Tax Audit Help from a Tax Attorney & CPA
For many taxpayers, there are few things as concerning and anxiety-inducing as being selected for a tax audit or taking some action that raises red flags and triggers an audit by the IRS. Many taxpayers will suffer through countless sleepless nights before reaching out to a tax attorney for guidance regarding the severity of the situation they face. In some instances, it is indeed an action by the taxpayer that increases their odds of being audited or triggers the audit. For instance, the individual may have forgotten to include one or more sources of income and was identified by the IRS from information matching procedures. The tax lawyers and tax professionals of the Tax Law Office of David W. Klasing can taxpayers tax audit help when navigate these difficult scenarios.
However, in other cases, certain characteristics of the taxpayer makes the individual an attractive target for an audit. For instance, the IRS is known to audit small business owners, businesses that deal extensively or exclusively in cash, and high-income individuals at higher rates than the general population. If you face audit due to certain characteristics, it is equally important to prepare and protect your assets and business from the IRS.
IRS Tax Audit Notices
If I Receive a Letter from the IRS, Does it Mean I’m Under Audit?
Simply because you have received a letter or some correspondence from the IRS does not necessarily mean that you are under audit. The IRS sends letters and notices to taxpayers for an array of reasons. So, simply seeing a letter from the IRS in your mailbox does not necessarily mean that your worst fears are coming true. Some of the reasons the IRS may send correspondence to a taxpayer include:
- You are the victim of identity theft (IRS Notice CP01, CP01S)
- You or a spouse are engaged in active military service in a combat zone and may be eligible for a tax deferment (CP04)
- You have no balance due with the IRS due to changes made to your taxes (CP21C)
- You are receiving a reminder of the installment agreement in place with the IRS (CP521)
However, the IRS may also send letters requesting missing documents or stating that certain information provided to the IRS does not comport with their records. To assess your IRS letter or notice, please consult the IRS Notice look-up tool. Taxpayers who handle this limited request in a timely manner without raising additional red flags will typically avoid a full-scale IRS tax audit unless there are serious underlying problems. An experienced tax audit attorney can often facilitate this process and reduce the likelihood that the taxpayer makes a serious mistake or a damaging admission.
Unfortunately, some taxpayers do receive a notice of audit (CP06, CP75, CP75A, CP75D, etc.). Other taxpayers may botch a limited request for information and trigger a full-scale audit. Therefore, if you have received correspondence from the IRS about a problem with your taxes, it is prudent to seek the guidance of a tax lawyer.
Top Reasons for Tax Investigations and Audits
Speaking generally, there are two main reasons why taxpayers are selected for an IRS audit. The first reason is that the taxpayer holds certain characteristics that the IRS finds intriguing. The second reason is that the IRS found red flags in the form discrepancy in the information you submitted due to your failure to file or other problems with your taxes.
In some instances, taxpayer characteristics may mean that the taxpayer’s risk of committing fraud is greater than average. In other cases, taxpayer characteristics are targeted as part of IRS attempts to maximize the potential return on its audit dollar. That is, the IRS selects a high-income taxpayer since that is where the money is. For instance, taxpayers who reported $10 million or more in income for the 2014 tax year faced an audit rate of greater than 16 percent. By contrast, a filer reporting between $50,000 and $74,999 in income had only a 0.53 percent audit rate. Individuals with income in the single-digit millions also face an elevated risk of an audit with those taxpayers reporting between $5 million and $10 million in income facing an audit rate of 10.53 percent.
Similarly, taxpayers who are the owners of a small business, who are involved with a business dealing mostly in cash, or taxpayers who see big changes in their finances are also more likely to face an audit. Finally, in light of the IRS and DOJ push to stamp out offshore tax evasion, holders of foreign assets and accounts along with people who file international tax returns also face an elevated audit risk.
The second common reason why people face an audit is because the IRS identifies a problem with their taxes. All tax returns are scored according to a “Discriminant Function System” or DIF. According to the IRS, DIF functions by:
… rat[ing] the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
Thus, DIF and UIDIF act as a screening and identification mechanism such that IRS can allocate its audit resources to address taxpayers with a high likelihood of tax problems.
People who report zero income or fail to file taxes at all are much more likely to be audited. In fact, the audit rate for individuals reporting zero income is only surpassed by the rate of high-income taxpayers reporting income of more than $1 million. Other mistakes that IRS computer systems are adept at identifying include failures to include all or some sources of income, deductions or tax credits out of step with those of similarly situated taxpayers, and failures to disclose foreign accounts.
How Many Tax Years Does an IRS Tax Audit Cover?
