California Combo Tax Attorney & CPA for IRS, FTB, EDD and CDTFA Tax Audits / Investigations of Childcare Provider Companies
On November 24, 2020, the IRS posted the following press release under its Criminal Investigation section:
Owner and employees of Chicago-area childcare centers charged with defrauding Illinois low-income daycare program out of $6.1 million
The owner of several childcare centers and several of her employees fraudulently schemed to pocket more than $6.1 million from a State program. The owners and directors had submitted materially false information, including fraudulent paystubs and income verification letters.
This is just one of the many examples of how the Internal Revenue Service Criminal Investigation Division conducts criminal investigations regarding alleged violations by childcare providers of the Internal Revenue Code, the Bank Secrecy Act, and various money laundering statutes. The findings of these investigations are then referred to the Department of Justice for recommended prosecution.
At the Tax Law Office of David W. Klasing, we are Tax Attorneys and CPAs providing audit representation, audit appeals representation, criminal tax defense, tax preparation services, and business bookkeeping and accounting services to childcare providers throughout California and the U.S. We possess more than 20 years of experience working with daycare centers, preschool facilities, babysitters, nannies, and au pairs, enabling our award-winning tax lawyers to deliver effective service targeted to meet the needs of the industry. Whether you need help preparing to face a tax audit, appealing the results of a state or federal tax audit, fighting criminal tax charges resulting from an audit, or simply streamlining your corporate tax strategy, rely on the Tax Law Office of David W. Klasing to deliver dependable, comprehensive, 24-hour legal and accounting support.
The IRS gives special attention to childcare providers, evident by the fact that it has developed an Audit Techniques Guide that provides information to enable its examiners to effectively audit issues pertaining to childcare providers. The Guide provides background information, identifies frequent and/or unique issues, provides examination techniques, and supplies applicable law for the benefit of IRS examiners.
Why Was My Childcare Business Chosen for a Tax Audit?
The IRS examines tax returns to determine whether taxable income has been accurately reported on the tax return. The IRS has the authority to examine the books and records of a taxpayer and to interview the taxpayer directly. A number of factors may trigger an IRS examination including, but not limited to:
• Excessive deductions in relation to income
• IRS receipt of conflicting information from a third party (e.g., a 1099 or K-1 which does not match the amounts reported on a taxpayer’s return)
• Whistleblower complaints
• Tips from disgruntled employees or ex-spouses
• Taxpayer participation in a particular transaction or type of transaction that the IRS has flagged for review (e.g., a tax shelter)
• Information obtained by the IRS from a John Doe summons
• The expansion of a previously limited audit
Whether you are a self-employed babysitter, the owner of a daycare center, an employee at a preschool, a live-in nanny, or you work with children in some other capacity, there are numerous factors that could cause you to be selected for a state or federal tax audit. These factors range from how much income you report earning, to how your workers (where applicable) are classified, to the types of deductions you claimed on your tax returns, to the number of returns you have timely filed.
If you have unfiled tax returns, owe unpaid tax liabilities, report high or low levels of income, classify your workers as independent contractors, claim excessive deductions or tax credits, conceal business income, or overstate your business expenses, you will have a higher likelihood of being chosen for an audit – and potentially, being criminally investigated for tax fraud. If you believe that you are likely to be targeted for an high risk audit, it is wise to be proactive and get ahead of the situation by consulting a tax audit defense lawyer as soon as possible.
If you and your childcare/daycare center/company are doing particularly well, you should know that the IRS has recently articulated a renewed emphasis on examining the compliance of high-wealth taxpayers. In addition, the IRS applies internally developed formulas, generally referred to as the Discriminant Function System (DIF), to “score” returns for purposes of determining whether they should be audited.
While some audits are conducted solely through correspondence with the IRS, audits concerning childcare providers that the IRS anticipates will involve relatively complex issues are usually handled in the field by revenue agents. Revenue agents do not collect tax; rather, their primary job is to determine whether a childcare/daycare provider has accurately reported his or her taxable income, ferreting out issues of potential fraud in the process. Most often, you will first learn of an IRS exam through a notice received in the mail. The notice will often identify for you the tax years being audited and the issues underlying the audit. However, please be aware that the scope of the audit is not limited to the issues identified in the initial notice and may expand as the revenue agent obtains more information. Typically, that notice will also include an Information Document Request (IDR) requesting you to produce specified documents by a certain date.
