Recommendation #15:

Congress should require the IRS to issue a "notification of rights"
    to taxpayers during any interview in connection with the assessment
    of a deficiency. The taxpayer should be told that he has the right
    not to disclose any information or evidence that he believes would
    violate his Fifth Amendment rights against self-incrimination, that
    any such information or evidence would be used against him, and that
    he has the right to the presence of an attorney, a CPA, or an
    enrolled agent during the interview or examination.

Reasons for Change

An audit is a civil procedure even though it can be the prelude to a criminal investigation and courts in the past have not applied the Miranda-type warnings to civil procedures. A taxpayer can be caught in a different situation: he has no choice but to cooperate with the tax auditor, unless he is willing to subject himself to any amount of additional assessment that the IRS might otherwise propose.

A taxpayer who cooperates with the IRS, and who has committed no fraudulent act, only incurs the possibility of additional tax assessments, interest, and various civil penalties. A taxpayer who cooperates with the IRS and who has committed a fraudulent act, subjects himself to possible criminal prosecution by self-incrimination.

Any taxpayer who does not cooperate with a tax auditor or revenue agent immediately arouses suspicion. The auditor can decide to either summons the taxpayer's books and records or to refer the case to the Criminal investigations Division to determine if there is the potential for a fraud prosecution. Either way the taxpayer loses because a federal judge can require the taxpayer to produce the books and records under threat of contempt of court, and the Criminal Investigations Division might "scare" the taxpayer sufficiently to comply. The taxpayer might well imagine the IRS making a fraud case of a situation that was not initially intended to be.

But taxpayers do need to know that any normal, routine civil audit may lead to a potential fraud investigation which may turn into a criminal prosecution. The Fifth Amendment protection against self-incrimination should give a taxpayer the opportunity to decide if he will cooperate. The penalty for a contempt of court citation may be preferable to the penalties levied for fraud. At any rate, a lot of IRS's criminal prosecutions are successful because they are able to obtain evidence granted to them through the initial cooperation of the taxpayer.

The IRS is concerned that giving taxpayers notification of their rights would unnecessarily frighten and worry them. Taxpayers have seen it on TV a million times; the warnings are always given to the criminal as he's being hauled off to jail. This perception will certainly cause many "honest" taxpayers to be more concerned than they need to be. While the intention of the safeguard warning provision is to expand the rights of taxpayers, in doing so it actually instills such fear of the IRS that it could actually result in a severe detriment to them. After being audited once and subjected to the Miranda warnings, honest middle-class taxpayers may then decide to take fewer deductions than they would normally take or be entitled to, with the explicit intention of avoiding an audit.

I believe that there is a way to fulfill the need of taxpayers to know, to maintain their Fifth Amendment rights, and yet not frighten them needlessly. The Congress should consider the adoption of a statement that conveys a message that is instructive and protective, but not overbearing, harsh, or frightening. It could be something like this:

    This examination of your tax return is intended for the civil
    administration of the tax laws of the United States. In order
    for us to perform this function properly, we need your
    cooperation. But you should know that in the event we find
    evidence that appears to indicate a criminal violation of the
    tax laws, the scope of this audit examination will change from
    civil to criminal. If that happens you will be notified.
    Anything you tell us or any books and records you give us during
    the course of this audit examination may later be used in the
    investigation of the alleged criminal violation. For this reason
    you have the right not to disclose any information or evidence
    that you believe would violate your Fifth Amendment rights
    against self-incrimination; any such information or evidence
    may be used against you, and you have the right to the presence
    of an attorney, a CPA, or an enrolled agent during this
    interview, or examination.