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If you were never the subject of a tax audit, you could be curious about how the IRS conducts this matter. There are three types of audits that the IRS may utilize, depending on the facts of the case.
In a correspondence audit, the IRS will pose questions to a taxpayer because of an error on a tax return or another similar mistake usually identified by IRS computers by matching third party information to a taxpayer return. This type of audit is typically initiated through the mail. The IRS can also ask the taxpayer to provide documents to substantiate a suspect deduction, such as why a taxpayer filed for an irregular business deduction.
An office audit is when the IRS wants to interview you in person at an IRS office near you A field audit occurs when the IRS sends an examiner to your home or office to conduct the audit. Office & field audits are ordinarily much higher risk and broader in scope and ordinary the auditor will examine an extensive amount of documentation, which is why it would be prudent to hire on of our dual licensed California Tax Attorneys and CPAs to represent you.
A National Research Project line-by-line tax audit is when the IRS selects a taxpayer at random and examines every line of your income tax return to fine tune the IRS software that selects taxpayers for audit and to attempt to quantify the “tax gap”.
A tax audit is initiated by the IRS to review the income tax returns that are filed by a taxpayer to determine if the taxpayer is in full compliance with State or Federal tax law. The IRS wants to confirm that a person and the businesses that they own, are not purposefully or accidentally underreporting income or claiming deductions, credits, and other tax breaks that they were not entitled to, which is why you want to always be cautious when filing your individual or business taxes.
An IRS of State audit can conclude in a few different manners:
No Change Audit
If after analyzing your tax returns and financial records, the IRS determines that you do not owe any additional taxes and ends the audit.
The IRS or State Taxing Authority Will Attempt to Assess Additional Tax, Penalties, and Interest
If the IRS or State Taxing Authority discovers discrepancies in your tax returns the will issue an audit report that attempts to assess additional tax penalties and interest.
Tax Appeals and Litigation
If the taxpayer does not agree with the assessment of the IRS or State Taxing Authority the taxpayer can choose to dispute their audit findings through either submitting a protest letter or via the filing a Federal or State Tax Court Petition. When disputing tax assessments, you will want to retain a dually licensed Tax Attorney and CPA that has first-hand knowledge and experience in the tax appeals and litigation process.
If your appeal or litigation with the IRS or State Taxing Authority is successful, it is because your representative was able to convince the taxing authority that they had either the law or facts at issue incorrect. The taxing authority will then be legally forced to decrease the assessment of additional tax penalties or interest to the result that was arrived at in the appeal or tax court.
A tax audit is initiated by the IRS to review an income tax return that is filed by a taxpayer where they suspect tax noncompliance. The IRS wants to confirm that a person or business is not underreporting income or over claiming deductions, credits, and other tax breaks that were not earned, which is why you want to be cautious when filing your taxes or responding to an audit.
There are three ways that an IRS tax audit could end. The first way is after analyzing your financial records, the IRS determines that you do not owe any additional taxes and ends the audit and issues a “no change” audit report. This is extremely rare but on occasion is known to happen.
The second manner that an audit can resolve is where the IRS discovers a discrepancies in your taxes and assesses additional tax, penalties, and interest. In this scenario, the taxpayer has the option of signing the audit report indicating that they agree with the assessment by the IRS. This will forfeit any appeal rights of the taxpayer and result in the IRS immediately assessing the additional tax penalties and interest and beginning collection action.
The third manner of resolving an audit is where the taxpayer does not agree with the assessment of the IRS and disputes the findings of the IRS. When disputing tax assessments, you will want to retain a dual licensed California Tax Attorney and CPA that has first-hand knowledge of not only how to prevail in the appeals process but will give you an honest assessment of your odds of success and a determination if it makes economic sense or not to file the appeal.
If your dispute with the IRS is successful, the IRS will decrease the amount owed in tax penalties and interest based on its perceived odds of success in tax court. If the appeals agent is of the opinion that the IRS has a 50% chance of prevailing, they are authorized to settle the audit for ½ of the original assessment. However, if you are not successful in proving that you would likely prevail in tax court on the law and facts at issue in your case in the appeals process, you will be required to pay the entire balance they previously assessed plus any additional interest that has accrued during the appeals process on the underlying liability.
It is important to note that merely being forced to pay the tax you should have paid in the first place is not the only potential result of a tax audit. If the audit discovers evidence that you committed criminal violations of tax law, you could face civil fraud penalties at best and criminal tax prosecution at worst.
Underreporting income to the IRS can yield differing results for a taxpayer. One of the primary factors the IRS will consider when looking at underreported income is the intent a taxpayer when they filed the tax returns at issue. For example, if a taxpayer is proven to have sought to deceive the IRS by hiding certain assets and the associated taxable income, this would very likely lead to criminal tax exposure.
Alternatively, taxpayers that were found to have underreported income due to a good-faith mistake will be treated differently by the IRS. Willful tax law offenders could have to deal with costly civil fraud penalties and possibly criminal tax prosecution, while non-willful offenders may simply have to pay a 20% negligence penalty on any additional income tax assessed in the audit. Each case is different, so you would be well served to hire our dual licensed California Tax Attorneys and CPAs to guide you through the often-multiple developments in your tax audit.