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IRS Tax Audit: This Page at a Glance
Nothing quite matches the level of fear that an American taxpayer has when he or she receives a letter of notice from the IRS about the start of an audit process. To protect your liberty and your financial interests to the fullest, you will want to have the strongest level of legal representation at your side.
The original preparer has a conflict of interest with you where they need to protect their own reputation often at the expense of yours. They do not have the attorney-client privilege and no matter what they tell you, they can be forced to testify against you should your audit go criminal.
The IRS selects businesses and individual taxpayers for an audit for a variety of reasons. The IRS statistically compares your tax return to other returns that have similar characteristics, and if it finds significant discrepancies between your return and the average like return, the IRS may select you or your business entity for an audit. Other reasons for a tax audit include underreported income, mathematical errors, payroll tax errors, missing FBAR information, extremely high income, or no claimed income.
Once you receive an audit notice from the IRS, you need to start by figuring out exactly what the IRS could eventually allege. Sometimes the letter will clearly state what you are facing, but, other times, you may need the help of a tax attorney to decipher the letter. The letter will often indicate the three areas of your return the IRS computer software has identified to likely contain misstatement. If an error is indeed found, the rest of the return and other tax years are likely to become involved.
The letter also should inform you exactly what kind of audit will be occurring. The IRS may ask for more information through correspondence, meaning you won’t actually receive a visit from an agent, unless the information you provide does not solve the problem.
In a field audit, the most invasive type of audit, the IRS may request to send an agent to your home or business for a face to face meeting and tour. Your attorney will attempt to move this meeting to their office, as the IRS agent may be attempting to see if the belongings at your home or office and your lifestyle match up with the information you have submitted on your historical tax returns. Your attorney will also attempt to handle the interview without you if possible as you cannot apologize and make associated criminal admissions if you do not submit to an interview.
Table of Contents
- Why Did the IRS Decide to Audit Me or My Business?
- Help Figuring Out What Your IRS Letter or Notice Means
- What Type of Tax Audit Will I Face?
- How Many Years Will My Audit Cover?
- What If I Cheated on My Taxes and I Think the IRS Noticed?
- How Should I Prepare for an IRS Audit?
- Can I Make It Through a Tax Audit Without Owing the IRS More Money?
- Contact Us and Rely on Our Federal Tax Audit Experience
There are few government agencies that can strike fear into the heart of Americans like the IRS can. Perhaps an aversion to paying federal taxes is simply part of the American psyche. But, in reality, this historical and cultural aversion towards taxes is only part of the story. Americans are aware that the penalties that can be imposed for a failure to satisfy a tax obligation are often harsh. Furthermore, the IRS has cracked down on informational reporting obligations such as the duty to report foreign accounts under FBAR and FATCA. Here, even accidental violations can be punished harshly. In the case of intentional or voluntary avoidance of a tax duty, penalties become even more severe and can cross the line into criminal liability.
If you have received a notice from the IRS seeking additional information or announcing the IRS’s intention to do a federal tax audit, you face a potentially dangerous legal situation. While California taxpayers who have satisfied all obligations and retained tax records for the requisite time period should be able to show that they satisfied all obligations, there is always the possibility of a bungled audit by an inexperienced individual. Unartful statements made or pieces of information volunteered to the agent may inadvertently raise the suspicion of the auditing agent leading to unnecessary complications in the audit.
Why Did the IRS Decide to Audit Me or My Business?
Taxpayers who are audited typically want to know why they were selected. Taxpayer’s inquiry into their audit should begin by regarding the audit notice they received from the IRS. This notice will contain the requests the IRS has and your pertinent filing timeframes. Potential reasons for an IRS tax audit can include:
- Failure to include all income on tax filings – The IRS engages in information-matching and form-matching. That is, the agency looks for the corresponding forms and information submitted by both the worker or contractor and the employer. Therefore, the failure to include accurate information in tax filings and the failure to include all sources of income is relatively easy for the IRS to identify and pursue.
- Employment or payroll tax problems – Employers have an obligation to account for, hold, and pay over employment taxes including FICA and FUTA. Likewise, businesses in most states have an obligation to collect and turn over state sales tax. Failure to satisfy the sales tax obligation can result in state-based tax issues. For example, Orange County IRS audits may entail certain requirements. In many cases, the state tax authority will then pass information about your noncompliance to the IRS which may result in additional tax consequences.
- Failure to disclose offshore accounts under FBAR or FATCA – Taxpayers who hold or control foreign accounts or assets in excess of reporting thresholds must report under FBAR and FATCA. Furthermore, there is an obligation to accurately disclose your offshore accounts in Schedule B, Part III of a taxpayer’s income tax return. Taxpayers who fail to take these required actions can face serious offshore tax consequences including a tax audit.
- Extremely high gross income or no income claimed — Taxpayers with extremely high gross incomes face a significantly higher chance of facing an audit. Taxpayers who claim zero or no income on their tax return also face an increased risk of facing an audit that is second to only those with high-income
Realizing that you are facing an audit is only the first step in preparing to face it. Taxpayers who have been informed of the IRS’s intent to audit must take action to prepare and protect themselves from the consequences of a poorly handled audit.
Help Figuring Out What You IRS Letter or Notice Means
One of the first steps you should take after receiving correspondence from the IRS is to assess what the IRS says the problem is, what they are asking you to do, and determine your approach to meet this challenge. This can often be accomplished by a close reading of the letter. Furthermore, all IRS letters include a code that provides a brief, generalized description of the IRS’s inquiry. Individual tax filers can check the IRS Notice or Letter Look-up Tool for Individual Filers where they may find that their CP15B letter signifies the IRS’s belief that you failed to pay employment taxes and are subject to the Trust Fund Recovery Penalty. Business taxpayers can look-up similar information in the IRS Notice or Letter Lookup Tool: Business Filers. For instance, business taxpayers could look-up their CP 265 Notice and determine that this letter is issued when the IRS terminates a Subchapter S election. Once you have made this determination, you can call a tax attorney and provide this information.