An audit will generally and typically look back at your past three years of tax returns. While three years seems like a large window for the IRS, the audit window can only expand. For instance, if a substantial understatement or other substantial error is detected, then the audit window can expand to up to six years. When the taxpayer has failed to file or fraud allegations are included or the auditor discovers signs of fraud, the length of the audit period is, theoretically, indefinite. That is, the auditor can lookback and assess tax for any tax year.
Top Reasons Why You May Have Been Chosen for an IRS Tax Audit
Many taxpayers want to know why they were selected for a tax audit. Thankfully, it is part of a taxpayer’s rights to know why he or she was selected for audit. In fact, Section 3503 of the IRS Restructuring and Reform Act of 1998 (RRA 98) mandates that the general criteria and procedures for selecting taxpayers for examination are published.
However, a taxpayer must specifically request the reason why they were selected for audit. Once the taxpayer or his or her tax attorney make this request, the IRS is required to provide a reason for the audit that is as accurate as possible in light of nondisclosure of protected use information. Thus, information gleaned from this request should be taken in context and with a grain of salt. Once again, an experienced tax attorney can assist in assessing the IRS’s response and avoid the possibility of making admissions or other mistakes that may result in the case being referred for criminal prosecution.
What Type of Tax Audit Will I Face?
There are three basic forms of an audit that the IRS can launch against a taxpayer. Determining the type of audit you face can often provide insight into the potential severity of the situation you face. The types of IRS audits a taxpayer can face are:
- Field audit – A field audit is the most serious type of audit that can be faced by a taxpayer or taxpayer’s business. During a field audit, an IRS investigator will come into your home, business or both to get a sense of your operations, assets, and facilities. This type of audit is highly intrusive and presents the potential for trained IRS agents to detect an array of “badges of fraud” that may result in a criminal tax referral.
- Office audit – An office audit is typically less serious than a field audit but significantly more troubling than an audit by correspondence. Like in a field audit, an office audit does open the door to increase risks and increased exposure to interview. Furthermore, when an office audit is justified, a six-year statute of limitations typically exists and there is greater likelihood that fraud will be discovered. If fraud is discovered or admitted, the IRS may have an open-ended statute of limitations and may levy a 25 percent understatement penalty.
- Correspondence audit – A correspondence audit is typically conducted after a taxpayer is flagged by the IRS’s DIF or UIDIF computer system. While the computers are generally reasonably adept at flagging issues, the systems are not perfect. Thus, the IRS may request additional documentation from the taxpayer to verify his or her claims. While many correspondence audits are handled relatively painlessly, the potential for serious mistakes that result in a full-scale audit exists.
Generally, taxpayers should endeavor to avoid field and office audits. They should consider the form of audit they face along with the potential reason for the audit when they begin to work with a tax lawyer to prepare.
How to Handle Errors When Facing an Audit
If you have a suspicion that your audit was triggered by a mistake or some potential wrongdoing on your part, the most important thing you can do is to seek the representation of a tax attorney as soon as possible. This is essential because if you believe that you made accidental or intentional error, a chance exists that the agent may interpret the surrounding facts and circumstances as willful tax fraud or tax evasion.
Consider this scenario: You enter the audit with knowledge that certain “mistakes” exist in your taxes. You know that there is a reasonable likelihood that the examining agent will detect these potential improprieties. An experienced tax lawyer may be able to present the information to the agent in such a way that the agent is satisfied that fraud has not occurred. For instance, additional documentation or proof of mitigating circumstances may suffice. However, if the agent discovers the errors without an accompanying explanation or mitigating factors, he or she may determine that additional inquiry into related tax documents and additional tax years is necessary. Related tax documents may include an audit of your company’s taxes, your personal income taxes, and your California state tax returns. Needless to say, taxpayers who are aware of tax “mistakes” and errors should immediately contact a tax lawyer and begin preparation to meet the challenge of an “eggshell” audit. Remember, if you cheated on your taxes and face an audit, it only takes one “crack” in the veneer of propriety for the entire potential fraud to come to light.
IRS Audits Due to Failure to File Taxes
If you have failed to file taxes for all or some years, you face a similar situation to the one described above. The extent of the consequences you can face are based on several factors. First, taxpayers who have failed to file and pay taxes are likely to have unpaid tax obligations. These tax debts are generally inflated by penalties for non-filing and non-payment along with interest on the unpaid balance. Taxpayers who have not filed taxes also run the risk of having the IRS complete taxes on their behalf. While this may sound like an appealing labor-saving approach, the IRS will typically take positions that are extremely unfavorable to the taxpayer and results in an inflated tax liability.
