What is an Eggshell Audit?
Eggshell Audit & Reverse Eggshell: Oftentimes, an IRS audit is no big deal at all. IRS Examiners, Agents and Specialists are not attorneys and are (generally) not adversarial. Some even have less tax knowledge than the Tazpayer sitting in the audit. In a common situation, a US taxpayer receives a notice of audit which requires them to respond by correspondence or in person. It may be no big deal and simply that the Internal Revenue Service has different information on file then the taxpayer may have provided on the tax return — but this is not always the case. Especially with the increased enforcement of international and offshore compliance reporting fines and penalties — the number of international and offshore eggshell and reverse eggshell audits is on the rise. What can taxpayers do to protect themselves when they find themselves knee-deep in either an eggshell audit or reverse eggshell audit?
Eggshell Tax Audit
In an eggshell tax audit, the taxpayer who is under examination has information that they do not want to provide to the IRS. This information may result in much more increased scrutiny and enforcement by the IRS agent – and this is where it gets complicated. On the one hand, the taxpayer is not under criminal investigation yet so claiming a Fifth Amendment right is premature — and will do little more than to alert the IRS agent that there is something more damaging bubbling beneath the surface.
On the other hand, the taxpayer cannot make any intentional omissions or misrepresentations to the IRS agent — because that can result in a much worse situation leading to a special agent investigation or even a criminal indictment down the pipeline.
What can a Taxpayer io an Eggshell Audit Do?
The taxpayer should be sure to retain an experienced Board-Certified Tax Specialist who specializes in that specific area of tax, and be sure to put on their best poker face in order to truthfully answer the questions — without volunteering any additional information which is not being asked and which could lead the examiner down a path that may result in the audit heading in a different direction. As long as the taxpayer answers the questions truthfully and fully to the extent of the question — the taxpayer should be able to avoid purging themselves.
Reverse Eggshell Tax Audit
This is a much more dangerous situation. In a reverse eggshell tax audit situation, the agent has information about the taxpayer that the taxpayer is unaware that the agent has. In a common situation we see, a Taxpayer may be operating in several different countries and may have miscalculated their income or expenses when they prepare the return themselves — as well as did not report their foreign accounts and assets.
In preparation for the audit, the taxpayer comes to the realization that they also missed reporting some foreign accounts. The IDR (Information Document Request) does not specifically ask questions about foreign accounts, but it turns out that the Agent/Examiner has the information available to them.
During the audit, the agent may begin to ask questions about foreign accounts. If the taxpayer is not truthful or evasive during the audit it may lead to the examiner closing down the audit and referring the matter to the IRS Special Agents for a quasi-criminal investigation.
Be Careful During a Tax Audit
In conclusion, most tax audits are relatively straightforward and oftentimes will not even require the taxpayer to make any appearance at the IRS office. Sometimes, a tax audit can be much more complicated – especially when it is an eggshell tax audit or reverse eggshell tax audit. If a taxpayer believes they may be at risk for something more serious , they should consult with a Tax Lawyer Specialist to get a better idea of their situation.
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