A Hard Lesson
Two days of my life were spent helping with the defense of a former client we dismissed nearly a decade ago. Why we dismissed him will become obvious. Ten years later, he found himself in Tax Court facing federal tax fraud charges.
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The Future of Tax Audits
There is a mistaken belief that President Trump is severely limiting the IRS’s ability to conduct tax audits. That’s not true. His administration is changing the future of tax audits to be more AI-driven.
More audits will be done by “remote control”—and that’s a scary thought. The IRS will be able to conduct more audits, better audits, at a much lower cost to the government.
There will be more audits in the future. We are already seeing some of these “remote-controlled” audits. So far, they are primitive to the point of being amusing, but they will improve quickly.
AI is now a fact of life for the IRS—and therefore for taxpayers.
Your defense, now and always, is the quality of your books and records.
The Facts
A routine IRS audit turned into allegations that the taxpayer had deliberately understated income over several years, triggering a criminal investigation. When it became clear the IRS was building a fraud case, we had no ethical choice but to withdraw as his CPA firm.
The criminal charges were eventually withdrawn—criminal charges are hard to prove—but the civil fraud charge remained. The unreported income, close to $1 million over multiple years, is not in dispute.
I can’t tell you how the Court will rule. To win, the IRS must prove intent—a high bar. The taxpayer might prevail on that point.
But what does “winning” really mean?
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The Problem
The taxpayer’s books were pristine, but they hid substantial understatements of income for multiple years.
The core issue before the Court is this:
• Was the understatement of income intentional or accidental?
Or, put another way:
• Was the bookkeeping done with criminal or fraudulent intent, or was it simply lousy bookkeeping?
What bothers me most is the phrase “the taxpayer’s books were pristine.” Keeping “pristine” books while hiding income takes talent—and that’s not a compliment.
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A Very Important Message!
Your books and records are critical in any matter before the IRS. They will either testify for you—or testify against you.
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What Does “Winning” Really Mean?
Underreporting income is never worth it. The IRS doesn’t forget, and the bill grows while you wait.
Consider for example: $900,000 in unreported income amounting to $315,000 in tax grows to a bill of over $850,000 with penalties and interest—more than double the original tax. That’s not counting legal and CPA fees or the stress of living under a cloud for years. Legal fees alone will likely top $2 million.
And it’s not just about money. A fraud ruling reopens the statute of limitations, letting the IRS dig deeper and even revisit criminal charges. This can drag on for another decade, piling on more costs—and the risk of jail time.
Tax fraud simply isn’t worth it.
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Why We Withdrew
When it became clear the IRS was developing a criminal fraud case, we withdrew to protect the client’s legal rights. He needed a criminal tax lawyer. That lawyer, in turn, needed to hire a different CPA firm to handle the audit.
We encouraged him to find a CPA firm to support a criminal tax defense. In this situation, that was not us.
We are often hired by attorneys to assist with criminal tax cases and are qualified to do so. But we could not serve in that role here.
If we believe a client is dishonest, we will withdraw. But the main reason we withdrew was to protect the client’s legal rights.
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Legal Rights
When tax crimes are alleged, you need a lawyer more than a CPA. Attorneys can offer privileged communications; CPAs generally cannot during ordinary tax work.
However, if your lawyer hires us, our communications may become privileged because we work for the attorney, not directly for you. This legal right is essential.
We withdrew to protect that right. As his day-to-day CPA firm, we could not offer privilege. He needed a CPA hired by his attorney—and he got a good one.
Without that privilege, anything we learned could have been shared with the IRS.
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Even When Lied To, We Protect Rights
Speaking generally, even if a client has lied to us—even if we are frustrated or angry—we still have an ethical obligation to protect that client’s legal rights. Our standards require us to act with integrity, objectivity, and respect for the law, even when clients fail to do so.
If a situation escalates into potential criminal tax charges, stepping aside allows the client to secure adequate legal counsel and privileged protection. Protecting legal rights isn’t about shielding wrongdoing; it’s about upholding our ethical duties while ensuring due process.
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What is CID?
The IRS’s Criminal Investigation Division (CID) is its law enforcement branch. They carry badges—and guns.
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Poor Records Are Your Worst Enemy
In an audit, poor records can cost you money. In a criminal investigation, they can cost you your freedom.
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Why This Matters
You may think, “That could never happen to me.” I agree—most of our clients are honest and diligent. But the IRS doesn’t know you like I do. Poor records, ignored notices, or unreported income will make the IRS assume the worst. Good compliance protects you, your family, and your business.
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Books and Records Matter!
Your best defense in any IRS interaction is high-quality books and records. In tax law, you must be able to prove that your reported income is accurate and your deductions are appropriate.
“Prove” is a high standard—and it’s on you, the taxpayer.
In a tax audit, it’s not inaccurate to say, “You are guilty until you prove your innocence.”
Only your books and records can prove your income and deductions.
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How to Avoid This
Most IRS problems start as routine audits triggered by poor books and records. They escalate when notices are ignored, records are missing, or taxpayers try to “explain away” omissions.
Your best protection:
• Keep accurate records.
• Report income correctly.
• Respond to IRS notices promptly.
First rule: Never talk to the IRS without talking to me first.
If a situation calls for a tax attorney, I will refer you quickly.
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What to Do if the IRS Knocks
If you receive an IRS letter, don’t panic—and don’t ignore it. Do not respond without talking to us first, and do not delay.
We will review your records, explain your rights, and help you respond appropriately. Minor issues can often be resolved quickly. If the IRS hints at criminal charges, we will bring in a qualified tax attorney to protect your rights.
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We Are Here to Help
Our job is to keep you out of Tax Court. Good records, timely filings, and honest conversations give you peace of mind and protection if the IRS comes knocking.
Let’s keep it that way.
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Closing
We work hard to keep you out of Tax Court. The best strategy:
• Maintain good records.
• Report your income accurately.
• Address tax issues early.
It’s July—now is the time to schedule your year-end planning. We can review your records, adjust your estimates, and position you well for year-end.
Good records, timely payments, and a clear plan protect you, your family, and your business.
That’s our job—and we’re here for it.
Call or email us this month to schedule your year-end planning appointment.

Steve Richardson, CPA
stever@srcocpa.com