While the financial penalties are concerning, if your failure to file taxes is accompanied by signs of fraud then you face the potential for even more severe tax consequences. Acts that may be interpreted as signs of fraud are identified in the Internal Revenue Manual 126.96.36.199 Indicators of Fraud and include concealing income, dealing only in cash, using check cashing services, making inconsistent statements, keeping multiple sets of books, claiming inflated deductions, and keeping secret accounts. If these indicators of fraud are present, your audit is likely to expand in scope and you may even be referred to IRS Criminal Investigations.
Can Foreign Assets, Trusts, and Accounts Trigger an Audit?
Few taxpayers should be surprised at the fact that the IRS, Department of Justice, and entirety of the U.S. government is focused on identifying and halting offshore tax evasion. That is, starting just after the Great Recession the U.S. Congress became increasingly interested in closing the “tax gap.” Wealthy Americans who used offshore accounts and trusts to conceal income were identified as a main cause of the difference between expected and actual tax revenues. Therefore, while the Report of Foreign Bank Account (FBAR) obligation has existed since the 1970s, stringent enforcement only began circa 2008. Furthermore, Foreign Account Tax Compliance Act (FATCA) was passed in 2010 and more than 100 nations have agreed to provide the IRS with their foreign financial data.
If you have undisclosed foreign accounts or assets, the risk of an audit is extremely high. In fact, it is likely more of a matter of when the audit will be conducted rather than if the IRS will audit. Offshore penalties are particularly harsh even when conduct is non-willful and present the potential for felony tax evasion charges.
How Should I Prepare for an IRS Audit?
It is essential for taxpayers to prepare for an audit. While some taxpayers seem to believe that disorganized books and records will cause the IRS, California FTB, Employment Development Division or other tax agency to throw up their hands and give up on the audit, nothing could be further from the truth. IRS and other auditors are highly trained and familiar with methods to make life difficult for taxpayers who do not comply. Generally, insufficient or nonexistent records open the door to potentially catastrophic determinations by the IRS.
For individual filers with insufficient or unreliable records, it is not uncommon for the IRS to draw unfavorable conclusions against the taxpayer and simply assert a large tax liability. This shifts the burden of proof onto the taxpayer. Now, the taxpayer must piece together documents and records to disprove the IRS’s claims. Needless to say, this is labor intensive and frequently requires the services of a consulting forensic accountant.
Businesses can also face catastrophic consequences when books and records are insufficient. For instance, the IRS agent may determine that he or she needs to audit on a sample basis. If the business owner fails to establish ground rules for the sample audit, there is a chance that the sample will not be representative of the company’s actual volume of business. As such, the company may be place on the hook for taxes on income that was never actually received. Like the first scenario, the burden of proof is shifted and the business must then endeavor to disprove the IRS’s determinations.
Therefore, it is essential to seek out a tax audit help from a tax professional as soon as possible to begin preparing for an audit.
Should I Consult My Original Tax Preparer Prior to an Audit?
While it may seem tempting for a taxpayer to ask the person who “broke it” to “fix” their taxes, this is not typically a prudent approach. The fact is that anything you disclose to an accountant or tax preparer is not protected. That is, if the tax preparer or CPA is subpoenaed in a subsequent criminal tax proceeding, they will be compelled to reveal any wrongdoing you admitted. Furthermore, accountants and tax preparers who come under scrutiny often blame their clients to protect their license, reputation and livelihood.
Instead, taxpayers should seek out tax audit help from a criminal tax defense lawyer as soon as possible. Only the attorney-client privilege and the attorney work-product rule can protect the disclosures you may make in the course of seeking legal advice. Furthermore, a tax attorney can bring in consulting accountants while providing them with derivative attorney-client privilege through a legal device known as a Kovel letter. Last, the focus of an attorney is advocacy while the focus of an accountant is accuracy. Once matters have moved into questions of tax law and tax controversies, the skill set of a lawyer is more appropriate and likely to be effective.
Can California FTB, EDD, or BOE Audit Me After the IRS Is Completed?
Yet another reason why it is so important to work with a tax lawyer from the outset is the fact that the IRS and State tax agencies like the California Franchise Tax Board, Board of Equalization, and Employment Development Division are all known to share information. If an IRS or California state agency audit discovers problems or other improprieties, it is highly likely that they will share this information with the sister agency. Thus, it is not uncommon for taxpayers to face a federal and subsequent state tax audit and vice-versa.
If the party under audit is a business and the IRS audit turns up issues relating to understated income or payroll tax issues, it is reasonably common for the California Employment Development Division to audit. It will typically assert employment tax obligation problems and will require the business to produce, at minimum, the records required by California state law under Sections 1085 and 1092 of the CUIC. IF the business has not kept these records or is not prepared to provide them and other requested documents, EDD is likely to dig deeper into the company finances.
