How it works
An eggshell audit is a civil examination in which the taxpayer knows the return contains a problem that could become criminal if discovered. The auditor may not know. The taxpayer cannot lie, but is not obligated to volunteer, and every document produced and question answered has to be weighed for what it reveals. The return preparer should not represent the taxpayer, because a preparer can be compelled to testify.
Why it matters
Civil auditors refer cases to Criminal Investigation when they see badges of fraud. Statements made to a civil auditor are evidence. This is the situation where the first call must be to an attorney, and where a Kovel arrangement keeps the accountant’s work privileged.
Example
A business owner is audited on Schedule C expenses. He knows 60,000 dollars of cash receipts were never deposited. His attorney manages document production to answer only what is asked, evaluates a voluntary disclosure, and keeps the owner out of the interview.
Related: attorney-client privilege, Kovel agreement. Read more: criminal tax defense.
