IRS Audit Representation

One of the first questions that your Bakersfield dual-licensed Tax Attorney and CPA will ask you when you reach out about your impending audit is about the type of audit the IRSFTB, CDTFA & EDD is planning. Audits come in three different forms: correspondence audits, office audits, and field audits. Each of these forms of audit carry different timeline expectations and connotations of severity and thoroughness. You can tell which type of audit you are facing based on what the IRS says in the letter they send to notify you of the audit.

Correspondence Audit

Every audit is a tiresome, time-consuming affair. However, the least intrusive form of an audit available is ordinarily a correspondence audit. These are also sometimes referred to as mail audits. For a correspondence audit, you will receive a letter from the auditor asking for more information, such as records and documents. You will reply to the auditor’s requests through mail, phone, or electronically. A tax attorney can help you reconstruct your records and reply to these requests accurately to avoid any further penalties or repercussions. It is still very important to hire and attorney if you are not being treated fairly or you have cheated on your return and you wish to avoid criminal prosecution.

If there are no additional issues presented and the taxpayer cooperates thoroughly, the process of a correspondence audit can take between three to six months from start to finish. The IRS routinely ignores taxpayer correspondence and will eventually send you a 90-day letter. If you do not file a tax court petition with 90 days of receiving the 90-day letter the assessment will become legally due and collectible even if based on faulty law or facts.

Office Audit

When dealing with an office audit, your notice letter will request that you bring records and documents into an IRS, FTB, CDTFA & EDD office for the auditor to review in person. The letter will also indicate the date and location of your office audit. You should always hire a dual licensed Tax Lawyer & CPA to accompany you to any meeting with the IRS, FTB, CDTFA & EDD so that you are not doing anything to further jeopardize yourself. A dual licensed Tax Attorney & CPA will endeavor to protect constitutional rights, your net worth, and your very liberty. Office audits are intended in part to be intimidating to their targets. Seventy percent of communication is nonverbal, and the auditor will be watching your body language very carefully. Having an attorney make an appearance on your behalf will save you an incredible amount of stress.

Field Audit

A field audit is by far the most serious type of audit. When a field audit is employed, IRS, FTB, CDTFA & EDD agents will often attempt to visit your place of business or your home to look through your books and documents themselves. They will also be attempting to explore your history of reported income versus their assessment of your standard of living and business success. These audits are usually reserved for cases where the taxpayer’s filings require assessment of complex revenue streams, serious civil assessments are suspected, or potentially criminal penalties for fraud are being considered. If the IRS does not receive the compliance that it is seeking from a correspondence or office audit, it may subsequently institute a field audit to further assess the issues with which it is concerned. It is vital that you contact an experienced tax attorney as soon as you find out a field audit is to occur.

Frequently, a field audit is accompanied by substantial risk for the audited taxpayer. It is even more dangerous if the audit is also an eggshell or reverse eggshell audit. Our dual licensed Tax Attorneys & CPAs are most effective when we are involved as soon as possible. Even if an audit ends with no major issues, the likelihood of major risk is too great to chance not hiring legal counsel.

Bakersfield Eggshell Audits

Eggshell audits present unique risks than more typical audit types. In an eggshell audit, the taxpayer knows information that could be construed as a material misrepresentation on their tax return. The auditor does not know this information. This situation is fragile for the taxpayer because one wrong step could mean admitting to a tax crime. A successful eggshell audit defense entails providing the IRS representative with responsive answers and documentation without providing excessive information that could incriminate the taxpayer, as well as potentially repairing any underpayments or misstatements on tax returns.

International companies or taxpayers with offshore assets are at particular risk for these audits. In recent years, the IRS has focused more on taxpayers likely to have offshore accounts or assets that are not reported on tax returns. In such cases, the auditor may ask general questions regarding the tax returns but not specific questions that would uncover issues on the tax return.

