The IRS rarely announces the turn. It happens quietly.
What is the difference between a civil IRS audit and a criminal tax case?
A civil audit is about money. A criminal case is about liberty. The two run on different standards of proof and different parts of the agency.
The scale gap is large. The IRS closed 497,621 return audits in fiscal year 2025, recommending $26.8 billion in tax [Source: IRS Compliance Presence 2025]. That same year, IRS Criminal Investigation initiated 2,792 investigations across all program areas [Source: IRS-CI Annual Report 2025].
The odds of any one audit becoming criminal are low. The consequences if it does are not. Our guide to what to expect during a tax audit covers the civil track.
What does the government have to prove under IRC 7201?
Three things, beyond a reasonable doubt. Unpaid tax alone is never enough.
The Department of Justice Tax Division states the elements as an affirmative act constituting an attempt to evade or defeat tax, an additional tax due and owing, and willfulness, meaning a voluntary and intentional violation of a known legal duty [Source: DOJ Criminal Tax Manual 2024]. Section 7201 is a felony carrying up to five years in prison and a fine up to $250,000 for an individual or $500,000 for a corporation [Source: Internal Revenue Manual 9.1.3].
The affirmative act is the piece people underestimate. Courts have treated a second set of books, false entries, and concealed assets as affirmative acts. Owing money and not paying it is not evasion. Hiding the liability can be.
How is tax evasion different from a false return or failure to file?
They are separate statutes with separate elements and very different exposure. Section 7206(1) punishes signing a return you know is materially false, whether or not tax is owed. Section 7203 punishes willfully failing to file, pay, or supply information. Neither requires the affirmative act that section 7201 does.
| Statute | Conduct | Class | Max prison | Max fine, individual |
|---|---|---|---|---|
| IRC 7201 | Attempt to evade or defeat tax | Felony | 5 years | $250,000 |
| IRC 7202 | Failure to collect or pay over tax | Felony | 5 years | $250,000 |
| IRC 7206(1) | False return under penalty of perjury | Felony | 3 years | $250,000 |
| IRC 7203 | Willful failure to file or pay | Misdemeanor | 1 year | $100,000 |
| IRC 7207 | Fraudulent returns or statements | Misdemeanor | 1 year | $10,000 |
[Source: Internal Revenue Manual 9.1.3]
Unfiled returns carry civil consequences too, covered in what happens if you do not file taxes.
What badges of fraud does an IRS examiner look for?
Badges of fraud are the signals an examiner is trained to notice and document. They are indicators, not proof, but they drive the referral decision.
The Internal Revenue Manual groups them into categories: omitted income, fictitious deductions, irregular books and records, improper allocation of income, conduct such as false statements or destroyed records, concealment through nominee accounts, and unreported digital asset activity [Source: Internal Revenue Manual 25.1.2]. The manual separates indicators, which are signs, from affirmative acts, which are documented conduct.
Patterns matter more than any single item. One badge is a question. Several in the same file are a referral memo waiting to be written. Our post on common audit triggers covers the civil side.
What happens when an audit is referred to IRS Criminal Investigation?
The civil examination stops, often without explanation, and the file moves to special agents. Cases that reach that stage resolve at high rates.
| IRS-CI measure, all programs | Fiscal year 2025 |
|---|---|
| Investigations initiated | 2,792 |
| Prosecution recommendations | 2,043 |
| Informations and indictments | 1,726 |
| Defendants sentenced | 1,613 |
| Conviction rate | 89% |
| Incarceration rate | 76% |
| Average months to serve | 49 |
[Source: IRS-CI Annual Report 2025]
Those figures cover every IRS-CI program, not tax charges alone. Read them as how the agency finishes what it starts, not as a prediction about any one taxpayer. An attorney who handles tax litigation can explain how a specific file compares.
Why is an eggshell audit the dangerous moment?
An eggshell audit is a civil examination where the taxpayer already knows there is a problem in the return. Everything said in it can become evidence later.
The agency’s attention is squarely on tax. IRS-CI spent nearly 64% of its investigative time on tax crimes in fiscal year 2025 and executed 1,445 warrants [Source: IRS-CI Annual Report 2025].