What Type of Tax Audit Will I Face?
There are three types of tax audits a taxpayer can face. While serious tax problems can arise from an audit of any type, field audits and office audits that can bring an IRS agent into your home, place of business, or other relevant facilities present a significant risk. The agent is trained to look for and assess your assets, employees, business facilities, home furnishings and luxuries, and an array of other items that may show that the taxpayer is living beyond their means or taking steps to conceal income or other tax obligations such as payroll taxes.
However, most federal tax audits will take place through correspondence. These types of audits are typically more limited in scope, but mistakes made during the process can open the door to an expanded investigation. A taxpayer who makes inconsistent statements, fails to provide requested documents, is combative or uncooperative, or who otherwise piques the auditing agent’s interest in potential fraud can face a cascade of tax consequences.
How Many Years Will My Audit Cover?
In general, the IRS can audit your federal taxes for up to three years. Unfortunately, there are an array of exceptions and scenarios that can extend the amount of time the IRS has to audit. To start, taxpayers who never filed taxes can theoretically be audited indefinitely. That is, the statute of limitations never begins to run because the tax return was never filed.
The IRS is authorized to audit taxes greater than three years old when it alleges that the taxpayer has committed certain acts. For instance, a taxpayer who makes a substantial understatement of income of at least 25 percent of their income can be audited for up to six years. Likewise, a taxpayer who fails to disclose at least $5,000 in foreign assets or accounts can also face an extended six-year audit. Furthermore, in regards to taxpayers who understate the basis of property, Congress has passed statutes overturning previous tax court decisions. Therefore, taxpayers who understate the basis of property can also face the extended audit window.
It is also important to understand that, the IRS can request additional time to audit. There are different schools of thought regarding how to approach this request. A close reading of the facts present coupled with an understanding of the audit process is essential is essential when making a decision. An experienced tax audit attorney can help you determine which approach is most likely to result in a favorable outcome in your matter. Finally, if the IRS imposes new or additional tax obligations, it generally has 10 years to collect on the debt.
What if I Cheated on My Taxes and I Think the IRS Noticed?
Taxpayers who cheated on their taxes and face a subsequent audit are placed in a precarious position. On one hand, admitting to the tax violation or tax crime can be used against you in subsequent proceedings and will lead to penalties. On the other hand, failing to make accurate and honest statements about one’s finances can lead the agent to believe that a tax error is actually intentional or voluntary tax evasion. If the agent believes that you committed tax evasion or other tax crimes, he or she will refer your matter to IRS Criminal Investigations. Referral for criminal prosecution is something that should be avoided at all costs.
How Should I Prepare for an IRS Audit?
If you are facing an Orange County IRS tax audit and have already read the audit notice and looked up the letter code, your next step is to gather all pertinent tax records. By law, taxpayers must retain tax and related records for a certain period of time. In general, a taxpayer is required to keep records of filed tax returns for three years. Furthermore, employment tax records should be retained for a minimum of four years.
However, it is often prudent to keep records for longer. For instance, a taxpayer who fails to disclose a significant – greater than 25 percent – amount of income on their tax return should retain their records for at least six years. Non-filers who have unfiled income taxes should retain their tax records indefinitely as a failure to file technically creates liability in perpetuity.
Taxpayers who have insufficient or unreliable records are often shocked to find that rather than acting as a shield to obfuscate their noncompliance, it is used as a sword by the IRS auditor. The absence of records typically means that the IRS agent will make numerous tax determinations on your behalf. Typically, these determinations are not in your favor. The problem is, once the IRS uses your lack of records to make tax liability determinations, the burden shifts to the taxpayer to disprove the IRS’s accounting. Thus, the taxpayer will need to engage with a forensic accountant and other tax professionals to reconstruct their accounts regardless. Thus, it is routinely more prudent to get your records in order before their absence can be used against you. Contacting an IRS tax audit attorney who can oversee the reconstruction and hire accountants on your behalf is the first step in this process.
Can I Make it Through a Tax Audit without Owing the IRS More Money?
Many potential tax clients are eager to learn whether they will owe the IRS additional money at the close of the audit. While there is always the possibility that you can make it through an audit unscathed or even with the IRS owing you a tax refund, this type of determination cannot be made without a comprehensive review of your finances, past tax filings, past offshore disclosures, and an array of other tax documents.
Unfortunately, many taxpayers do not realize that monetary consequences should be the least of their worries until it is too late. As set forth above facing a tax audit when you have intentionally cheated on your taxes opens the door to an array of potentially criminal consequences. You may face charges of tax evasion, obstructing the administration of the U.S. Tax Code, or other allegations. Thus, it is essential for taxpayers to consult a tax audit lawyer as soon as possible so that they understand the potential risks and consequences they can face.
Rely on Our Federal Tax Audit Experience
If you have managed to track down all relevant tax records and still have questions or concerns regarding your IRS tax audit, contact the experienced tax audit professionals of the Tax Law Offices of David W. Klasing for a reduced-rate consultation by calling 800-681-1295 or contact us online today. Our experienced tax lawyers and CPAs can work to mitigate the tax consequences you face due to unfiled taxes, IRS tax audits, undisclosed income, unreported foreign accounts, and an array of other tax concerns.
