Tip #5: Conduct a Shadow Investigation

Representatives should “audit” the auditor. In other words, track his investigation to determine what – and how much – he knows at all times. It goes without saying that the representative should interview any witnesses with whom the government has already spoken.

This task has been made easier under 1998 legislation. The IRS must now notify the taxpayer before contacting third parties and keep records of any third party contacted, at least during the civil phase of an investigation. I.R.C. § 7602(c).

Moreover, section 7609, as amended in 1998, now requires the IRS to notify taxpayers of summonses issued to third parties. I.R.C. § 7609(a)(1). Although the notice requirement does not apply in criminal investigations, it still applies to eggshell audits because eggshell audits are civil, not criminal. Therefore, all summonses issued to third parties should be tracked.

If a third-party summons has been issued without the taxpayer receiving notice, the representative should immediately inquire. It could mean one of two things: (1) that the summons was issued in violation of the notice requirement or (2) that the summons was issued incident to a criminal investigation.

The civil agent’s sources of information are the following: (1) the taxpayer himself; (2) third parties; and (3) other sources. The practitioner will be able to monitor information from the taxpayer and will know when the IRS obtains information from third parties by compulsory process.

The problem, of course, is that the IRS can obtain information from third parties without the need for compulsory process. This possibility is why it is critical for the practitioner to interview and establish a good relationship with the witnesses in advance. Remember to ask the witness to call you in the event he is contacted by the IRS.

Only by carefully tracking the agent’s activities will you know – within reasonable parameters – what the agent knows. Additional steps that can be taken to determine what the government already knows are the following:

(1) File a Freedom of Information Act Request (FOIA).

(2) To the extent that any documents are in the possession of third parties – such as a former accountant – the client should request that they be returned in order to set up a potential Fifth Amendment privilege claim with respect to these documents.

(3) Copy any documents that third parties have provided to the government.

(4) Order account transcripts through the IRS Practitioner’s Hotline or Form 4056.

(5) If, after a review of all the information, you determine that the government has sufficient information to calculate a deficiency under any method of proof, you must conduct a similar analysis to determine whether there are any discrepancies and discover any potential defenses.

Next:  Tip #6: Keep in Touch With the Revenue Agent

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