When an IRS Issue Gets Serious: Civil vs. Criminal with Jason Silver

Most Tax Problems Are Honest Mistakes. So What Makes One Different?

Every business owner deals with a little mess now and then. A form doesn't show up, a receipt gets lost, or the books fall a few months behind. Most of the time, those are honest errors that get sorted out.

But there's a line between a civil tax matter and a criminal one, and most owners have never had it explained. In this episode, Andrew Rafal welcomes back tax attorney Jason Silver, who joined us in Episode 128 for The Real IRS Playbook: What To Do Before, During, and After an Audit. This time, he walks through where that line sits, what the IRS actually looks for, and the everyday habits that help keep a business on the right side of it.

Jason spent about four years as an IRS counsel attorney in Los Angeles, representing the IRS in U.S. Tax Court and working criminal tax cases, before moving to the client side. He's now been practicing law for 31 years, the last 25 as a partner at his own firm, Silver Law, PLC.

Civil vs. Criminal: How the Two Are Different

Jason explains that a civil fraud case and a criminal case are built differently. On the civil side, the IRS looks at what courts call "badges of fraud." These are patterns like dealing heavily in cash without records, keeping two sets of books, or holding foreign accounts that were never disclosed.

A criminal case turns on intent. Jason describes the standard as an intentional violation of a known legal duty, and the government has to prove it beyond a reasonable doubt. That's a much higher bar than the "clear and convincing evidence" standard used in civil fraud cases.

Timing differs too. Jason notes that the IRS generally has three years to look at a filed return on the civil side, while the criminal statute of limitations is generally six years. Those timeframes can vary depending on the circumstances. If a return is never filed, the civil clock doesn't start at all, which is why he encourages people to file even when they can't pay and then work out an arrangement.

Where Criminal Tax Cases Usually Start

According to Jason, most criminal cases involving businesses come back to unreported income, because it's the easiest kind of case for the government to prove. Undisclosed foreign bank accounts are another common thread.

Employment taxes are a third area he sees often. When a business withholds Social Security, Medicare, and income tax from employee paychecks, it's holding that money in trust for the government. Jason explains that using those funds to cover other expenses, even during a tough stretch, is an area that gets close attention from the IRS.

Cases can also start with a tip. Jason notes that referrals often come from people close to the business, like a former spouse, a former business partner, or a competitor. Others start with a simple mismatch between what's reported to the IRS and what shows up on a return.

Cash-Heavy Businesses: Recording Every Dollar

Restaurants, landscapers, contractors, and other businesses that take a lot of cash aren't doing anything wrong by accepting it. Jason's point is that cash needs to be reflected in the books and records as gross receipts, whether or not it's deposited.

He also explains that a bank filing a currency transaction report on a cash deposit over $10,000 is routine and isn't something to worry about if the income is properly recorded. What creates a real issue is breaking deposits or withdrawals into smaller amounts to avoid that report. That's called structuring, and Jason notes it's an offense on its own, separate from any tax question.

Businesses that receive more than $10,000 in cash or certain cash equivalents, like money orders, in one transaction or a series of related ones may also have a separate filing requirement called Form 8300. Jason says he sees this missed most often at car dealerships, and occasionally at law firms.

Keeping Business and Personal Separate

Expenses work differently from income in an audit. Jason explains that in a civil matter, the burden is generally on the taxpayer to show an expense was real and business-related. That's why documentation matters so much.

His approach is simple: run personal expenses through personal accounts, and take money out of the business through distributions or payroll. If a business expense accidentally lands on a personal card, submit it for reimbursement. A credit card statement helps, but Jason notes the best evidence is the actual itemized receipt.

Recordkeeping: Why Seven Years?

Almost everyone has heard you should keep tax records for seven years. Jason likes to ask why. He explains that the federal civil review window is generally three years and Arizona's is generally four, though these windows can be longer in certain situations. Jason's view is that a four-year retention period may cover most routine records for Arizona businesses.

Some records are worth keeping much longer. Jason points to documents supporting the basis of assets you still own, home improvement receipts that may matter when you sell, and records behind any net operating loss you're still carrying forward. Scanning everything into digital files makes long-term storage easy and keeps paper from fading.

He also recommends reviewing your bookkeeping monthly so you know what's coming in, what's going out, and whether it's coded correctly. For businesses that deposit everything, one extra safeguard he mentions is having the CPA compare bank deposits to the general ledger to confirm they match.

Building the Right Team Before You Need It

Jason's view is that a successful business is built with a team: a good bookkeeper, a good return preparer or CPA, and a relationship with a tax attorney. Each plays a different role.

If an audit or IRS issue does come up, he shares a few things owners may not know. Conversations with an attorney are generally protected by privilege, while there's typically no equivalent privilege with a return preparer in a criminal matter. He also notes that the person who prepares your returns isn't always the best fit to represent you in an audit, since that's often not what they do full time. These are worth discussing with a qualified tax attorney based on your situation.

Andrew's takeaway: as the year wraps up, it's a good time to take stock, make sure the right people are on your team, and confirm your books are in order heading into the new year.

Disclosure: The content on this page is for informational and educational purposes only. Bayntree Wealth Advisors and its representatives do not provide legal or tax advice. Nothing on this page should be construed as legal or tax guidance specific to your situation. Any references to tax code provisions, entity structures, or planning strategies are general in nature and may not apply to your circumstances. Please consult a qualified attorney and/or tax professional before making any decisions about your specific situation. Jason Silver and Silver Law, PLC are independent and not affiliated with or endorsed by Bayntree Wealth Advisors. Opinions expressed by guests are their own.