Many accountants fear the day may come when one of their clients calls them and says, “The IRS is investigating me for tax fraud. What do I do?”
First things first: You can explain what the general investigation process would be like and should refer your client to an attorney instead of trying to represent or otherwise help your client like an attorney might. Do this even if you happen to be an attorney. It is simply the safest course.
Do you need an attorney?
As to what you should do, you might or might not need an attorney yourself. The more involved you are and the longer your professional relationship with the client, the more necessary getting an attorney for the case tends to be. It could be that the client under investigation will try to implicate you somehow. If you do think you may have erred, then getting an attorney may be even more important. Your client could be under investigation for claiming personal expenses as business expenses, backdating documents, maintaining two sets of books, leaving out sources of income and much more. If you were aware of some of these behaviors, you could end up in trouble as well.
Turning over documents
The IRS will likely ask you to turn over any documents you have that relate to the tax return or potential criminal matter. That is normal, and the IRS has the right to do so.
If you see potential fraud
If that phone call from a client has not yet come but you see a potentially problematic issue as you work on a tax return, your best bet is normally to advise the client to get legal advice. You should not take it upon yourself to determine whether a move could pass legal muster.
If you notice errors that occurred in the past, perhaps on last year’s tax return prepared by another CPA, you do have the responsibility to inform your client to seek legal counsel and possibly pursue ways to fix the problem. You are not always required to contact the IRS yourself if the client does nothing (check with an attorney for your specific case), but you do have the privilege of deciding to terminate the relationship with that client.