Representation before the IRS · Building the Taxpayer's Case: Preliminary Work
Potential for criminal aspects
tax year · reviewed 2026-08-18 · I. Ohu
The single most consequential judgment a representative makes at intake is whether a matter has criminal potential. It changes who should hold the file, what protection the client’s communications have, what may safely be said to a revenue agent, and whether the practitioner should be in the matter at all. Get it right early and the client has options. Get it wrong and the damage — candid emails, admissions to an examiner, an amended return that concedes the elements — is already done.
The rule
The privilege stops at the criminal line. IRC § 7525 extends the attorney-client privilege to a federally authorized tax practitioner, but only in “any noncriminal tax matter before the Internal Revenue Service” and “any noncriminal tax proceeding in Federal court brought by or against the United States” (IRC § 7525(a)(2)). Both forums are limited to noncriminal matters. The moment the matter turns criminal, the statute does not reach it — and the communications already exist.
What the practitioner must tell the client. See the figures table (Circular 230 § 10.21). A practitioner who “knows that the client has not complied with the revenue laws … or has made an error in or omission from any return, document, affidavit, or other paper” must “advise the client promptly of the fact of such noncompliance, error, or omission,” and “must advise the client of the consequences as provided under the Code and regulations.”
Read what it does not say. There is no duty to correct the return, no duty to notify the IRS, and no duty to withdraw. The obligation runs to the client.
The referral bar. See the figures table (IRC § 7602(d)). “No summons may be issued under this title, and the Secretary may not begin any action under section 7604 to enforce any summons, with respect to any person if a Justice Department referral is in effect with respect to such person.”
When a referral is in effect. See the figures table (§ 7602(d)(2)(A)). Either the Secretary has recommended to the Attorney General a grand jury investigation or criminal prosecution of the person for an offence connected with the administration or enforcement of the internal revenue laws, or a § 6103(h)(3)(B) request has been made for disclosure of that person’s return or return information.
When it ends. A referral ceases when the Attorney General notifies the Secretary in writing that they will not prosecute, will not authorise a grand jury investigation, or will discontinue one; or on final disposition of a criminal proceeding instituted against that person (§ 7602(d)(2)(B)).
Period by period. “Each taxable period (or, if there is no taxable period, each taxable event) and each tax imposed by a separate chapter of this title shall be treated separately” (§ 7602(d)(3)). A referral on one year does not shut off the summons power for another.
Financial status techniques are limited. See the figures table (IRC § 7602(e)). The Secretary “shall not use financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the Secretary has a reasonable indication that there is a likelihood of such unreported income.”
The offences themselves. Evasion under IRC § 7201 requires a willful attempt and reaches evasion of the tax “or the payment thereof”; willful failure to file, pay, keep records or supply information is a misdemeanor under § 7203; and § 7206 covers false documents, including § 7206(2), which reaches a preparer “whether or not” the taxpayer knew. Those are developed at tax avoidance vs. tax evasion.
Current figures
| Item | Rule | Authority |
|---|---|---|
| Where the privilege reaches | any noncriminal tax matter before the IRS, and any noncriminal tax proceeding in Federal court brought by or against the United StatesTY2026 | IRC § 7525(a)(2) |
| Duty on knowing of an omission | a practitioner who knows a client has not complied with the revenue laws, or has made an error in or omission from any return, document, affidavit or other paper submitted or executed under them, must advise the client promptly of that fact and of the consequences under the Code and regulationsTY2026 | Circular 230 § 10.21 |
| Justice Department referral bar | no summons may be issued, and no § 7604 enforcement action begun, with respect to any person while a Justice Department referral is in effect for that person — each taxable period and each tax imposed by a separate chapter being treated separatelyTY2026 | IRC § 7602(d)(1), (3) |
| When a referral is in effect | a referral is in effect once the Secretary has recommended to the Attorney General a grand jury investigation of, or the criminal prosecution of, the person for an offence connected with the administration or enforcement of the internal revenue laws, or once a request is made under § 6103(h)(3)(B) for disclosure of that person's return or return informationTY2026 | IRC § 7602(d)(2)(A) |
| Financial status techniques | the Secretary shall not use financial status or economic reality examination techniques to determine the existence of unreported income unless there is a reasonable indication that unreported income is likelyTY2026 | IRC § 7602(e) |
How it works in practice
Screen for badges at intake, not after the examination opens. Unreported cash receipts, a nominee account, two sets of books, personal expenses run through a business, consistent understatement across years, destroyed records, a client who lies to you — any of these should stop the intake conversation and change it. The question is not whether the client will be prosecuted; it is whether the matter has criminal potential, because that alone changes the handling.
