An Internal Revenue Service (IRS) audit is an examination of an individual’s or organization’s accounts and financial information. The audit can easily spread to other entities and related individuals where an examined flow through entity dumps taxable income found to be understated on to multiple owner’s individual tax returns and where these individuals own multiple entities that can easily be suspected of understating taxable income. The IRS endeavors to ensure that financial information is reported correctly and that tax obligations are fulfilled.
Business owners can be audited for several reasons. The process can be very intimidating and stressful. However, if your business & personal returns are audited you can contact our dual licensed Tax Audit Lawyers & CPAs for help. Our experienced & winning legal team will assess your case and prepare the best defense possible. Furthermore, we will vigorously appeal the IRS’s audit assessment when the IRS gets either the facts or the law wrong, as we find they frequently do, and thus your audit does not initially go your way.
Seek guidance from our Dual Licensed Tax Attorneys and CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or schedule a reduced rate initial consultation here.
Types of IRS Audits that Small Businesses Can Face in California
Millions of business and individual tax returns are filed each year. Accordingly, the IRS has developed sophisticated, computerized systems designed to catch taxpayers who submit incorrect or fraudulent returns. Information from tax returns is compared with the information supplied by third parties like banks, businesses, and other individuals. If a businesses or individual’s tax return is flagged, the IRS will review the returns at issue and determine whether the matter should be civilly or criminally investigated further.
For business owners and related entities, three general types of audits can be performed. Fortunately, our Dual Licensed Tax Attorneys and CPAs can explain the appropriate next steps if you are facing any of the following:
Correspondence Audits
Correspondence audits are performed, at least initially, through written correspondence. These audits typically question specific items from your business or individual tax returns instead of questioning your return in its entirety. For example, if you claim to have donated a large amount of money to charity, the IRS may ask for proof of these donations. In that case, your audit may be resolved by simply mailing the IRS agent copies of receipts that will verify the information in question.
Still, you should be notified of any type of audit through the mail, not just correspondence audits.
Field Audit
Field audits are among the IRS’s most in-depth, stressful, frightening, invasive and high-risk types of in person examinations. If your business or individual return is subject to a field audit, an IRS agent will request an in-person meeting to discuss discrepancies found on your tax return to take place either in your home or business location. Support from experienced tax audit professionals is highly valuable and downright comforting when undergoing a field audit.
Office Audit
You will also have to sit down with an IRS agent in person if you are subject to an IRS office audit. However, these interviews will be performed at local IRS offices which can be downright intimidating. During your office audit, you will be asked to answer questions pertaining to any item reported on your businesses or individual income tax returns. In order for the issue to be resolved, you will have to prove that the information you filed was correct or that you made a mistake in good faith.
Are Businesses Targeted at Random for IRS Audits in California?
Business tax returns are initially selected for audits using a statistical formula that is a closely guarded secret. Your business’s returns are statistically compared with similar returns to determine if you should be audited. The IRS asserts that auditing practices for businesses are initiated at random. However, many business owners often suspect they are being deliberately targeted for audits.
Potential Triggers for Business or Individual Eggshell Reverse Eggshell Audits or Criminal Tax Investigations
When the IRS examines a small businesses or individuals tax returns, it will look for specific signifiers or “badges” of fraud. If any of the following issues are noticed on your returns, then your business may be subject to a civil audit, eggshell audit, or criminal tax investigation:
Misrepresentation of Taxable Domestic or Offshore Income & Omitting Required Foreign Information Reporting
If you did not accurately report your businesses or individual taxable income, then you may be audited or criminally investigated. There are several ways that income may be misrepresented. For example, perpetrators may accidentally or intentionally understate income, overstate deductions, claim credits they are not entitled too or omit certain transactions and leave the related domestic or offshore taxable funds, entities or investments unreported.
Improperly Claiming Deductions
Small business owners in California regularly claim tax deductions for expenses like travel costs, vehicle use, and internet bills. These deductions are useful for lessening your tax liability. However, if you invent or fraudulently inflate deductions, a red flag may be raised that can trigger an IRS audit.
Excessive Expenses
Spending an extraordinary amount of money, or merely fraudulently representing your business expenses, and thus drastically increasing your business expenses from one year to the next may also trigger an audit or criminal tax investigation.
High Number of Cash Transactions
Several types of businesses ordinarily engage in a large number of cash transactions. For instance, restaurants, laundromats, and barbershops may accept a large amount of their income in cash.
Businesses that engage in mostly cash transactions may find themselves subject to IRS audits or criminal tax investigations because the government suspects that income has been fraudulently underreported. If your business engages in a great deal of cash transactions, you should be prepared to substantiate those transactions and help verify your income. Maintaining accurate point of sale registers, making daily cash deposits and keeping an accurate cash receipt journal can help. Avoid paying expenses in cash whenever possible. Whatever you do, do not pay employees and independent contractors in cash and then fail to issue W2’s and 1099’s as this can be criminally prosecuted as aiding and abetting the income tax evasion of another.
Claiming Losses Every Year
Losses are not uncommon for business owners. Still, if you claim losses for your business year after year, the IRS may question if your returns are legitimate or throw the hobby loss rules at you. You must be able to document any losses that your business sustained.
It is also worth mentioning that any carryforward Net Operating Loss (NOL) claimed on a tax return under audit can and will be routinely challenged which is an effective way of opening an audit on an otherwise closed tax years and you will thus be legally compelled to prove your NOL’s or lose them. Moreover, a great way to find yourself criminally investigated is to live a lifestyle that is beyond what your reported historical taxable income shows you can afford.
Misclassified Employees & Employment Tax Fraud
Finally, the misclassification of employees as independent contractors will commonly trigger a business audit. It is well known to the IRS and state taxing authorities that businesses often attempt to lower their insurance costs & reduce payroll expenses by misclassifying what are in essence employees as independent contractors. If you wish to nip this exposure in the bud, we can enter you into the IRS’s Voluntary Classification Settlement Program.
Engaging in employment tax fraud by routinely failing to remit the employment taxes and withholding of your employees to the federal and state governments, paying employees in cash and failing to issue W2’s or 1099s, or fraudulently underreporting taxable wages can easily get you audited or criminally investigated.
Small Business Owners in California Can Call Our Law Firm for Help with Their Tax Issues
Contact our experienced Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 today.
How to avoid and Audit or Criminal Tax Investigation Altogether.
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 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 being 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. See our Testimonials to see what our clients have to say about us!
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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
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