These audits are especially risky because the taxpayer must respond appropriately to the auditor and avoid an intentional omission or misrepresentation, which is a fine line to walk. Taxpayers will want to protect themselves from revealing information not specifically asked for. However, being too protective of this information could create elevated consequences. Since many eggshell audits are only civil investigations, the taxpayer might feel uncomfortable asserting their right to remain silent without tipping their hand and admitting they know something the IRS does not. If the IRS asks a direct question and the answer is incriminating, you are given an awkward choice between pleading the fifth, lying, withholding information, or telling the truth – all of which could potentially lead to criminal liability. Hiring our dual-licensed Tax Attorneys & CPAs will allow us to advise on appropriate responses to IRS requests.

Generally, there are three potential outcomes of an eggshell audit. The first is the most beneficial scenario in which the auditor does not discover any issues and ends the audit. Risk-tolerant taxpayers may want to take their chances and proceed with an eggshell audit without counsel while hoping for this outcome. That approach is not advised. Responding to an audit while avoiding potential landmine issues is a delicate matter that would heavily benefit from experienced legal counsel.

The second outcome is where the auditor discovered a misrepresentation or omission, but our attorneys have convinced the IRS that the matter can be resolved without a criminal tax investigation. This situation allows a dual licensed Tax Attorney & CPA to shine. The IRS does not have the resources to refer every civil audit for criminal tax investigation. If the matter is adequately resolved with recommendations from a civil audit, further criminal liability is avoided. Our attorneys can work with IRS representatives to remedy deficiencies and convince them that criminal consequences are unnecessary.

The third outcome of an eggshell audit is where the auditor refers the case to a criminal investigation. This is the most severe outcome and bears the most significant consequences. It is highly advised that our dual-licensed Tax Attorneys & CPAs are engaged in this instance to provide a criminal tax defense strategy.

Bakersfield Reverse Eggshell Audits

Reverse eggshell audits are usually the most dangerous types of IRS audits. In this instance, the IRS auditor knows or has reason to believe information that could indicate criminal liability, but the taxpayer is not aware that this information is known. This situation leads to a civil audit that contains covert criminal suspicions. The audits are extremely dangerous as taxpayers are ordinarily unaware that they are under a criminal tax investigation disguised as a civil tax audit. Unfortunately, that does not mean these audits are rare. It can be very hard to prove that a civil audit has criminal tax undertones, so a criminal tax defense attorney is absolutely critical to carefully navigate these circumstances.

Intentional misrepresentations or omissions can be the kiss of death in a reverse eggshell audit. Auditors will ask direct questions to which they already know the answer. The auditor will infer intentional deception if a taxpayer explicitly lies or does not disclose an important fact.

Using a lawyer to respond to the IRS can help ensure adequate responses are given. In this case, predicting what information the auditor knows is beneficial. Foreign accounts or assets may not be explicitly asked about, but if the auditor knows about these accounts or assets, failing to disclose them could cause problems. An attorney can inform the taxpayer of any international agreements that allow foreign governments to report such information to the U.S. or other sources of information that imply these foreign accounts or assets. Understanding what the auditor knows can help taxpayers respond to inquiries truthfully and fully.

Defending Against High-Risk Audits

A key strategy to address eggshell and reverse eggshell audits is to carefully and precisely respond to requests from the IRS. There is no criminal investigation at the audit stage yet, but one could be likely. This means that responses to the audit must adequately answer the question while not incriminating the taxpayer. Taxpayers should strike a balance between being truthful and providing too much information.

For example, an auditor could ask, “What internal accounting controls does the company have in place?” An adequate response could be, “We have an internal auditing department that adheres to federal and state auditing requirements.” An excessive response would be to go on describing the particulars of the internal auditing process. If an IRS representative has additional questions, they will ask them. Developing responsive responses to responsive questions while not providing excess information is a skill that our dual-licensed Tax Attorneys & CPAs can assist with developing.

A reverse eggshell audit, which is also a field audit, is a huge challenge to defend. Business field audits often involve interviews with employees covering a myriad of topics. Preparing these employees to respond appropriately to IRS questions is crucial to avoid excessive disclosure, and an attorney can assist with this process.