What the IRS Looks for?
From our experience, we know what items examiners/revenue agents consider important when auditing a childcare provider. You should be prepared to discuss the business history of your childcare activity, including the starting date, a brief description of a typical day’s activities, rooms used on a regular basis, and internal controls for income and expense information.
If you are taking any deductions for the use of your home in your childcare activity, you should be prepared to provide a floor plan, blueprint, or other relevant documents that reflect the square footage of the residence. The examiner may also ask for the escrow and/or closing statement to verify the cost of the property. He may also ask you to provide mortgage company statements or other relevant documents that show the property taxes and mortgage interest paid during the taxable years. If you are renting your home, you can expect to be asked to provide substantiation of the rent paid during the taxable years and a copy of the rental agreement.
You would be well advised to properly document all journals, ledgers, records, and/or notebooks used to keep a record of your clients and the amount they paid (weekly, monthly, etc.) during the taxable years. If you are a participant in a food program, keep copies of the reimbursement statements, name and address of the food sponsor, attendance and meal count record, and time record for reimbursements received during the taxable years. The examiner may also ask you to provide any contracts for services, rate schedules, policy statements, sign-in/out sheets or any other attendance records, emergency contact sheets and/or medical treatment forms for children in the program for the year of examination, permission slips for trips, and year-end statements to parents, if any.
Preparing for the Audit
Preparation for an audit is extremely essential and must not be taken lightly. Having represented hundreds of clients who were faced with an IRS audit, we pride ourselves on our ability to always be one step ahead of the IRS agent conducting the audit. Right from our first interview with you, our focus shall not be only on the issues known to be the current focus of the examination, but we shall glean insight into other issues that you may not have considered and of which the IRS might not yet be aware but is likely to ask about. That is precisely where our decades of experience comes in! For instance, in recent years, the IRS has maintained a focus on tax evasion accomplished through offshore bank accounts and entities, so a line of questioning regarding foreign accounts and assets would be essential, regardless of how unlikely your ownership of such assets appears to be.
Business Use of Your Home
The purpose of this section is to provide information on figuring and claiming the deduction for business use of your home. The term “home” includes a house, apartment, condominium, mobile home, boat, or similar property which provides basic living accommodations. It also includes structures on the property, such as an unattached garage, studio, barn, or greenhouse. However, it does not include any part of your property used exclusively as a hotel, motel, inn, or similar establishment.
If you use space in your home on a regular basis for providing daycare, you may be able to claim a deduction for that part of your home even if you use the same space for non-business purposes. To qualify for this exception to the exclusive use rule, you must meet both of the following requirements.
- You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
- You must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. You do not meet this requirement if your application was rejected, or your license or other authorization was revoked.
To find the percentage of time you actually use your home for business, compare the total time used for business to the total time that part of your home can be used for all purposes. You can compare the hours of business use in a week with the number of hours in a week (168). Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2021). If you started or stopped using your home for daycare in 2021, you must prorate the number of hours based on the number of days the home was available for daycare. Let us explain by use of some examples.
Suppose you use your basement to operate a daycare business for children. The basement constitutes 50% of the square footage of the entire house. You figure that the percentage of time the basement was used for daycare comes to about 35%. You can deduct 35% of any direct expenses for the basement. However, because your indirect expenses are for the entire house, you can deduct only 17.5% of the indirect expenses. For example, suppose you paid $500 to have your basement painted. The painting is a direct expense. However, because you did not use the basement exclusively for daycare, you must multiply $500 by the percentage of time the basement was used for daycare, i.e., 35%.
Tax Audit Attorneys & CPAs for Daycares, Preschools, Nannies, and Babysitters
IRS + California Tax Audits (EDD, CDTFA, FTB)
Our office routinely represents childcare companies and individual taxpayers in all types of tax audits, including IRS tax audits, FTB tax audits (Franchise Tax Board audits), CDTFA sales tax audits (California Department of Tax and Fee Administration audits), and EDD employment tax audits (Employment Development Department audits). Types of IRS audits with which our attorneys can assist include correspondence audits, office audits, and field audits, extending to eggshell and reverse eggshell audits, audits of cash-intensive businesses (such as babysitting businesses), and worker classification audits.
