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What New Jersey Business Owners Need to Know
Yes. An IRS auditor can refer a case for possible criminal investigation if the facts suggest intentional tax violations. Most audits remain civil matters, but unfiled returns, unpaid payroll taxes, false records, or hidden income may raise serious concerns.
For New Jersey business owners, the most important point is this: an IRS criminal referral does not automatically mean a crime was committed. Early legal representation can help ensure the facts are properly understood.
Can an IRS Auditor Refer Your Case to Criminal Investigation?
Yes. A civil IRS auditor who finds indicators of potential fraud may refer the matter through IRS procedures for consideration by IRS Criminal Investigation (CI). Criminal Investigation is the law enforcement division of the IRS. A referral is not a conviction, and it does not mean prosecution is inevitable.
A civil audit generally examines whether the correct taxes were reported and paid. A criminal investigation examines whether someone intentionally broke federal tax laws. The difference matters because criminal tax charges may carry fines and imprisonment.
What Can Cause an IRS Audit to Become Criminal?
The IRS may pay closer attention when records or conduct suggest intentional wrongdoing. Examples include:
- Repeated failure to file required tax returns
- Failure to turn over payroll taxes withheld from employees
- Concealing cash receipts or other business income
- False invoices, deductions, or sets of books
- Altered or destroyed records
- Knowingly inaccurate explanations to an auditor
A mistake, poor bookkeeping, or inability to pay is not automatically criminal tax fraud. In many criminal tax offenses, the government must prove willfulness, generally an intentional violation of a known legal duty.
William’s Story: A Payroll Tax Audit Referred to CI
William owned a business and had fallen behind on federal tax obligations. He had not filed required tax returns and had not paid payroll taxes. During an IRS audit, the auditor referred his case to Criminal Investigation.
William hired Tomes Law Firm after the referral. We examined the circumstances, assembled the facts, and demonstrated that his conduct was not willful. The criminal investigation was closed, and his case was returned to the civil audit process.
That was a major result, but it was not the end of the tax matter. William must still address his tax obligations in the civil audit, and penalties and interest may apply.
The lesson: avoiding criminal prosecution does not erase unpaid taxes. It can, however, protect a business owner from a much more serious legal outcome.
Client name and identifying details have been changed to protect confidentiality.
Why Are Unpaid Payroll Taxes Especially Serious?
When a business withholds federal income, Social Security, and Medicare taxes from employees, it must pay those amounts over to the IRS. The withheld money is held in trust for the government, not available to cover rent, vendors, or other operating costs.
In some situations, the IRS may assess the Trust Fund Recovery Penalty against responsible individuals who willfully failed to collect, account for, or pay over trust fund taxes. The civil test for willfulness differs from the standard used in criminal prosecutions. A successful criminal defense does not automatically prevent civil assessments.
Closing the company does not necessarily protect responsible individuals from these liabilities.
How Is a Civil Audit Different From a Criminal Investigation?
A civil auditor may request returns, bank records, payroll reports, receipts, and other support for a tax examination. Criminal Investigation special agents investigate possible federal tax crimes and may conduct interviews, gather financial evidence, and prepare matters for possible prosecution.
Not every CI investigation leads to charges. As William’s case illustrates, a matter can return to the civil process when the evidence does not support criminal prosecution.
What Should You Do If Your Audit May Become Criminal?
If an auditor raises concerns about hidden income, unfiled returns, false documents, or unpaid payroll taxes, speak with a tax attorney before offering substantive explanations about potentially criminal conduct. Do not ignore IRS deadlines or assume that hiring an attorney means you may refuse all requests.
- Preserve tax returns, payroll records, books, bank statements, and messages.
- Never backdate, alter, destroy, or invent records.
- Do not guess or give explanations you know are inaccurate.
- Have counsel review what the IRS is asking and coordinate an accurate response.
Why Have a Tax Attorney Handle the Audit?
Business owners often know what happened inside their business but do not know how their explanations may affect the audit. An attorney can identify legal exposure, evaluate the evidence, communicate with IRS personnel, help prepare an organized response, and protect applicable legal rights.
Certain confidential communications seeking legal advice may be protected by attorney-client privilege. The privilege generally does not make preexisting business records confidential merely because they are handed to an attorney.
A complicated audit can take months, pulling the owner away from customers and operations. Representation can help the business owner focus on running the business while the audit is handled in an organized way.
Can You Correct Tax Problems Before the IRS Finds Them?
Early action may provide more options. Depending on the facts, that could mean filing missing returns, correcting reporting, and developing an appropriate payment strategy. For some willful violations, the IRS Voluntary Disclosure Practice may be relevant, but eligibility is limited, and disclosure does not guarantee immunity from prosecution.
Once the IRS has begun a civil examination or criminal investigation relating to the noncompliance, that practice may no longer be available. Seek legal advice before attempting a disclosure.
If Criminal Investigation Ends, Do You Still Owe the Taxes?
Yes. A closed criminal investigation does not automatically cancel the taxes, penalties, or interest. William’s case returned to a civil audit, where the IRS can still determine the amount owed. Civil penalties can have their own standards and possible defenses.
There may be two separate tasks: resolving criminal exposure, then resolving civil tax assessments and collection issues. Both deserve careful attention.
Frequently Asked Questions
Does every audit involving unpaid taxes become criminal?
No. Most unpaid tax disputes proceed through civil audit or collection channels. Criminal concerns generally involve evidence suggesting a tax crime.
Can the IRS prosecute someone for not filing tax returns?
Certain willful failures to file required returns can support criminal charges. Nonfiling alone does not establish that a crime occurred.
Can unpaid payroll taxes lead to criminal charges?
Yes, when the facts meet the elements of a criminal payroll tax offense. Civil trust fund liability may also apply.
Can a Criminal Investigation case close without charges?
Yes. William’s matter was returned to the civil audit process after we showed his conduct was not willful.
Should I speak to an IRS special agent without a lawyer?
Consult a tax attorney before a substantive interview about possible criminal wrongdoing. Counsel can explain your rights and obligations.
Facing an IRS Audit in New Jersey?
An IRS audit does not have to turn into a criminal investigation. But if the auditor raises concerns about unreported income, missing returns, or payroll taxes, do not try to improvise your way through it.
Tomes Law Firm represents New Jersey individuals and business owners in IRS audits, payroll tax matters, and serious tax disputes. Contact us to schedule a consultation and discuss how to respond before the problem grows.
We Solve Tax Problems. You Get Peace of Mind.
Contact Tomes Law Firm for a confidential free consultation at 732-333-0681 or 833-4IRS-TAX,
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