Say the § 7525 point out loud, early. Clients assume that talking to their enrolled agent is protected the way talking to a lawyer is. It is, in noncriminal matters only. Where criminal exposure is realistic, the practitioner should say plainly that the protection does not extend there, before the client says something that cannot be unsaid.
The route through counsel exists for exactly this. Where criminal exposure is real, the client engages an attorney and the attorney engages the practitioner, so the work rests on the attorney’s own privilege rather than on the narrower statutory one. That is a referral to make early, and it is not an admission of anything.
Section 10.21 tells you to advise, not to confess. The duty on learning of a client’s noncompliance is to tell the client promptly, and to explain the consequences. Circular 230 does not require the practitioner to correct the return, to disclose to the IRS, or to withdraw. Practitioners frequently believe it does, and the belief leads either to unnecessary disclosure or to paralysis.
But the practitioner may not go on as if nothing happened. Continuing to prepare a return the practitioner knows to be wrong, or making representations to the IRS the practitioner knows to be false, engages other duties entirely — diligence under § 10.22, the § 6694 preparer penalties, and § 7206(2), which is a felony and does not require the client to be complicit.
Signs of a referral are worth watching for. A summons that stops being pursued, a revenue agent who becomes unresponsive, a case that goes quiet without closing — these can indicate a referral is in effect, because § 7602(d) shuts the summons power off. The bar is period-specific, so activity continuing on one year says nothing about another.
Financial status techniques signal what the examiner suspects. Where an examiner starts reconstructing lifestyle, bank deposits or net worth, § 7602(e) requires a reasonable indication of a likelihood of unreported income before they may do so. That tells the representative something about the direction of the case, and whether the reasonable indication exists is a fair question to ask.
Amending is not automatically the answer. A voluntary correction is often right, and sometimes it hands the government the elements of an offence in the client’s own signature. Where criminal potential exists, whether and how to correct is a decision for counsel with the criminal exposure in view — not a routine remediation step.
The candid email
Three months into an examination of unreported cash receipts, a restaurant owner and her enrolled agent have exchanged frank emails about gaps in the till records. The examiner then makes a fraud referral.
Analysis. The correspondence is unprotected. IRC § 7525(a)(2) permits the privilege to be asserted only in a noncriminal tax matter before the IRS and a noncriminal Federal court proceeding. A criminal investigation is outside the statute, and the emails already exist. The point at which this should have been handled differently was the first conversation about missing till records — the agent should have named the exposure, explained that § 7525 does not reach criminal matters, and raised engaging counsel.
The omission the client will not fix
Preparing a current-year return, a practitioner discovers that a prior year omitted substantial income. He tells the client, who refuses to amend and instructs him to say nothing.
Analysis. Circular 230 § 10.21 is satisfied by advising the client promptly of the noncompliance and of its consequences under the Code and regulations. There is no duty to correct the prior return, to notify the IRS or to withdraw. What the practitioner cannot do is carry the error forward into the current return, make representations to the IRS he knows to be false, or sign a return he knows to be wrong — IRC § 7206(2) reaches a preparer whether or not the client is complicit. Document the advice given, and decline the work that would compound it.
The case that went quiet
An examination has been active for a year. A summons to the client's bank is abruptly not pursued, the revenue agent stops returning calls, and nothing closes. The client asks whether the matter has gone away.
Analysis. It may have gone somewhere worse. IRC § 7602(d)(1) bars any summons, and any § 7604 enforcement action, while a Justice Department referral is in effect — so a summons being dropped and the case going silent is consistent with a referral. Note that § 7602(d)(3) treats each taxable period and each separately-imposed tax separately, so continued activity on one year says nothing about another. This is the point to involve counsel, not to press the agent for reassurance.
The lifestyle questions
An examiner begins asking about the client's home, vehicles, holidays and cash spending, and requests twelve months of personal bank statements on a business return examination.
Analysis. These are financial status or economic reality techniques. IRC § 7602(e) provides that the Secretary "shall not use financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the Secretary has a reasonable indication that there is a likelihood of such unreported income." The representative may properly ask what the reasonable indication is. Whatever the answer, the direction of the examination has been signalled and the criminal-potential assessment should be revisited now.