Bakersfield IRS, FTB, CDTFA (BOE) and EDD Audit Appeals Representation

It rarely is the case that a taxpayer both agrees with a Federal or California auditor’s conclusions and voluntarily consents to paying the resulting additional tax, penalties and interest. Taxpayers often disagree with an auditor’s findings, and can often find themselves financially unable to pay the additional tax, penalties and interest or other fines that have been assessed or proposed. Taxpayers that outright disagree with an auditor’s findings and wish to challenge or protest the outcome of the audit need experienced and practical representation to obtain optimal results.

The Federal and California audit appeals process is complicated, and rarely successful for the unrepresented taxpayer. It is also governed by unforgiving deadlines and procedural requirements. A tax audit attorney can help you avoid these pitfalls while giving you a better chance of successfully protesting the audit’s outcome, especially where the law and fact are squarely on your side. A Bakersfield tax lawyer can provide FTB, CDTFA (BOE), EDD or IRS appeals representation to dispute the auditor’s findings – potentially resulting in a significantly lower tax bill. An appeals attorney may be able to help the taxpayer avoid the early impositions of a State or Federal levy, tax lien, or tax garnishment where an audit goes uncontested until the end of the appeals or litigation process or by negotiating an installment agreement or offer in compromise (OIC) at the conclusion of the appeals / litigation process.

California Franchise Tax Board (FTB) Audit Representation

In addition to federal income tax filing requirements, every citizen of California that is required to file a federal return must ordinarily file state entity and personal income tax return as well. The California Franchise Tax Board (FTB) also conducts independent audits related to your state income tax filings. Sometimes, you may owe money to the state even though you did not owe money to the IRS due to the differences between state and federal tax laws. Differences between federal and California tax laws can often spark FTB audits.

The FTB also conducts independent audits if they believe potential fraud occurred on your returns. An audit by the FTB should be treated just as seriously as one by the IRS as California prosecutes tax crimes regularly. A tax attorney can help you prepare and reconstruct the necessary documents and can prevent your case from going criminal and appeal / fight any tax, penalties or interest that you believe to be unfair or incorrect and can help negotiate a reasonable payment plan for any money you ultimately do owe.

California Employment Development Department (EDD) Audit Representation

The California Employment Development Department (EDD) conducts audits related to payroll taxes that businesses are required to pay. Employers are required to take a certain amount in payroll taxes out of each employee’s paycheck and remit them to the proper state and federal agencies. If you fail to collect such taxes or fail to properly remit them, you could face back taxes as well as potential fines and penalties.

The most common issue in EDD audits relates to the classification of workers as employees vs. independent contractors especially considering California’s recent new legislation in AB5. Employers are required to collect and remit payroll taxes from employees but not from independent contractors who work for them. There are many complex rules governing who can and cannot be an independent contractor in California. A tax attorney can help you properly classify your employees and to prove to the EDD that any misclassifications you made were unintentional.

California Department of Tax and Fee Administration (CDTFA) Audit Representation

The California Department of Tax and Fee Administration (CDTFA) conducts audits related to the improper collection or remittance of California sales taxes. The rules regarding how much a business must charge in sales tax vary depending on the locality and the type of product you are selling. CDTFA often conducts random audits of businesses where sales tax issues are common, such as the restaurant and bar industry. Its not a matter of if you will be audited, it’s a matter of when. The CDTFA is famous for placing a hold on any escrow proceeds and holding them hostage while they very slowly complete a sales tax audit on any business sold in California.

These types of audits are very invasive, as the auditor will want to look at your entire history of sales to make sure you are not failing to collect sales taxes when you should be and can be your worst nightmare if you’re in the habit of pocketing cash sales. They will also look at scenarios where you are collecting sales taxes but not properly remitting them to the state. Serious penalties and even criminal tax charges can apply if the CDTFA determines you have been deliberately underpaying sales taxes. The CDTFA will also compare the sales your report for sales tax purposes to the sales your report for income tax purposes and will resort to a markup audit if they do not believe your records reflect cash sales. A tax lawyer will be able to help you prepare a defense and file any necessary documents, such as a petition challenging an incorrect finding, in a timely manner so that you do not lose your right to appeal.