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All federal or California tax audits pose serious hazards to any taxpayer or business owner. The auditor may conclude that you or your business owes additional tax, unpaid interest, costly tax penalties – or all three. Still more concerning is the potential for an IRS, FTB, CDTFA, EDD tax audit to uncover taxpayer actions that can result in misdemeanor or felony criminal tax charge exposure, giving rise to a criminal tax investigation.
One of the Best Tax Audit Defense Lawyers and CPAs in San Jose
It is difficult not to panic when you receive a Federal or California tax audit notice. Whether you are being audited by the Internal Revenue Service (IRS), or by a state agency, such as the California Franchise Tax Board (FTB), the California Employment Development Department (EDD), or the California Department of Tax and Fee Administration (CDTFA), formerly known as the (BOE), you are likely feeling anxious and uncertain about the weeks and months ahead.
Though you may be feeling nervous or overwhelmed, you do not have to face the tax audit process on your own. Serving businesses and individuals throughout the San Jose area, the California and Federal tax audit attorneys & CPAs at the Tax Law Office of David W. Klasing can guide you, protect you, prepare you, and defend you against allegations ranging from mere negligence through tax fraud. In addition to being an accomplished attorney, David W. Klasing is also a former public auditor, giving our firm an insider perspective on audit methods and how to combat them effectively. If you, your husband or wife, or your business is being audited in the San Jose region, contact us for a reduced-rate consultation about the audit defense services we can provide for you.
Federal IRS Audits vs. California State Tax Audits
There are both similarities across, and differences between, state and federal tax audits. The fundamental purpose of every tax audit is to identify and resolve noncompliance with tax regulations, a process which involves reviewing taxpayer records and, where appropriate, assessing additional tax, interest, and/or penalties. Another similarity is that both state and federal audits can be disputed, or appealed, by the taxpayer, as discussed in greater detail below.
Moreover, both IRS and California tax audits have the potential to spur criminal tax investigations if willful noncompliance seems to have occurred. For example, if an auditor finds cause to believe that a taxpayer intentionally underreported his or her income to avoid paying state or federal taxes, the matter can be referred to criminal investigators – which may result in charges being filed. If this occurs, or is at risk of occurring, it is vital for the taxpayer to seek out a criminal tax defense attorney immediately.
The most obvious difference between state and federal examinations is the government agency conducting the audit. Federal tax audits are conducted by the Internal Revenue Service (IRS), while state audits are conducted by California government agencies such as the Franchise Tax Board (FTB), Employment Development Department (EDD), or California Department of Tax and Fee Administration (CDTFA). Each of these agencies has a different regulatory focus. For example, California income tax audits are generally conducted by the FTB, whereas sales tax audits of brick-and-mortar or internet businesses are handled by the CDTFA. California payroll and employment tax audits are generally performed by the EDD, such as worker classification audits. However, state and federal agencies share information with each other, which means that a state tax audit can give rise to an IRS audit, or vice versa.
One more vital difference between state and federal audits is the pertinent statute of limitations. The IRS statute of limitations is, at minimum, three years. This means the IRS has three years – or more, depending on the situation – to audit a tax return, either from its original due date or date of filing. However, state tax regulations differ on this point, giving California auditors four years: an extra 12 months. Both IRS and California tax audits can be conducted indefinitely if the case involves (1) non-filer issues or (2) tax fraud.
Reasons You May Be Audited by the IRS, CDTFA, EDD, or FTB
There are various reasons the EDD, FTB, IRS, or CDTFA (formerly known Board of Equalization) may select an individual or business entity for audit. While some of these reasons are more innocuous than others – for instance, being chosen at random by computer software – any audit has the potential to endanger the net worth and liberty of a taxpayer, particularly if the auditor uncovers errors, discrepancies, or purposeful omissions while examining the original issues underlying the audit. To supply just a few examples, factors that can cause you to be audited include the following:
- Claiming inappropriate deductions, exemptions, and/or credits
- Claiming deductions that happen to be loosely associated with tax fraud, such as the Home Office Deduction
- Failing to file state and/or federal tax returns (personal or business)
- Failing to pay and/or collect and remit taxes (e.g. income tax, payroll/FICA taxes)
- Failing to report sales and use tax
- Overstating (“padding”) your business expenses
- Understating your income
- Using outdated or stolen identifying information
- Working in a field or industry where there are high rates of fraud or noncompliance, such as dentistry, real estate, veterinary care, auto sales, or the restaurant industry
- Working with other companies which have been audited
What Happens During an Audit?
