1. Alice’s coffee shop is currently under exam by the IRS. The Revenue Agent has
ID: 2556331 • Letter: 1
Question
1. Alice’s coffee shop is currently under exam by the IRS. The Revenue Agent has requested copies of Alice’s general ledger, wanting to compare the income and expenses to the amounts claimed on Alice’s return. Alice has admitted to you, her new CPA, that she did not use the ledger to prepare her return and, instead, made up numbers that would get her a tax refund. She tells you that the business was in debt and that she needed the refund to keep from going bankrupt. She knew the return was wrong when she self-prepared and filed it.
a. Alice wants to know if she should confess to the Revenue Agent what she did. Would making this disclosure prevent possible prosecution?
b. Does Alice have a Fifth Amendment right to deny the IRS access to her coffee shop’s general ledger? c. Does Alice have a Fifth Amendment right to prevent the IRS access to the coffee shop’s bank records if the IRS issues a summons for the records to the bank?
d. Do the answers to (b) and/or (c) above change if the coffee shop was incorporated?
e. The IRS’s Special Agent later wants to interview you regarding what Alice told you – specifically how she made up the amounts she reported on the return. Is this information privileged or subject to Fifth Amendment protection claims?
Explanation / Answer
a. Option 1: Yes, as Alice voluntarily disclosed fraud in her tax returns before the IRS identified it, she would be free from any possible prosecutions. But this kind of prosecutions are still in way of investigation whether or not to exceed this king of disclosures but currently this is not void.
Option 2: CPA can amend the accounts properly and report appropriate forms within three years of original returns and claim refund according to the appropriate provisions.
b. In option 1 mentioned above she has no right to claim fifth amendment right, but in option 2 yes, she can claim fifth amendment right as long as she is not committed to any criminal consequences.
c, In option 1 mentioned above she has no right to claim fifth amendment right in case of preventing disclosure of bank records, but in option 2 yes, she can claim fifth amendment right as long as she is not committed to any criminal consequences.
d. Yes, as many shareholders and investors who will be definitely affected by the right of not disclosing proper accounts the answers of b/c would vary.
e. As long as the client is not in a criminal consequences he can claim but with proper documentation retention which should be presented before tax court if required and in the above question it's not necessary to disclose each and every answer asked as the client is not in any criminal prosecution related in any terms.
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