IRC § 7525 does not reach criminal matters — not a criminal investigation, not a criminal proceeding. Both forums in § 7525(a)(2) are limited to noncriminal matters.
Circular 230 § 10.21 requires advising the client. There is no duty to correct the return, disclose to the IRS, or withdraw.
A Justice Department referral shuts off the summons power — and the bar applies period by period, not to the taxpayer at large.
Financial status techniques require a reasonable indication of a likelihood of unreported income before they may be used.
How this has changed
The referral bar is a 1982 provision and it is absolute while it lasts. IRC § 7602(c) as then numbered was added by TEFRA to stop the civil summons power being used to build a criminal case after referral. It is now § 7602(d) — renumbered when the Taxpayer First Act of 2019 inserted the current third-party contact notice at § 7602(c). Material citing ”§ 7602(c)” for the referral bar is using the pre-2019 numbering, and § 7602(c) now means something entirely different.
Financial status techniques were restricted in 1998. IRC § 7602(e) came in with the IRS Restructuring and Reform Act. Before it there was no statutory threshold for using economic reality methods, and their use was a significant grievance. The current rule does not forbid them; it requires a reasonable indication of a likelihood of unreported income first.
The § 7525 privilege is newer than most of what surrounds it. It was added by the same 1998 Act, applying to communications made on or after 22 July 1998, and it was drawn narrowly by design — the noncriminal limitation sits in § 7525(a)(2) itself, as a restriction Congress placed on the borrowed privilege rather than a feature of the attorney-client privilege it borrows from.
Section 10.21 has not changed and is often misremembered. It requires prompt advice to the client about the noncompliance and its consequences. It has never required disclosure to the IRS, and practitioners who believe otherwise are importing a rule from another professional regime.
Exam focus
Know that IRC § 7525 applies only in noncriminal matters — both the IRS matter and the Federal court proceeding must be noncriminal.
Know that Circular 230 § 10.21 requires the practitioner to advise the client promptly of noncompliance, an error or an omission, and of the consequences — and requires nothing more.
Know that a Justice Department referral bars any summons and any § 7604 enforcement action, that it takes effect on a recommendation to the Attorney General for grand jury investigation or prosecution or on a § 6103(h)(3)(B) request, and that it ends only on written notification or final disposition.
Know that the referral bar operates separately for each taxable period and each separately-imposed tax.
Know that financial status or economic reality techniques may not be used to determine the existence of unreported income without a reasonable indication of a likelihood of it.
Know that IRC § 7206(2) reaches a preparer whether or not the taxpayer knew of the falsity.
Check yourself
1. A client’s civil examination becomes a criminal investigation. What protection does IRC § 7525 give earlier communications with the enrolled agent? (A) Full protection, since they were made while the matter was civil (B) None — the privilege may be asserted only in noncriminal matters (C) Protection unless the IRS shows fraud (D) Protection only in Federal court Answer: B. Both forums in § 7525(a)(2) are limited to noncriminal matters.
2. A practitioner learns a client omitted income from a prior return. What does Circular 230 § 10.21 require? (A) Notifying the IRS (B) Withdrawing from the engagement (C) Advising the client promptly of the omission and of the consequences under the Code and regulations (D) Amending the return Answer: C. The duty runs to the client, and § 10.21 requires nothing beyond it.
3. What is the effect of a Justice Department referral under IRC § 7602(d)? (A) The examination must close (B) No summons may be issued and no § 7604 enforcement action begun as to that person (C) The limitation period is suspended (D) The taxpayer must be notified Answer: B. And each taxable period and separately-imposed tax is treated separately.
4. When may the IRS use financial status or economic reality examination techniques to determine the existence of unreported income? (A) At any time during an examination (B) Only with the taxpayer’s consent (C) Only where there is a reasonable indication that unreported income is likely (D) Only in a criminal investigation Answer: C. IRC § 7602(e).
5. Which of these ends a Justice Department referral? (A) The passage of one year (B) The examiner closing the civil case (C) Written notification from the Attorney General declining prosecution or a grand jury investigation, or final disposition of a criminal proceeding (D) The taxpayer filing an amended return Answer: C. IRC § 7602(d)(2)(B), and the notification must be in writing.
Change log
- Initial publication from IRC §§ 7602(d)–(e), 7525, 7201 and 7206 and Circular 230 § 10.21, each opened at source.