Internal Revenue Service (IRS) audits can be a highly stressful experience for taxpayers due to the invasive nature of the process and the potential for financial & potential criminal tax repercussions. The scrutiny of personal and financial information can lead to a significant disruption in one’s life and result in sleepless nights and strain on a marriage. Additionally, the uncertainty and anxiety ordinarily associated with the audit process contribute to a negative perception, making it an undesirable, stressful, and challenging ordeal for individuals, especially those who own businesses.
Strategies to avoid an IRS audit involve filing accurate and timely tax returns, leveraging tax preparation software, or better yet, utilizing a reputable preparer and recognizing and avoiding known audit triggers, known in the industry as “red flags” like excessive deductions or a pattern of losses exceedingly historically reported income. Vigilance is particularly crucial when dealing with offshore income-generating business and investment activities, especially involving cryptocurrency holdings. Furthermore, taxpayers must be weary of potential audit triggers like early withdrawals from retirement accounts and a pattern of underreported taxable income.
If you are concerned that you may be audited by the IRS, seek guidance from our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 or clicking here to book a reduced rate initial consultation.
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into the tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one-stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.
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Strategic Approaches to Avoiding IRS Audits
As mentioned, IRS audits can be extremely disruptive to taxpayers’ lives. Fortunately, our Dual-Licensed Tax Lawyers & CPAs can help you understand the triggers that lead to audits and employ potential tax filing tactics to avoid them.
Ensuring Accuracy and Honesty
Achieving accuracy and honesty in tax filings remains paramount to sidestep IRS tax audits. Timely submission of returns with precise and well-documented information on income sources, tax credits, and deductions is a fundamental strategy. Leveraging tax preparation software or utilizing a reputable tax preparer can mitigate mathematical errors, particularly when e-filing, which significantly reduces the risk of errors compared to paper returns.
The Influence of FATCA
In the current landscape, it is prudent to assume that the IRS possesses comprehensive information on offshore financial accounts thanks to the global impact of the Foreign Account Tax Compliance Act (FATCA). The IRS’s enhanced data processing systems, bolstered by artificial intelligence applications, facilitate seamless matching of U.S. Taxpayers with information acquired from diverse sources globally, such as financial institutions and sovereign tax authorities. Offshore businesses, investments, and income-generating real estate can lead to income tax and information reporting obligations that are heavily penalized and potentially criminally prosecuted if willfully admitted. Utilities the services of a dual licensed International Tax Attorney and CPA can make all the difference to getting into compliance and staying in compliance in this area.
Identifying Known Audit Triggers
Understanding and steering clear of known audit triggers, often termed “red flags,” form a robust strategy. These red flags include unusually high itemized or business deductions and business or investment losses exceeding industry income range averages.
In any event, if you do get audited, surviving an audit, even where everything was reported correctly, largely depends on whether you have the proper substantiation, accounting, and evidence to support what was reported on your tax return. For instance, claiming 100% business use for a personally owned vehicle is sure to raise IRS scrutiny, which may necessitate a thorough verification via an audit.
Navigating Business Expenses and Losses
Business owners, especially those reporting losses on Schedule C exceeding $250,000, should exercise extreme caution. Rigorous documentation is imperative, particularly for claims related to passive real estate activities or activities that could be categorized as a “hobby” rather than a legitimate business. Additionally, meticulous attention to details such as home office allocations and reasonable owner’s salaries in S Corporations is crucial.
Addressing Offshore Activities and Cryptocurrency Holdings
Given the increased scrutiny and reporting obligations, offshore financial activities demand sophisticated strategies to evade tax audits. Failure to disclose offshore income and assets can result in significant civil penalties & criminal tax and offshore information reporting criminal prosecution. Similarly, the IRS considers cryptocurrency and Non-Fungible Tokens (NFTs) primary tax audit targets, emphasizing the importance of accurate reporting and adherence to tax reporting obligations in the rapidly evolving digital asset landscape.
Other IRS Audit Targets
Various other triggers include unreported early withdrawals from retirement accounts, non-filers, and individuals under-reporting income by more than 25% which can open up a 6-year statute of limitations leading to up to 6 tax returns going under audit simultaneously. The IRS is particularly vigilant regarding unreported income exceeding $10,000, regardless of whether acquired domestically or abroad. Seeking professional advice for early withdrawals from retirement accounts and ensuring compliance with reporting requirements are crucial steps in avoiding IRS scrutiny.
Civil and Criminal Penalties for Tax Evasion Charges
There are several potential civil and criminal penalties that may accompany tax evasion charges. For instance, the accused may face any of the following:
Civil Penalties
Tax evasion, a serious offense, can lead to substantial civil penalties. These penalties are primarily monetary and are assessed at 75% percentage of the underpaid taxes determined via audit. The scary part here is that if the government has sufficient evidence to assess a fraud penalty, they also have sufficient evidence to criminally prosecute. The severity of the civil/criminal tax penalties depends, in part, on the extent of evasion and whether there is sufficient evidence that the act was intentional or potentially due to negligence.
Criminal Prosecution
Tax evasion can result in criminal tax charges in more severe cases, leading to significant legal consequences. Conviction may lead to fines & restitution, which can escalate based on the amount of evaded taxes. Additionally, individuals found guilty of tax evasion may face imprisonment, with the duration determined by the severity of the offense and the existence of any prior convictions.
Other Consequences of Tax Evasion Charges
In addition to facing criminal penalties and civil penalties, those convicted of tax evasion may face several additional consequences. For example, any of the following may result from a tax evasion charge:
Damage to Reputation and Career
Tax evasion charges can potentially tarnish an individual’s reputation and jeopardize their career. Employers may view tax evasion convictions as a breach of trust, leading to termination or difficulty in securing future employment opportunities.
Professional Licensing Impact
Tax evasion charges can affect individuals holding professional licenses, such as lawyers, accountants, or financial advisors. Regulatory bodies may impose restrictions or revoke licenses, hindering the individual’s ability to practice in their respective fields.
Loss of Government Benefits
Convictions for tax evasion may result in the loss of various government benefits. This includes eligibility for federal assistance programs, social security benefits, and other financial support systems. The economic impact can be profound, affecting the individual and their dependents.
Visa and Residency Issues
For individuals who are not U.S. citizens (Green Card and Visa Holders), tax evasion charges can have severe immigration consequences. It may impact visa status or residency, potentially leading to deportation proceedings. Adverse immigration outcomes further underscore the multifaceted and far-reaching implications of tax evasion charges.
Social Stigma and Isolation
Beyond legal and financial repercussions, tax evasion charges can lead to social consequences. Individuals facing charges may experience social stigma and isolation within their communities. The negative perception surrounding tax evasion can impact personal relationships and community standing.
Call Our Attorneys Today for Help with Your Tax Problems
Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
In addition to our fully staffed main office in downtown Irvine California, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) California-based satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad, Sacramento. We also have unstaffed (conference room only) satellite offices in Las Vegas, Nevada; Salt Lake City, Utah; Phoenix, Arizona & Albuquerque, New Mexico; Austin, Texas; Washington, DC; Miami, Florida; and New York that solely handle Federal & California Tax issues.
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