The answer to this question depends on two factors: (1) which agency is conducting the audit, and (2) why the audit is being conducted. The former determines which forms, procedures, and rules will guide the audit process, while the latter determines what type of audit will be conducted. The more extensive or complex the issue, the likelier it is that the auditing agency will choose to conduct a field audit, wherein the auditor attempts to search records in the taxpayer’s home and/or business, as opposed to a correspondence audit, which is undertaken entirely via mailed communications (and is therefore aimed at minor anomalies).
During the audit, you will be asked to answer questions and provide documentation, which the auditor will use to determine whether an error was made, and if so, which course of action is appropriate – for example, whether additional tax, penalties and interest should be assessed, whether a tax refund should be issued, or whether the taxpayer should be investigated by the IRS Criminal Investigation Division (IRS-CI), the Department of Justice (DOJ), or other agencies. Your representative can handle negotiation and correspondence, protecting you from accidentally revealing too much information or inadvertently making a criminal admission. If you disagree with the audit’s results, you may be able to dispute the auditor’s findings by filing a written protest or tax court petition, which initiates the “appeals” process first, and if not resolved at that level – tax litigation.
What Limitations Does the IRS Have During an Audit?
The IRS must operate under specific guidelines and parameters when it opens an audit against an individual taxpayer or a business entity. The IRS is limited to a three-year timeframe to open an audit starting from the date the taxpayer initially filed his or her return or from the original due date of the return, whichever is later. However, there are some exceptions.
First, the IRS ordinarily begins an audit in the majority of cases within two years after the taxpayer files. For a taxpayer who hasn’t learned of an audit within this two years period, that doesn’t automatically mean the chances of an audit are entirely gone, but, in general, the chances of an audit are greatly reduced.
Second, the IRS is not automatically required to stop auditing after examining the three most current tax years. Should the IRS find firm indications of fraud, the statute of limitations becomes open back to the date of time. A pattern of repeated and unsubstantiated and apparently intentional errors in the returns, where income went unreported, deductions were claimed that could not be supported, credits were claimed that the taxpayer was not entitled to, along with other badges of fraud, can cause an unlimited look back scenario to arise. If a 25% or greater understatement of income occurs, the IRS can automatically go back as far as six years. If the IRS finds a pattern of repeated and apparently intentional mistakes in your past returns, fraud penalties and the possibility of criminal tax prosecution can arise along with assessments of back taxes and interest.
To reiterate, in extreme cases, the IRS does not have to adhere to a time limit in examining your past returns. If the taxpayer failed to file a return at all, or if the taxpayer purposefully filed a fraudulent tax return, the IRS does not have to stick to any time limit when looking at older returns during the audit process.
Also if your return contains Net Operating Losses or Capital Loss Carryforwards, The IRS can open any prior tax year to substantiate these carryforwards and if you refuse to cooperate they will most likely disallow them in their entirety in the best case scenario. In the worst case scenario they will additionally adjust and assess additional tax penalties and interest on every prior tax return that claimed a tax benefit for these items that you were unable to substantiate.
Because of the risk factors that cause an audit to extend beyond the ordinary three-year statute of limitations, it is an extremely serious situation when this occurs. An experienced Tax Attorney will know how to guide you through the process. You are allowed by law to have representation throughout the audit process so why not ensure the absolute best results and hire the Tax Law Offices of David W. Klasing, P.C. to achieve the absolute lowest assessment of additional tax penalties and interest and avoid the possibility of criminal tax liability at all costs.