Can I Appeal the Results of an Audit?
Following the close of the audit, you are likely to receive a number of documents from the IRS. You will receive a 30-day letter setting forth your right to appeal along with the audit determination and other accompanying documents. The 30-day letter is named as such because it sets forth the taxpayer’s right to accept the changes or to appeal the audit determination within 30 days. If the taxpayer fails to respond to this letter, a 90-day Notice of Deficiency will be sent.
In any case, a taxpayer does have multiple appeal options. If the taxpayer’s appeal concerns the application of tax law, he or she may request an appeal through a small case review or via a formal written protest. A small case review request can be filed when the total amount for any one tax period is $25,000 or less. This type of appeal can be filed via IRS Form 12203. Taxpayers can also file a formal appeal in which they must set forth:
- A statement evincing your intent to appeal the audit decision.
- All changes to your tax return that you do not agree with.
- All tax periods or tax years involved.
- Citation of all facts supporting your position.
- Citation of all relevant law supporting your tax position.
- Authentication of the appeal documents under penalty of perjury.
If your appeal is premised on mistakes made during the IRS collection process, a number of collection-specific appeals options exist. These options include the Collection Appeals Program (CAP) and Collection Due Process (CDP) programs. While the CAP program covers a broader array of collection appeal issues, your right to further appeal in a federal court is limited. By contrast, CDP is more narrowly focused but preserves a taxpayers rights to further appeal. A tax lawyer can help a taxpayer determine if appeal is appropriate and, if so, the form of appeal that is reasonably likely to result in a successful appeal.
Payment Options After Being Audited
If you can’t pay the taxes the IRS says you owe but do not disagree with the determination, there still may be relief available. If your tax audit was preceded by a recent divorce or separation, innocent spouse relief may be relevant to your circumstances. Relief may be available in circumstances where one spouse was responsible for the misstatements that gave rise to an unsatisfied tax liability and the innocent spouse did not have reason to know about the improprieties. Other potential options to manage a large tax bill as the result of an appeal include:
- IRS Installment agreement – The IRS makes a number of payment agreements and arrangements possible. While the programs a taxpayer qualifies varies on the basis of the amount of the debt and whether the taxpayer is a business, an installment agreement approach can make a tax debt more manageable.
- Reasonable cause for compliance failure – In some circumstances, a taxpayer may be able to mitigate or eliminate penalties by showing evidence for reasonable cause for the delay or compliance failure. To be clear, reasonable cause requires more than a simple “I forgot.” Rather, the taxpayer must generally experience a major, life-altering event to qualify for relief of this type.
- IRS Fresh Start Program – Is the name of a number of IRS policies and procedures that are intended to encourage taxpayers to come forward and settle tax debts. IRS policies and procedures offer the opportunity for taxpayers to reap the benefits of penalty abatement and procedures to stop a lien against a taxpayer’s property.
- Offer-in-compromise – While offers-in-compromise are not granted liberally, a taxpayer who files this type of request that contemplates their “reasonable collection potential” is perhaps more likely than average to be granted this form of relief. Essentially, an offer-in-compromise can permit a taxpayer to settle their tax debt for less than the full amount of the obligation.
Every tax situation is different and an experienced attorney can provide tax audit help that will determine if relief is likely to be available in your matter.
Facing a Tax Audit? Work with a California and IRS Tax Audit Defense Attorney
If you are facing a tax audit, it is prudent to seek the profession and experienced guidance of a tax lawyer. IRS, California FTB, and other revenue agents are highly trained, experienced, and aggressive in their tactics. Don’t you deserve a level playing field when tens of thousands of dollars or more or your business in on the line? If you have underlying tax problems or tax mistakes that may be discovered during the audit, your need for strategic guidance is even more pressing.
The tax attorneys and tax professionals of The Tax Law Office of David W. Klasing may be able to fight for you and mitigate the consequences you face. Mr. Klasing is a former public auditor who can put his more than 20 years of experience to work for you. He can often anticipate audit strategies and techniques that will be utilized by the examining agent and develop approaches to meet these challenges. To discuss how an experienced tax lawyer can provide you or your business tax audit help through an IRS or California tax audit, call 800-681-1295 today. We offer reduced-rate, confidential tax audit initial consultations at both our Los Angeles and Orange County tax law firm offices.
Common Tax Audit Questions
- How should Tax Audits be Handled by Criminal Tax Counsel?
- How to survive audit when I cheated on a return being audited
- What is an eggshell audit?
- What is a reverse eggshell 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