Carlsbad Employment, Payroll, and Business Tax Services

Employers, business owners, stakeholders, board members, and others have special tax obligations under state and federal tax laws. For example, employers in Carlsbad are generally required to withhold and remit payroll taxes, namely Social Security and Medicare taxes, or be subject to, at best, trust fund recovery penalties and potentially, at worst, criminal tax prosecution where employment taxes are found by the IRS or FTB / EDD to have been willfully evaded.

In addition to the myriad (and often confusing) tax requirements to which business owners and business entities are subject, entrepreneurs must also consider the tax ramifications of each and every business decision throughout the life of the entity, beginning with strategic entity selection before the company is even launched. At the Tax Law Office of David W. Klasing, we possess the cutting-edge, up-to-date tax knowledge you need to make the most of every opportunity, including updates to the Tax Code under the Tax Cuts and Jobs Act (TCJA) enacted December 2017. For assistance with all your business and employment tax issues, speak with our:

• Business Succession Planning Lawyers
• Business Tax Lawyers
• Business Transaction Lawyers
• Employment Tax Lawyers

Carlsbad IRS, FTB, CDTFA (BOE) and EDD Tax Audit Representation

“Tax audit” may be one of the most dreaded phrases in the English language. However, with a skilled and aggressive California and IRS tax audit attorney negotiating and advocating on your behalf, there is no need to approach the process from a position of fear or anxiety. Not only have we helped thousands of taxpayers emerge from examination with considerably reduced penalties, interest, or other tax liabilities – in addition, our IRS audit and appeals lawyers have also represented countless taxpayers in all stages of the appellate or “protest” process, which is the process of challenging an audit outcome with which you disagree. We stand ready willing and able to litigate any tax issue where the law and facts are squarely on your side, but we have a track record of advantageously settling all our extensive Tax Litigation to date, prior to our clients having to incur the astronomical costs of a trial.

The IRS routinely conducts audits on individual, business, trust, estate and offshore federal information and tax returns. Many IRS audits are conducted at random, but the vast majority are conducted because a computerized statistical review of your tax returns triggered an audit. Issues that may trigger an audit include suspicion of underpaid taxes, suspicion of underreporting of assets and income, and suspicion that you are claiming excess exemptions, credits or deductions for which you do not actually qualify. While a typical IRS audit can look back over 3 years of your tax returns and related documents, sometimes the IRS will be permitted to look back 6 years or even back to the dawn of time.

Types of IRS, FTB, EDD & CDTFA Audits

When you receive your notice letter indicating the California or Federal government’s plans to audit you or your small to middle market business, you will discover which type of audit the IRS, FTB, EDD or CDTFA will use. There are three basic types of audits: correspondence audits, office audits, and field audits. Each is conducted differently and comes with varying implications of severity. There are also two types of clandestine audits where criminal tax exposure is an issue: eggshell audits and reverse eggshell audits. These especially risky audits are defined by one party knowing or suspecting incriminating information the other party does not know. Taxpayers should be particularly cautious if a suspected eggshell audit or reverse eggshell audit is occurring since such cases can quickly be referred for criminal tax investigation & prosecution.

Correspondence Audits

Correspondence audits, or “mail audits,” occur remotely, making them the least invasive form of government tax inquiry. You will receive a letter from the IRS, FTB, EDD or CDTFA asking you to provide information such as financial records and documents to substantiate the positions taken on your tax returns You then send this information to the agents through a mix of traditional mail, e-mail, fax, and telephone communication. A tax lawyer can help you organize or even reconstruct your records and can work to correct any mistakes made on the original returns in a manner that keeps the audit about money and not about potential jail time. If resolved appropriately, correspondence audits usually last no longer than three to six months.

Office Audits

An office audit is different from a correspondence audit in that the letter you receive will ask you to bring the requested documents and records into an IRS, FTB, EDD or CDTFA office for review. You will also likely be interviewed by IRS agents, which can be trying and stressful without the presence of legal counsel. You should consult with a dual licensed Tax Attorney & CPA who can help you prepare and accompany you to this meeting, or better yet, appear on your behalf, where they will be able to use their experience to make your case. Similar to correspondence audits, office audits usually conclude within three to six months of your visit date.

Field Audits

A field audit is the by far the most serious type of audit and is often reserved for cases where serious civil and even potential criminal tax charges are possibly being considered. In a field audit, the agents will come to your home or place of work to review your records in person. They will often attempt to reconcile your perceived standard of living against your return filing pattern. Field audits are particularly common in situations where multiple business entities complicate the government’s assessment. These processes may last over a year. Field audits involve more than a simple review of the business or financial records. The IRS may interview employees of a business they are auditing or request to tour facilities belonging to that business. Since the IRS will have access to a large amount of information from multiple sources, it can be difficult to control what information the IRS discovers. To minimize the damage and get your case resolved as soon as possible, you should contact a tax lawyer as soon as you learn of the government’s plans to institute a field audit against you.

An office audit is like a correspondence audit, except the letter you receive will ask you to bring the requested documents and records into an IRS office for review. You will also be interviewed if you do not hire a representative. You should consult with a Tax Attorney who can help you prepare and accompany you to this meeting, or better yet, appear on your behalf, where they will be able to use their experience to negotiate on your behalf. A field audit is the by far the most serious type of audit and is often reserved for cases where serious civil and even potential criminal tax charges are possibly being considered. In a field audit, the agents will come to your home or place of work to review your records in person. They will often attempt to reconcile your perceived standard of living back against your return filing pattern. You should contact a Tax Lawyer as soon as you learn of the possibility of a field audit occurring.