Civil + Criminal Tax Audits
IRS’s Criminal Investigation wing classifies its investigations into certain program and emphasis areas. One of such areas is Abusive Return Preparer Enforcement. IRS, FTB, EDD, and CDTFA are always on the lookout for return preparer fraud, which generally involves the orchestrated preparation and filing of false income tax returns (in either paper or electronic form) by unscrupulous preparers who may claim, for example: inflated personal or business expenses, false deductions, unallowable credits, or excessive exemptions. Criminal Investigations can be initiated against you from information obtained from within the IRS when a revenue agent (auditor) or revenue officer (collection) detects possible fraud. Information is also routinely received from the public as well as from ongoing investigations underway by other law enforcement agencies or by United States Attorneys’ offices across the country.
In any tax matter, one of our primary objectives is to limit your criminal tax exposure, mitigating or avoiding the risk of prosecution and criminal penalties such as jail time and restitution. For instance, it may be possible to prevent criminal prosecution by making a California voluntary disclosure, depending on the situation. However, we are accomplished tax defense attorneys, and know what signs to look for when a civil audit is at risk of turning criminal. Our founder and lead tax attorney, David W. Klasing, was a public auditor for over a decade, and has almost three decades of audit representation experience providing our legal team with inside insights into the IRS, FTB, EDD and CDTFA civil and criminal investigate process.
Taxpayers should be advised that only communications with attorneys or attorney-CPAs – not communications with accountants or tax preparers – are, with some limits, protected by the attorney-client privilege (ACP). It is in your best interests to obtain the services of a tax evasion defense lawyer if, however remote, criminal tax charges are a potential risk.
An eggshell audit refers to the possibility that the subject of a civil audit could, under pressure, crack open and provide information leading to a referral for criminal investigation. To get a conviction, the government needs to prove three elements: (i) willfulness; (ii) a deficiency in tax; and (iii) an affirmative act constituting the evasion or attempted evasion of tax. We know that the government understands that in most cases, direct evidence of a taxpayer’s willfulness is hard to come by, if it exists at all. We also know that consequently, the likely focus of the government’s efforts to establish willfulness will be circumstantial evidence tending to show the intentionality of your conduct. Thus, bringing our extensive experience into play, in evaluating whether you may be facing an eggshell audit, this circumstantial evidence will be our focus as well.
Audit Appeals Representation for San Francisco Childcare Companies
When a civil tax audit concludes, the taxpayer will receive a written notice outlining the IRS, FTB, CDTFA of EDDs determination. For example, the IRS may find that you owe additional tax, interest, and/or civil penalties. However, if you feel that the auditor’s findings are in error, you may challenge the outcome of your audit by filing an IRS appeal. This process involves preparing an opening brief or protest letter that outlines your dispute and provides the factual basis for your disagreement(s).
In some cases, IRS mediation may resolve the dispute before filing an appeal becomes necessary. Conversely, if the appeal fails, the taxpayer may need to litigate the issue. A Tax Litigation Attorney should handle this process due to the complex tax statutes, court rules, and legal deadlines that are involved and an attorneys superior training in the art of being persuasive.
California Tax Lawyer + Accountant for Childcare Providers
Whether you have questions about how to file taxes as a childcare provider, how to report a daycare to the state of California’s various tax agencies, how to prepare your business for an audit, or how to challenge an audit’s outcome, the Tax Law Office of David W. Klasing can provide clear answers while taking steps to ensure that your constitutional rights are protected. To schedule a reduced-rate consultation concerning a childcare tax audit or related tax matter, contact us online, or call the Tax Law Office of David W. Klasing.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here
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More Commonly Asked Tax Audit Questions
- How should Tax Audits be Handled by Criminal Tax Counsel?
- How to survive audit when I cheated on return being audited
- What is an eggshell audit?
- What is a reverse egg shell audit?
- Why is a reverse egg shell audit dangerous for a taxpayer?
- Warning signs of a criminal referral from an IRS audit
- Effective tax defense counsels goals in an egg shell audit?
- How are the 4 goals and outcomes 1 and 2 best obtained?
- What are the possible outcomes of an egg shell audit?
- Is it my right to know why I was selected for examination?