Eggshell Audits and Criminal Tax Investigation Representation
If the auditing agency believes that the taxpayer’s return contains substantial and intentional mistakes or omissions, it may conduct an “eggshell” audit. For this reason, eggshell audits pose a serious legal threat to the taxpayer. If the audit reveals mere negligence – in other words, the failure to make reasonable efforts to obey state and/or federal tax laws – a penalty of up to 20% of an additional tax assessed may be imposed. If the audit reveals fraud – in other words, one or more willful attempts to evade the proper assessment of tax – the penalty increases to 75% of the additional tax assessed at best and in a hand off to IRS criminal investigations for criminal tax investigation and subsequent tax crime prosecution, at worst.
Willful violations of state or federal tax laws can send the audited or investigated taxpayer to prison. Various statutes within the U.S. Tax Code, also called the Internal Revenue Code (IRC), establish maximum sentences for misdemeanor and felony tax crimes, including:
- Up to five years in prison per count of willful failure to collect or pay over tax
- Up to five years in prison per count of tax evasion
- Up to three years in prison per count of false statements
- Up to one year in prison per count of failing to file a return or failing to pay tax
Because eggshell audits are so risky for the taxpayer, aggressive audit representation is imperative – as is criminal tax representation, should misdemeanor or felony charges arise or threaten to arise from the auditor’s findings. A San Jose eggshell audit lawyer can mitigate the danger by ensuring the audit does not violate the taxpayer’s constitutional rights against unreasonable searches and seizures, protecting the taxpayer rights against self-incrimination, and attempting to prevent the development of damaging direct evidence against the taxpayer from being utilized in a subsequent criminal tax proceeding.
Can You Appeal a California or Federal Tax Audit?
The short answer to this question is yes – subject to certain conditions. Provided you meet appropriate standards and criteria, which we will discuss momentarily, you may be eligible to appeal the results of your California or IRS audit. Put simply, an appeal is a method for resolving a disagreement between the government and the taxpayer about what the latter owes. If the taxpayer’s appeal is successful, the result may be a substantially lower tax bill.
Before you can request an appeal, you must meet certain criteria, as noted above. For example, you may not file an appeal with the California Office of Tax Appeals (OTA) until you have received either a Notice of Action or Appeals Bureau Decision from the FTB or CDTFA. It is also crucial to adhere to filing deadlines, which will be provided in the following documents:
- Federal Audits – Refer to the date on your “30-day letter”
- California Audits – Refer to the date on your Appeals Bureau Decision or Notice of Action
Even if your request for an appeal is granted, you must continue to approach the process methodically and strategically in order to prevail. It is particularly vital to submit a strong “written protest” (for IRS appeals) or “opening brief” (for OTA appeals). Though the terminology is different, the requirements are similar: the OTA and IRS both require taxpayers to submit a written protest or opening brief that provides the taxpayer’s contact information, summarizes the items in dispute, and supports the taxpayer’s reasoning with factual information, such as relevant statutes or court decisions. If the taxpayer can successfully prove that the auditor made an error, the disputed penalties, interest charges, and tax liabilities will be reduced.
San Jose, CA Tax Audit Attorneys Offering Reduced-Rate Consultations
The San Jose audit attorneys at the Tax Law Office of David W. Klasing provide the full array of audit defense services for California residents and businesses, as well as out-of-state entities which have a sales tax nexus with California. Comprised of tenacious, experienced tax lawyers and CPAs our zealous, nationally recognized tax audit defense team handles income tax audits, sales tax audits, employment tax audits, worker classification and payroll tax audits, foreign account and FBAR tax audits, audit appeals and tax controversy resolution, and, in cases where criminal tax charges are filed as a result of the audit, state and federal criminal tax defense in misdemeanor and felony cases. To arrange a reduced-rate consultation about the tax audit services we offer in San Jose, you can contact us online, or call (408) 643-0573 or (800) 681-1295 to schedule a reduced rate initial consultation.
San Jose Tax Law Offices
For any of your tax planning compliance and controversy needs in San Jose, contact the Lawyers at The Tax Law Offices of David W. Klasing today. Our experienced Tax Lawyers offer a reduced-rate consultation on new cases or engagements. Call 408-643-0573 or 800-681-1295 or contact us online today to schedule a reduce rate initial consultation at our San Jose tax law offices, or at one of our other convenient locations across Southern California.