Eggshell Audits

An eggshell audit occurs when the taxpayer, and potentially their representative, is aware of intentional material misstatements on a tax return under audit, but the IRS representative is unaware. This puts them in a delicate position where they need to walk on eggshells, metaphorically, to avoid facing criminal tax investigation & prosecution.

For example, assume your 2020 tax returns have been selected for an audit. While reviewing the requested documentation, you realize that the tax preparer understated your annual income by over $100,000. In this situation, the auditor is not suspicious yet; they are performing a routine audit and not searching specifically for understated income. Unfortunately, you are aware that there is material understatement in the return that could be viewed as fraudulent by the auditor.

Fortunately, in the example above, the understatement was not intentional, but there still could be consequences when the error is discovered. In cases of mere negligence, the taxpayer can face a 20% negligence penalty. In cases where willful intent is found, the taxpayer could face a 75% fraud penalty and potential jail time. When such widely differing potential ramifications are on the line, it is prudent to quickly address misstatements found in tax returns, regardless of whether they were intentional or not.

During an audit, the IRS representative will look for any intentionally false information or truthful omission on a tax return that affects a filer's true accurate and complete tax liability. Many issues could catch an auditor’s attention. Understatements of income, overstatements of deductions, inappropriately claiming tax credits, or not disclosing offshore accounts are a few common issues that will catch the auditor’s attention and potentially result in a criminal tax referral. The IRS has paid particular attention in recent years to undisclosed offshore accounts especially where the taxable income was consistently deposited to it but erroneously or intentionally went unreported for U.S. tax purposes. If you have money or income generating assets & businesses being deposited to undeclared offshore accounts, seeking counsel on any required omitted foreign information and income tax noncompliance will prevent potential criminal tax exposure that would surely arise where discovered in a subsequent audit as long as you are willing to knock on the governments door before they knock on yours.

Additionally, an unintended criminal tax admission will provide clear cause for the auditor to refer your case for criminal tax investigation. Eggshell audits present this risk since the taxpayer will have information that the IRS does not. It will be crucial to respond fully to IRS requests while avoiding unnecessary details that could incriminate you. A tax audit attorney can help you avoid this scenario by counseling you on appropriate responses to IRS inquiries.

What can a taxpayer do if an eggshell audit is suspected? The first step is to engage our dual-licensed Tax Attorneys & CPAs and disclose your concerns safely under the attorney client privilege. Your attorney is under a duty of loyalty to help you as a client, so they must understand all relevant facts. Complete candor is the best route to ensure your attorney has all relevant information. When your tax preparer is at fault for the problems on your tax return, distancing yourself from that preparer would be beneficial as they are likely to be government witness number one in any subsequent criminal tax prosecution. Your attorney will analyze your circumstances and the evidence at issue and work with you to determine the appropriate next steps.

Reverse Eggshell Audits

An eggshell audit is “reversed” when the IRS has information regarding potential tax fraud, but the taxpayer does not know this. An IRS revenue agent must usually halt a civil audit when they find clear indications of fraud. With increasing frequency criminal tax investigations are disguised as civil tax audits. In such a case, the IRS auditor will attempt to collect criminal tax evidence and pass it on to the undisclosed criminal tax investigator or civil fraud advisor without the taxpayer’s, or their representative’s knowledge.

A key challenge with reverse eggshell audits is identifying one. Our dual-licensed Tax Attorneys & CPAs have assisted many clients with IRS audits and can easily spot the warning signs. A few common signs that criminal fraud is suspected are listed below.

The IRS agent might begin asking why certain decisions were made. Lines of questioning that ask about the taxpayer’s intent signify that criminal tax fraud is suspected and is being investigated.

The civil audit will be suspended when it has not yet been concluded. The auditor may become suddenly and inexplicably unreachable.

The IRS agent may conduct a net worth analysis. A net worth analysis compares your estimated net worth with the calculated net worth based on your tax returns. A net worth analysis is a significant risk during a field audit where the auditor visits the taxpayer’s home or business. If your actual standard of living exceeds the income stated on your tax return, the IRS will suspect unreported income.

The auditor may ask for excessive documentation or make numerous copies of the documentation provided.

The IRS agent may reach out to third parties, like a bank or a business supplier, without notifying the taxpayer.

The IRS agent may begin making audio or video recordings of audit interviews.

The taxpayer may receive a summons for an appearance or records. A formal summons instead of a simple request signifies a more serious criminal investigation.

Reverse eggshell audits are increasing in frequency as opposed to traditional criminal tax investigations because when taxpayers are not notified that they are under criminal tax investigation they cannot adequately defend against the allegations or utilize constitutional protections that are available to potentially remove the evidence from consideration by criminal tax defense counsel. Taxpayers that are read Miranda like warnings by agents wearing guns and badges from the IRS Criminal Investigations division will ordinarily hire competent criminal tax defense counsel. To compound this risk even more, Taxpayers that believe they are only facing a standard civil tax audit will quite often have the original preparer represent them in the audit. The original preparer will either be complicit in the fraud and will thus have a motivation to bury the client in an attempt to stay out of jail themselves or will bury the client in an attempt to protect their own reputation if they were not complicit in the fraud.

Hiring our dual-licensed Tax Attorneys & CPAs at the beginning of an audit allows us to monitor the audit and look for signs of a potential clandestine criminal tax investigation. We excel at defending against allegations of criminal tax fraud and to the date of this writing have not had an audit client face federal or state criminal tax charges. In cases of eggshell or reverse eggshell audits, the audit can evolve into criminal tax issues very quickly. Using our dual licensed Tax Audit Attorneys & CPAs to quickly identify criminal tax exposure and then mitigate the risk created by them is your absolute best chance at keeping the audit about money and not about jail time.