- What can I do to prepare for an audit?
- What is an IRS civil examination?
- How IRS decides which tax returns are audited
- What are my appeal options if I disagree with IRS?
- What are my basic taxpayer rights if the IRS audits me?
- Options if I am unable to pay at the conclusion of audit
- What a 30 or 90-Day Letter from the IRS means
- What is involved with appealing disagreements?
- Rights to disagree with IRStaxauditor’sss findings
- Can I stop the IRS from repeatedly auditing me?
- Can I have the examination transferred to another area?
- Can I record my IRS interview and is it a good idea?
- How many years of returns are at risk during an audit?
- Common reasons for the IRS to conduct a tax audit
- How to avoid negative consequences from an IRS interview
- Have to agree to interview by taxing authority directly?
- Are all audits the same?
- What should I do if the IRS is investigating me?
- What ifIdon’ttt respond to a taxing authority audit notice
- Your rights during an IRS tax audit
- Risks of attending an IRS audit without a tax lawyer
- Most common audit technique used by taxing authorities
- Don’t go into an IRS audit without representation
- Why hire an attorney to represent me in an audit?
- Why hire David W. Klasing to represent me in an audit
California Sales Tax Questions and Answers
- Common issues encountered during sales tax audit
- What is a sales tax audit?
- Disagreeing with business audit conclusions
- Timeline to file Petition for Redetermination?
- What should Petition for Redetermination contain?
- Is the appeals conference formal or informal?
- Appeals Division’s Decision and Recommendation
- Are a mark-up percentage and a profit margin the same?
- Problems with the mark up audit
- Can State Board of Equalization ignore my business records
- What is a sales tax deficiency determination?
- Business being audited for sales tax. Should I be worried?
- Audit determined fraud to avoid sales and use tax
- Definition of “sale” for California Sales Tax
- What do California sellers need to know about sales tax?
- How do I apply for a sellers permit?
- What are my obligations as a permit holder?
- What is sales tax?
- What is tangible personal property?
- What is a sale?
- What are total gross receipts?
- What is use tax?
- Who is responsible for paying the use tax?
- Who is a retailer engaged in business in California?
- Who is a qualified purchaser?
- Do I need a Certificate of Registration Use tax?
- Do I need a Use Tax Direct Payment Permit?
- What types of sales are exempt from sales tax?
- How are Internet Transactions Taxed?
- How is California sales or use tax determined?
- What is the statewide sales and use tax rate?
- Are there other local and district sales and use taxes?
- Total sales and use tax rate calculation
- How to protect against successor liability in California
- Recourse when issued California sales tax liability notice
- CA Sales Tax liability extend to purchasers/successors?
- Waiting Until Audited to Take Action on Tax Matters
- Sales tax records needed in California
- What are California’s sales and use taxes?
- Why does the State of California audit businesses to ensure compliance with sales and use taxes? How does the State determine whether to audit my business?
- The BOE reviews the purchase invoices of my business
Questions and Answers for Criminal Tax Representation
- When tax defense counsel parallels tax crime investigation
- Guilty of tax obstruction by backdating documents?
- To be found guilty of tax obstruction must a person actually be successful in impeding the IRS’s functions?
- Help! The Document I Gave the IRS Had False Information
- Tax crime aiding or assisting false return IRC §7206(2)
- What is the crime known as tax obstruction § 7212?
- What is the difference between tax perjury and tax evasion?
- What is the tax crime commonly known as tax perjury?
- What is a Klein Conspiracy?
- Increased possibility of civil action in IRS investigation
- Am I Guilty of Tax Evasion if the Law is Vague?
- What happens if the IRS thinks I committed tax crimes?
- What are ways to defend against a tax evasion charge?
- Difference between criminal tax evasion and civil tax fraud
- What accounting method does the IRS use for tax fraud
- Can I Change Accounting Method to the Accrual Method
- What is the willfulness requirement for tax evasion?
- I didn’t know I committed tax fraud. Can I get off?
- Concealed assets from IRS. Can I avoid tax evasion charges
- How government proves I willfully engaged in tax evasion
- What is the venue or court where a tax crime case is heard?
- Must the IRS prove tax crimes beyond a reasonable doubt?
- Is it a crime to make false statements to the IRS?
