountants’ work. This allows for in-depth analysis of your returns without exposing your confidential communications. Second, while standard preparers tend to focus on accuracy, attorneys emphasize advocacy, a skill set that becomes exceptionally potent once a tax matter evolves into complex legal questions or the threat of a criminal tax prosecution looms.
3. Weigh amended returns or voluntary disclosure: If your original filings appear overstated or blatantly erroneous, a quiet or streamlined disclosure—completed before the IRS discovers the inconsistencies—can virtually remove your risk of indictment. An attorney-CPA can coordinate the timing and feasibility of such moves, cautioning that any misstep could confirm the government’s suspicions of deliberate misconduct. Acting sooner rather than later often yields a more favorable outcome, especially if you genuinely relied on your tax preparer without realizing the magnitude of the misrepresentations.
ABOUT THE AUTHOR:
David W. Klasing, Esq., is the founder and managing attorney of the Tax Law Offices of David W. Klasing PC, a boutique California tax firm comprised of nationally recognized tax attorneys and CPAs.
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