Chicken, Eggshell – Reverse Eggshell

Chicken, Eggshell – Reverse Eggshell

Chicken, Eggshell – Reverse Eggshell which came first? Perhaps they all came at the same time…no matter this is a continued discussion of consideration of how to proceed when an IRS audit notice shows up. Civil, criminal or we just don’t know yet.

What is an “eggshell” audit?
Chicken, Eggshell - Reverse Eggshell
Chicken, Eggshell – Reverse Eggshell

An eggshell audit is a civil IRS examination with underlying criminal issues. Representation during an eggshell audit should be limited to tax controversy attorneys and CPAs under a Kovel agreement with a tax controversy attorney calling the shots behind the scenes. United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961). The tax return preparer should NOT handle an eggshell audit. The taxpayer may have filed a fraudulent return in a prior year and the auditor is not aware of potential evidence of civil tax fraud or a criminal tax violation. A tax return is fraudulent if an additional tax is owed due to

(i) a deliberate intent to evade tax or

(ii) there is a willful and material submission of false statements/documents in connection with the return.

It is considered an “eggshell” audit because of the care one must take – i.e. walk on eggshells – to guide the examination and prevent suspicion by the auditor.

What is a “Reverse Eggshell Audit”?

An eggshell audit is a civil audit in which the auditing revenue agent is unaware that the taxpayer has filed one or more fraudulent tax returns. In this situation, the taxpayer and his practitioner must walk a fine line between cooperating with the auditing revenue agent to avoid suspicion and remaining silent to protect the taxpayer from self-incrimination or consenting to a search. The practitioner’s primary goal in an eggshell audit is to prevent the examiner from referring the case to the criminal investigation unit of the IRS.

A reverse eggshell audit, (also called a “joint investigation” or a sub rosa criminal proceeding) is an audit where the examiner collects information in an apparently civil audit with the intent of contributing the information to a simultaneous criminal investigation of which the taxpayer is unaware. So, rather than the examiner operating in the dark about the taxpayer’s criminal conduct, it is the taxpayer who is in the dark about the auditor’s actual intentions. The practitioner’s role is also different in a reverse eggshell audit: wherein an eggshell audit the practitioner seeks to avert a criminal investigation, in a reverse eggshell audit, the practitioner’s primary objective it to discover the criminal proceeding and protect the taxpayer from prosecution and from cooperation which might be used against him.

Chicken, Eggshell – Reverse Eggshell

Kovel Doctrine – Expanded Privilege

Additional Issues – Civil vs. Criminal Audit

Internal Revenue Manual – Badges of Fraud