Eggshell Tax Audit or Reverse Eggshel

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.

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, the Taxpayer may be operating in several different countries and may have miscalculated their income or expenses when they prepared 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.

How Can Taxpayers Protect Themselves?

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.

Be Careful During a Tax Audit

In conclusion, most tax audits are relatively straightforward and oftentimes will not even require the taxpayer to make an 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.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.