The Internal Revenue Service’s Criminal Investigation Division (IRS CI) is targeting tax preparers or the ones who prepare tax returns in 2022. IRS CI is focusing its efforts on tax preparers who underreport their clients’ tax liability—whether in coordination with their clients or simply as a means of generating business.

As one recent example, on April 7, 2022, the U.S. Department of Justice (DOJ) announced a permanent injunction against two paid tax return preparers who were accused of preparing fraudulent federal income tax returns. Among other allegations, the tax preparers were charged with claiming ineligible dependents, including false entries on Schedule C of Form 1040, and manipulating income to generate false or inflated credits on behalf of their clients. In issuing the injunction, the U.S. District Court for the Northern District of Georgia also found that the tax preparers, “misrepresented their due diligence efforts to determine customer eligibility for the credits they claimed.”

While the tax preparers, in this case, received an injunction, tax preparer fraud investigations can lead to much more serious penalties. Criminal violations of the Internal Revenue Code (IRC) and other relevant statutes can carry substantial fines and years or decades of federal imprisonment. As a result, facing an IRS CI investigation is a serious matter, and tax preparers cannot afford to take requests for interviews with IRS CI agents lightly.

“IRS CI has made tax preparer fraud an area of emphasis in recent years. The division is targeting tax preparers for a broad range of offenses, predominantly (though not exclusively) related to helping taxpayers file false or fraudulent returns. When targeted by IRS CI, tax preparers must take the necessary steps to protect themselves as thoroughly as possible. In many cases, this starts with preparing to sit for an interview. While handling an IRS CI interview effectively can set the stage for a favorable outcome, mistakes during an interview will often pave the way for federal criminal charges.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

5 Steps to Prepare for an IRS CI Interview as a Tax Preparer

Given the risks of facing an IRS CI investigation as a tax preparer, thorough preparation for interviews with IRS CI agents is vital. In broad strokes, preparing for an IRS criminal investigation and interview involves the following five steps:

1. Collect All Relevant Documentation

Tax preparers must collect all documentation that is relevant to IRS CI’s investigation. This includes both internal records (i.e., client intake policies and accounting records) and client records (i.e., intake notes, substantiating documentation, and filed returns). Even if it won’t be necessary to provide these records to IRS CI, collecting them is imperative so that counsel can conduct a review and determine where a tax preparer’s risks lie.

While the statute of limitations for many tax crimes is six years, IRS CI can look back even further in some cases. Thus, when collecting records concerning an IRS CI investigation, tax preparers should work with their counsel to ensure that they are going as far back as necessary. Tax preparers will also want to work with their counsel to ensure that they identify all relevant document types, and working with counsel during this process also provides the critical protection of the attorney-client privilege.

2. Assess Potential Criminal Culpability

Based on a review of the relevant documentation and the issues IRS CI is targeting in its investigation, experienced federal defense counsel should be able to assess a tax preparer’s potential criminal culpability. Has the paid preparer made mistakes? Do these mistakes appear to be intentional? Is there a pattern that suggests willful tax preparation fraud? These are just a few examples of numerous questions defense counsel will need to answer to provide effective advice and representation.

Assessing the risks associated with an IRS CI investigation also requires an in-depth understanding of the pertinent statutory and common law authority. As indicated above, the Internal Revenue Code is just one of several federal statutes that establish obligations for taxpayers and tax preparers. Violations of the Bank Secrecy Act (BSA), Foreign Account Tax Compliance Act (FATCA), and a multitude of other statutes can lead to criminal allegations against tax preparers as well. Examining all potential charges is essential for making informed decisions and building a strategic defense.

