Tax Attorney Pingree Offers IRS Audit Advice

Steve Pingree is a guest blogger and offers advice for those tax preparers wanting to avoid or minimize the chances of having a client selected for an IRS audit.   And for the tax payer, Pingree' s advice is also relevant to you as well.  Know what the red flags are and be prepared to explain or defend your tax return. 



Attorney at Law, a Law Corporation

820 Mililani Street 701

Honolulu, HI 96813

Tel: 808-983-9520             Fax: 808-356-8189


The purpose of this article is to alert Tax Practitioners about the “Red Flags” that may be present during the preparation of tax returns.  Recognizing these “Red Flags” can enable the return preparer to avoid errors that can have serious legal and ethical consequences for both the practitioner and client.  

*UNUSAL INCOME:  lifestyle analysis; this is a common audit procedure if the taxpayer’s records don’t support the source of income and expenses.

*UNUSAL RISE IN NET WORTH:  review sources of investments.

*PREVIOUS TAX RETURNS INCONSISTENT:  seek explanation and documentation that will support and explain differences from prior returns.

*UNUSAL POSSESSION OF ASSETS:  relatively low income with new cars and toys.

*FOREIGN BANK ACCOUNTS AND ASSETS: This is a #1 IRS exam priority.  There are strict reporting requirements and sanctions.  Permanent Residents (Green Card holders) have same tax responsibilities as U.S. Citizens.

*MONEY LAUNDERING: real estate purchases, cash transactions, offshore companies and false invoices and payments.  There is a high level of prosecutions for both Money Laundering and Tax Evasion.

*BANK RECORDS: a quick analysis of bank records can reveal potential audit issues.

*WILLFUL BLINDNESS: this is not an acceptable defense.

*TAX RETURN PREPARATION: is not merely data entry.  AICPA auditing standards require a review and documentation of taxpayer’s records to support return entries.

*DOCUMENT YOUR FILE:  your client file should contain notes and backup especially if you find unusual transactions.  This is the best accountant defense if the audit begins to get suspicious.

CONSEQUENCES of becoming involved in a client’s audit listed here in order of ascending severity.

*You are served with a Grand Jury Subpoena or an audit Information Document Request (IDR) to produce your client’s records.

*Federal or State agents interview you, which is very stressful and time consuming.

*It may be necessary to retain counsel to avoid legal consequences (interview, records production or court witness).

*You may be called to testify before the Grand Jury as a witness.  This costs time and money for counsel, and potentially could result in accountant liability.

*Criminal tax charges as a co-conspirator as return preparer for your client/defendant.

Almost all costly consequences (time and money) to the accountant can be avoided by looking, asking questions and conducting a minimal examination of the client’s records.


Stephen P. Pingree, Attorney at Law, has over 30 years of experience defending tax and financial investigations in civil audits, criminal investigations and criminal indictments through trial.  Steve over the years has given many seminars to CPAs, EAs, Tax Practitioners and attorneys on these subjects.  Steve is always available, at no charge, to consult with tax practitioners.  Please feel free to call Stephen P. Pingree, Attorney at Law, at 808-983-9520.


Tis The Season for IRS Audits!

Steve Pingree is a tax attorney and guest blogger.  He has a very insightful view of what is going on within the halls of the IRS.  It will be well worth it to take a look at this post. 



Attorney at Law, A Law Corporation

Mililani Building Suite 701

820 Mililani Street

Honolulu, HI 96813

Tel: 808-983-9520    Fax: 808-356-8189



It would seem that with the IRS budget cuts and audit percentages down below 1% for the majority of taxpayers, (read less than $200,000 of AGI) that citizens do not have much to fear these days about tax audits.  Unfortunately, that is not the case.

The IRS and the State of Hawaii are both concerned with maximizing tax revenues through civil audits and collection, and criminal tax investigations.  The reality is that, although fewer numerically, the Examination division, the Collection Division and the Criminal Investigation Division are focusing on taxpayer profiles that provide the maximum tax revenue for the audit hours spent.  For taxpayers reporting income of $200,000 or more, the audit percentages rise from 2% to potentially 24%.  By targeting specific return profile areas, the criminal investigation division is reporting over 94% conviction rate for criminal tax cases.  The majority of criminal investigations are initiated by a referral by the Examination or Collection divisions resulting from civil audits.  Foreign assets and off shore bank accounts are a major target area and the requirements of the FBAR and FACTA reporting laws require caution and attention.  Foreign banks are reporting US Citizens’ accounts to the IRS.

Underreported income or extraordinary deductions will trigger red flags in the IRS computer return profile programs for specific industries.  W-2, W-2Gambling and 1099 reports to the IRS will alert to potential unreported income.  Once an audit is commenced a “life style” audit may reveal that the taxpayer is living beyond their reported income.  The State has created a special audit unit called “Special Enforcement Section” (SES) targeting cash businesses for unreported income and General Excise tax.

The State Tax Criminal Investigation Section, after the last few years of inaction, has recently been ramped up by the hiring of two retired Federal Special Agents (ATF and DEA) and two ex-IRS agents.  Their primary targets are failure to file returns and pay GET, and tax evasion.

The IRS has created a Fraud Technical Advisor (FTA) unit of specialists who consult with the auditors and collectors and train them to focus on potential fraud issues.  The motive is that the Fraud Penalty can reach 75%.  This practice, while legally debatable, necessitates that taxpayers be very cautious when responding to an IRS audit letter requesting information.  It is well to note that IRS audit results are forward to the State of Hawaii Department of Taxation.

If you receive an IRS or State Tax notice that you are being audited or investigated, do not ever ignore it or delay responding.  Once the wheels of the IRS begin to move the process of notification, collection and enforcement can go quickly.  You should contact an experienced CPA and or tax defense attorney without delay.

Reg Baker, CPA (808-753-6026) has 30 years’ experience representing taxpayers before the IRS and the State Department of Taxation in audit and collection matters.  If the situation appears to require legal representation, Reg may contract with Stephen P. Pingree, JD (808-983-9520), a 35 year experienced civil and criminal tax defense attorney.  Both Reg and Steve are available for free consultations to evaluate your situation.

A Lawyer and CPA Story.

This is based on a true story.  Please enjoy……


A sharply dressed fast talking lawyer and a retired CPA senior citizen are sitting next to each other on a long flight to LA.

The lawyer is thinking that seniors are so dumb that he could get one over on them easily.

So, the lawyer asks if the senior would like to play a fun game.

The senior is tired and just wants to take a nap, so he politely declines and tries to catch a few winks

The lawyer persists, saying that the game is a lot of fun..."I ask you a question, and if you don't know the answer, you pay me only $5.00. Then you ask me one, and if I don't know the answer, I will pay you $500.00," he says.

This catches the senior's attention and, to keep the lawyer quiet, he agrees to play the game.

The lawyer asks the first question. "What's the distance from the Earth to the Moon?"

The senior doesn't say a word, but reaches into his pocket, pulls out a five-dollar bill, and hands it to the lawyer.

Now, it's the senior's turn. He asks the lawyer, "What goes up a hill with three legs, and comes down with four?" He then takes a nap.

The lawyer uses his laptop to search all references he can find on the Net.

He sends E-mails to all the smart friends he knows; all to no avail. After an hour of searching, he finally gives up.

He wakes the senior and hands him $500.00. The senior pockets the $500.00 and goes right back to sleep.

The lawyer is going nuts not knowing the answer. He wakes the senior up and asks, "Well, so what goes up a hill with three legs and comes down with four?"

The senior reaches into his pocket, hands the lawyer $5.00, and goes back to sleep.