Tax Lawyer's Blog

Most people would rank an IRS audit somewhere between gout and being forced to endure an Adam Sandler movie in their list of life’s most painful experiences. It’s understandable then that even taxpayers who are above reproach would want to avoid one.

However, Jack Townsend says that audit avoidance might in some cases be a tax crime:

Today’s Tax Notes had this article that grabbed my attention: Sam Young, Estate Tax Officer Provides Hints for Audit Avoidance, 2009 TNT 239-5.

All of these “tips” although appearing rather mundane are really intended to lessen the chance that the IRS will audit the estate tax return. In that sense, they may at least in theory come within the scope of potential criminal activity, particularly if there is some aggressive item reported in the return that the additional disclosures or even the neatness are intended to divert attention. I don’t think the particular items here really could turn into a problem alone, but packaged with other bad facts could be part of the ambiance of a tax obstruction charge.

I haven’t explored this issue with anywhere near the diligence Mr. Townwend has, but for what it’s worth here are my first impressions:

1. An IRS audit – or any government or regulatory authority audit for that matter – is disruptive, time-consuming and stressful and requires the disclosure of sensitive, private information. In short, there are good reasons other than the hiding of a criminal act to want to avoid an IRS audit and taxpayers should have every right to arrange their affairs in such a manner so as to do so.
2. Although it is generally true that when a taxpayer is audited and doesn’t have adequate records in support of a specific deduction the IRS will disallow that deduction. However, the law does not require a taxpayer to have detailed records supporting every deduction taken on his tax return. It is easy, therefore, to envision the case of a taxpayer who lacks adequate records – they may quite understandably have been lost by fire, flood or theft – wanting to avoid an IRS audit even though he knows the expense deductions he claimed on his return are accurate and legitimate.
3. Of course, to the extent that a taxpayer (or, presumably, a tax preparer) intentionally mischaracterizes an item on a tax return in the hopes of avoiding an audit because he knows that his treatement of that item is erroneous or fraudulent, there is already a criminal sanction for it. It’s called filing a false statement.

For a thorough discussion of the issue read Townsend’s 2009 Houston Business and Law Journal article titled Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?

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