When you are being audited, should you cooperate with the agent? Sometimes, definitely yes. Sometimes, definitely no. Sometimes, definitely call a tax attorney.

The answer relates to fraud. Cooperate if there is no fraud in your tax return. But if you have committed fraud, contact a tax attorney at the first sign of the IRS or before. If you aren't sure, before facing the agent talk with an attorney.

The fraud penalty is as much as 75 percent of the underpayment attributable to fraud, a fine and jail time. What you get depends in part on how good a case the government has against you.

So what is tax fraud? It is deliberately evading taxes. Underreporting taxes alone is not fraud. If it were, a good portion of U.S. citizens would be in jail. Merely excluding some income or taking excessive deductions could be caused by a mistake, negligence, a lack of education or relying on erroneous professional advice.

An IRS agent becomes concerned about fraud when there is:

• A substantial unexplained increase in net worth.
  
• A pattern of omitted income or a claim of fictitious or excessive deductions.
  
• An attempt to conceal records, two sets of books or backdated documents.
  
• An effort to delay the audit or a lack of cooperation.
  

A taxpayer, tagged with one or more of these badges of fraud, isn't
necessarily headed for jail. But that person is headed for a long session with the IRS.

The difficult decision: Cooperation with the agent is one factor indicating a clean return. Cooperation, however, increases your problems with a fraudulent return because anything you say can be used against you. This could help the IRS in court.

To win a fraud case, the government must prove the underreporting was intentional.

As one judge said, it isn't enough for the IRS to prove the taxpayer was careless, stubborn or stupid.

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What rules do you follow in an audit? And what role does the attorney have?

Fraud. A tax increase because of negligence or lack of knowledge isn't fraud. Fraud is intentional tax avoidance. Intent is gleaned from the facts in the case.

Deciding whether there is fraud is often as clear as mud. Even experienced lawyers and the IRS have trouble with it. Here are two cases showing the confusion surrounding fraud:

• Ralph DeFranco maintained nine checking and savings accounts for himself and his business. His records would never win a prize for thoroughness. The IRS discovered he had under reported income by nearly $60,000. The court accepted the increase but refused to call it fraud because DeFranco was notably disorganized and careless and was an unsophisticated businessman. His biggest concern, the court noted, involved concealing money from his wife, and "while such a goal may not appeal to the highest moral values, it is not tax fraud."
  
• A state-salaried forestry consultant earned almost $20,000 on the side marketing timber for landowners. He reported income from his W-2, payroll report, but not the income from landowners. The judge called this fraud. He said the omissions were consistent and substantial. Further, the ranger reported income he knew the IRS would find but left out the other.
  

Audit Rules. Here are rules to follow with an IRS audit:

• If you didn't commit fraud, cooperate fully. But don't give the agents any information they don't ask for. The tax code sometimes doesn't make clear what is or is not deductible, so being overly cooperative means you might accidentally show the agents something that would cause a questionable tax increase.
  
• If you don't know whether you committed fraud, you have a difficult decision. If the tax underpayment resulted from an accident or a stupid mistake, your cooperation is a plus, further indicating no fraud. But for an intentional tax underpayment, cooperation will not help you and may help the government prove its case. If a taxpayer has any question about fraud when the IRS knocks on the door, it's better to be safe than sorry. Call a tax attorney for advice.
  
• If you know you are guilty of fraud, get a tax attorney right away.
  

Attorney's Role. During the initial stage of a criminal audit, the lawyer controls the flow of information to the IRS Criminal Investigation Division. He or she should instruct the agents to contact only the attorney and advise the taxpayer not to talk to investigators. By talking to them, the taxpayer might be tempted to lie. Lying to the IRS is a crime.

The moral: Pay what you owe and sleep well every night.

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Released 06-25-01