Surprise visit by IRS likely trouble

Usually, an audit of your return is fairly routine. The Internal Revenue Service will ask you to produce receipts, canceled checks and similar documentation to verify deductions and other facts and figures.

Come up with the required substantiation, and the examiner sends the return back to the files. In fact, the feds frequently close cases without exacting extra taxes. In many others, they even authorize refunds.

But you are probably in hot water when an IRS investigator walks in unannouncedat your home or office and asks to see your records. Odds are that a surprise audit means the agency suspects you filed a return that is fraudulent.

So should you be targeted for what looks like an out-of-the-ordinary audit, make sure to find out the official designation of the person with whom you are suddenly chatting. Is the Sherlock a revenue agent with the Examination Division or a special agent with the Criminal Investigation Division?

The difference is not academic. Revenue agents conduct routine examinations of dependency exemptions, business expenses and similar items; ordinarily, special agents are assigned exclusively to investigate suspected criminal violations of the tax laws.

Also be on guard when you receive advance notice of an audit and two examiners show up to scrutinize returns. Both may be revenue agents - one a veteran and the other a rookie who’s along merely to get some on-the-job experience.

However, the appearance of two examiners often means that a special agent and a revenue agent are teamed together on a “joint investigation.” This is the bureaucratic euphemism that the IRS uses to describe what goes on when the agency accumulates evidence for a criminal prosecution that can culminate in a stay in the slammer for as much as five years, as well as a fine of as much as $100,000, for each fraudulent return.

Those sentences and fines, by the way, are in addition to the sizable civil penalties for fraud - plus back taxes and interest - that the tax men and women routinely exact from cheaters who are spared criminal prosecution.

The IRS sets strict guidelines for its special agents on what they can and should do when they drop in - with or without notice. They are supposed to identify themselves as special agents and to advise individuals of their constitutional rights. The ones that most concern you are “the right to remain silent and to be advised by an attorney.”

When you become aware that you have been singled out for a criminal investigation, your options immediately dwindle to one: Get the advice of an attorney knowledgeable about criminal investigations before you hand over any records or make any statements to special agents. Such disclosures can come back to haunt you when they are pieced together and repeated on the witness stand by government sleuths.

IRS investigators can compel third parties to furnish information about their business dealings with you. In fact, the IRS can obtain information for a year later than the one in issue.

There is no violation of your constitutional rights when an IRS summons forces the disclosure by, among others, an employer of your personnel records, or a bank of records of your deposits, undeposited checks converted into currency, and the dates you entered safe deposit boxes.

Nor are you entitled to damages for harassment and humiliation by IRS agents just because they try to collect overdue taxes. That, predictably, was what a judge told an aggrieved taxpayer.

• To send comments to Julian Block and obtain information about his tax books, go to www.julianblocktaxexpert.com.