The risk is not the original error. It is the second act: an inaccurate explanation, a backdated document, a false statement to the examiner. That is how a civil correction becomes an affirmative act. Timing matters here, and so does who stands between you and the examiner. When a notice arrives, our guide on responding to an IRS notice is a reasonable first read.
What does a tax evasion defense lawyer San Jose taxpayers hire actually protect?
Privilege, mainly. The protection you have with your accountant is narrower than most people assume, and it ends exactly where criminal exposure begins.
The Internal Revenue Manual states the IRC 7525 practitioner privilege may be asserted only in a noncriminal tax matter before the IRS and a noncriminal tax proceeding in federal court [Source: Internal Revenue Manual 25.5.5]. The same manual confirms that communications to an attorney seeking legal advice are privileged.
That gap is why Kovel arrangements exist. Under a Kovel engagement, named for a 1961 Second Circuit case, the attorney retains the accountant, so the accounting work supports legal advice and sits inside attorney-client privilege. The sequence is the whole point. An accountant already engaged directly by the taxpayer generally cannot be brought under that umbrella after the fact. The comparison in tax attorney versus CPA goes further.
The Fifth Amendment privilege against self-incrimination is the other tool, and a blunt one. It protects testimony, not records the law requires you to keep, and asserting it in a civil examination carries its own cost. When it applies is a judgment call for a defense attorney, never a decision to make alone.
How Kim & Rosado helps
Kim & Rosado LLP is a tax controversy firm with offices in San Jose and Walnut Creek, also serving San Francisco. Several of the firm’s attorneys previously worked for the IRS and have seen how referral decisions get made from the inside.
Nicholas Rosado and Anthony Kim lead the audit and litigation representation practice. The team handles eggshell examinations, Kovel engagements, and cases already with IRS Criminal Investigation. Where the exposure is civil, the firm’s tax resolution group takes over.
Frequently asked questions
Can an IRS auditor refer my case to criminal investigation without telling me?
In general, yes. The Internal Revenue Manual directs examiners to develop fraud indicators and document affirmative acts before making a referral, and it does not require them to announce that a referral is being considered. Taxpayers often notice only indirect signs, such as an examiner who suddenly stops responding, cancels meetings, or closes the audit with no adjustment and no explanation. Those signs are not proof of anything on their own. A tax attorney can read the file’s posture and advise on what, if anything, has changed.
Does owing a large amount of tax mean I committed tax evasion?
No. Owing tax and evading tax are different things under the law. A section 7201 charge requires the government to prove an affirmative act of evasion, an additional tax due and owing, and willfulness beyond a reasonable doubt. Honest mistakes, aggressive but disclosed positions, and inability to pay are not crimes. Many large balances are resolved entirely on the civil side. If you are carrying a significant balance, a tax attorney can assess whether the facts raise any criminal exposure at all.
Should I keep using my regular CPA if I think an audit is turning criminal?
This is a question for a tax attorney, quickly. The practitioner privilege in IRC 7525 applies only to noncriminal tax matters before the IRS and noncriminal proceedings in federal court, so an accountant can generally be compelled to testify about your conversations in a criminal case. A Kovel arrangement, where the attorney engages the accountant, is the usual way to preserve privilege over accounting work. The sequence has to be set up correctly and in advance, which is why timing matters more than almost anything else here.
What is the difference between fraud penalties and criminal charges?
The civil fraud penalty under IRC 6663 is money, set at 75 percent of the underpayment due to fraud, and the IRS carries the burden of proving it [Source: Internal Revenue Manual 20.1.5]. A criminal charge is brought by the Department of Justice, requires proof beyond a reasonable doubt, and can result in imprisonment. The same conduct can support both, and a civil fraud finding does not preclude a later criminal referral. If you would like help correcting an earlier return, see our guide on fixing tax filing errors.
Talking to someone early is the whole strategy
Criminal exposure is decided by what a file looks like, and files are built one answer at a time. Nothing here is legal advice about your situation, and no article can be. The point is to recognize when a general question has become a specific one.
If an examination feels like it has changed direction, you can schedule a confidential 30 minute consultation or use the contact page. San Jose 408-290-0280, Walnut Creek 925-255-1401.