- Will the IRS overlook my tax evasion if it’s minor?
- Failed to tell IRS about my nominee account
- Audit risk with cash based business transactions
- How to defend a client charged with tax evasion
- Is it tax evasion if I didn’t file income tax return?
- Government says I attempted to evade my taxes. Now what?
- I forgot to pay my taxes or estimated tax. Is this a crime?
- Government proof I “willfully” failed to pay taxes
- 5 Ways to Respond to Tax Evasion Charges
- Being audited after using a tax professional
- Rules for what an IRS agent can do while investigating me
- How tax preparers, attorneys and accountants are punished
- How the IRS selects tax crime lead for investigation
- How does the IRS prosecute suspected tax crimes?
- Does IRS reward informant leads for suspected tax crimes?
- How the government proves deficiency in a tax evasion case
- Do prior tax crimes factor into new IRS tax convictions?
- Requesting conference before investigative report is done
- Requesting conference after IRS Special Agent Report
- What are my rights during an IRS criminal investigation?
- Avoid prosecution for tax crime with voluntary disclosure?
- Defense tactics that make it hard for to prove willfulness
- How a tax attorney can stop your criminal tax case?
- What can you generally tell me about tax crimes?
- Continuing filing requirement with investigation pending
- Federal criminal code crimes that apply to tax issues
- Penalty for making, subscribing, and filing a false return
- CID special agent’s report for criminal prosecution
- What is the discovery process in a criminal tax case?
- What the IRS includes in indictment for tax case
- What is the hardest element of a tax crime to prove?
- IRS methods of gathering evidence to prove tax crime
- What does a grand jury do in IRS tax crime prosecution?
- Failure to keep records or supply information
- Failure to make a return, supply information, or pay tax
- What is attempting to evade payment of taxes?
- What is income tax evasion and how is it punished?
- What is attempted income tax evasion?
- What is the crime of failure to pay tax? What is punishment
- Crime of making or subscribing false return or document
- Criminal Investigation Division investigation tactics
- Tax crimes related to employment tax forms and trust funds
- Tactics to defend or mitigate IRS criminal tax charges
- How the IRS generates leads about suspected tax crimes
- What is the crime ”evasion of assessment” of tax?
- Specific examples of “attempting” to evade tax assessment
- What is the so-called Spies evasion doctrine?
- Does overstating deductions constitute tax evasion?
- Is it tax evasion if my W-4 contains false statements?
- IRC §7201 attempt to evade vs. common-law crime of attempt
- What are the penalties for Spies tax evasion?
- How government proves a taxpayer attempted tax fraud
- What is a tax that was “due and owing.”
- What is evasion of assessment for tax liability?
- Is evasion of assessment different from evasion of payment
- Does the IRS have a dollar threshold for tax fraud?
- What is the IRS burden of proof for tax fraud convictions?
- Are Tax Laws Constitutional?
- What is the source of law that defines tax evasion?
- Does section 7201 create two distinct criminal offenses?
- Does tax evasion definition include partnership LLC
- What if I helped someone else evade taxes?
- Is it illegal to overstate deductions on my tax return?
- Is it illegal to conceal bank accounts from the IRS?
- Do later losses justify prior deductions?
- Common reasons the IRS and DOJ start investigations
- What is the Mens Rea component of tax crimes?
- What is a proffer agreement and what are the risks?
- Why to have an attorney to review a proffer agreement
- Why enter into a proffer agreement?
- Limited use immunity from proffer agreements
- Difference between civil and criminal fraud allegation
Questions about delinquent payroll taxes and trust fund recovery penalty
- What happens if an employer continues to incur new payroll tax liabilities?
- California Employment Taxes Basics
- How Does the IRS Develop an Employment Tax Fraud Case from the First Indication of Fraud to a Criminal Indictment?
- Can more than one person be considered responsible by IRS
- How unpaid employment tax payments are allocated
- When a corporate officer is considered a responsible party
- Examples of trust fund recovery penalty determinations
- Failing to pay employment taxes after notice is given
- How to determine responsible person for trust fund recovery
- Assessing trust fund recovery penalty and option to appeal
- What is the trust fund recovery penalty?
- What are the penalties for failure to pay employment taxes
- When am I considered liable for company’s employment taxes