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Counsel’s engagement of the accountant should be in writing, and should indicate that the accountant is acting under the direction of counsel in connection with counsel’s rendering of legal services to the client, communications between the accountant and the client are confidential and are made solely for purposes of enabling counsel to provide legal advice; the accountant’s work-papers are held solely for counsel’s use and convenience and subject to counsel’s right to demand their return; and the accountant is to segregate their work papers, correspondence and other documents gathered during the course of the engagement and designate such documents as property of counsel.
The critical inquiry is often whether counsel should retain the taxpayer’s prior accountant or a new accountant.
IRS examination work papers will include the following information: “BADGES OF FRAUD.” Over the years, various courts have developed a list of “badges of fraud” from which fraudulent intent might be inferred.
These badges of fraud generally include: (1) understatement of income; (2) inadequate books and records; (3) failure to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealing assets; and (6) failure to cooperate with tax authorities.[x] The IRS Fraud Handbook sets forth a non-exclusive list of various indicators of potentially fraudulent conduct, including:[xi] The IRS examiner will typically search behind the books and to probe beneath the surface to validate and determine the consistency of information provided and statements made to evaluate the credibility of evidence and testimony provided by the taxpayer.
Thus, the civil fraud penalty may be asserted on one spouse only. To prove fraudulent intent, the IRS must demonstrate that the taxpayer intended to evade tax he believed to be due, by showing proof of conduct intended to conceal, mislead, or otherwise prevent the collection of such tax.[ii] Fraud can not be imputed or presumed – the government must prove by affirmative evidence that an understatement of tax set forth on the return is attributable to fraud.[iii] Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest difference of opinion, negligence or carelessness.[iv] RELIANCE AS A DEFENSE.
The existence of fraud is a question of fact to be resolved from the entire record.[v] Because direct proof of a taxpayer’s intent is rarely available, fraud may be proven by circumstantial evidence, and reasonable inferences may be drawn from the relevant facts.[vi] Mere suspicion, however, does not prove fraud.[vii] Reliance on a tax professional is a proper defense to the imposition of penalties, as the Supreme Court has observed: When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.
This privilege does not extend to the actual return preparation. Indicators of Fraud – Income [i] IRC § 7454(a); Rule 142(b); Di Leo v. If the IRS is able to prove that with clear and convincing evidence you acted fraudulently, the IRS may issue penalties upwards of 75%, in addition to other penalties for other related matters – as well as a potential referral the IRS Special Agents at the Department of Criminal Investigations. In order to make it palpable to you (while keeping you awake), we will use examples to break it down into various topics as provided in the IRS IRM (Internal Revenue Manual) evidence to prove that some part of the underpayment of tax was due to fraud.“Ordinary business care and prudence” do not demand such actions.[viii] SENSITIVE ISSUE TAX EXAMINATIONS. In civil tax audits that include potentially sensitive issues, taxpayers often engage a team of representatives, including counsel and a forensic accountant.