3. Evaluate Defense Strategies and Options

With a clear understanding of any charges that may be on the table, tax preparers and their tax counsel can next focus on evaluating potential defense strategies and the options they have available. While many defenses to federal tax crimes are highly technical and dependent on the specific statutory provisions under which charges are pursued, there are some overarching considerations. For example:

• Lack of Intent – Most federal tax crimes require evidence of intent. If a tax preparer unintentionally filed false returns, the tax preparer may be civilly liable, but he or she is not a criminal. Thus, arguing lack of intent (or lack of evidence of intent) can be an effective defense strategy during IRS CI investigations—recognizing that additional defenses may be necessary to avoid civil enforcement as well.
• Lack of Evidence – Proving tax preparer fraud requires evidence of wrongdoing. While a tax preparer’s filed income tax return may raise red flags, this alone is not enough to substantiate criminal charges and/or a criminal tax case—much less support a criminal conviction. While it can be in tax preparers’ interests to cooperate with IRS CI to an extent under appropriate circumstances, tax preparers must also be careful to avoid sharing incriminating information or records unnecessarily.
• Expedited Plea Program – For tax preparers who are at risk for criminal prosecution, the Expedited Plea Program will likely be an option worth considering. A joint effort of IRS CI and the DOJ’s Tax Division, the Expedited Plea Program provides a means to, “dispose expeditiously of those cases in which the target of the investigation does not contest criminal liability.” Of course, pleading guilty to a federal tax crime is not a decision to be made lightly, and tax preparers should work with their counsel to determine if this is their best path forward.

4. Prepare Answers to Anticipated Interview Questions

Going into an IRS CI initial interview, a tax preparer should have a reasonably clear and comprehensive understanding of the questions that the interviewing agent is likely to pose. Tax preparers should rely on their counsel to anticipate potential questions, and they should work with their counsel to craft appropriate answers.

What is an “appropriate” answer in the context of an IRS CI interview? First, tax preparers should not make false statements or attempt to mislead IRS CI agents. Not only are these efforts likely to prove unsuccessful, but they could also lead to federal charges. Even if a tax preparer is not guilty of federal tax crimes, the preparer could still face prosecution under 18 U.S.C. Section 1001 if he or she, “makes any materially false, fictitious, or fraudulent statement or representation,” during an IRS CI interview.

With that said, tax preparers do not have to (and generally should not) make incriminating statements—unless they are cooperating with IRS CI under the Expedited Plea Program or according to another documented arrangement. Thus, when preparing interview answers, tax preparers should focus on accuracy and comprehensiveness while remaining cognizant of the need to preserve any available defenses.

Questions asked during an IRS CI interview will typically fall into one of three categories: (i) background, (ii) due diligence, or (iii) uncovering tax preparer fraud. For example:

Common Background Questions

• What is your educational and professional background?
• What is your criminal history?
• What are your sources of income?
• What are your assets (i.e., real estate, cars, and investments)?
• What are your liabilities (i.e., loans and child support obligations)?

Common Due Diligence Questions

• What identifying documentation do you require new clients to provide?
• How do you assess the complexity of clients’ filing needs (i.e., whether 1040 will be sufficient or additional forms will be necessary)?
• Do you require clients to provide proof of income and copies of receipts for donations and deductions?
• Do you rely exclusively on client-provided information when preparing returns?
• How does your process change if a client is missing information or provides suspicious information?

Common Questions Focused on Uncovering Tax Preparer Fraud

• Do you personally prepare all of your clients’ returns?
• Do you help your clients identify dependents, credits, or deductions?
• What did you do to verify X information on Mr. Smith’s return?
• Don’t you agree that X information on Ms. Smith’s return is suspect?
• What is your fee arrangement with your clients?

5. Have a Plan for the Interview and Its Aftermath

Finally, tax preparers and their counsel should have a plan for both the IRS CI interview and its aftermath. Minimally, this should involve knowing how and when the tax preparer and counsel will communicate during the interview, and when the tax preparer should let the counsel speak on his or her behalf. Tax preparers should also know in advance what steps to take after their interview—particularly if there is a risk of facing a federal indictment for tax crimes or related offenses. When facing an IRS CI investigation, it is important to minimize uncertainty to the greatest extent possible.