Tax Audit Lawyer
Tax Audits: This Page at a Glance
You may feel like you are a brave person who has a handle on fear. Then you receive an official letter, notifying you of an IRS audit of your income taxes, and you have a new respect for fear.
An IRS tax audit can occur for a variety of reasons. Perhaps you made a simple error in entering data, or you may have omitted a key form with your return. This type of audit is simple and not all that frightening.
In other instances, though, the IRS may be seeking extensive information about your income and tax situation, leaving you in danger of owing a much higher tax bill with late payment penalties.
A tax attorney can help with this extremely scary situation. The attorney has the ability to negotiate with the IRS on your behalf, while helping you prepare a defense against the financial exposure and assist with any subsequent collection action.
If the audit does not go your way, a tax lawyer can help with an appeal of the judgment.
To schedule a 10-minute call with an experienced tax attorney to discuss a potential IRS audit, contact the Tax Law Offices of David W. Klasing.
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.
Table of Contents
- Notification of an IRS Audit
- Reasons Tax Audits Occur
- Factors That Trigger an IRS Audit (Infographic)
- Tax Years Covered in an Audit
- Why Was I Chosen for an Audit?
- Types of Tax Audits
- Why Calculation Errors May Trigger an Audit
- Audits Related to Not Filing Taxes
- Audits for Taxpayers with Foreign Assets
- Preparing for an IRS Audit
- Finding Representation for an Audit
- Will the State Also Audit Me?
- Appealing the Audit’s Results
- Making Payments After an Audit Judgment
- Hiring a Tax Audit Defense Attorney
- Tax Audit FAQ
- More Resources
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.
How Far Back Can the IRS Audit?
If you are faced with a potential audit by the IRS, rest assured that your entire tax history is likely not under investigation unless they discover fraud in which the statute of limitations becomes open all the way back to the dawn of time. If there are specific issues being examined, your audit might only go back just far enough to when the issues are believed to have arisen. For example, if you are being audited in connection with your business but have only owned the business for the last 2 years, your audit might only go back 2 years. In fact, most audits tend to only go back about 2 years. However, according to the IRS, it is fairly normal for audits to include the last 3 years of your tax history.
If your situation is unique, like where the IRS proves a 25% of greater understatement of taxable income, the IRS is permitted to extend how far back your audit may go. Generally, audits do not go back farther than 6 years, although this is not a hard rule. If your audit is still not resolved after examining the last 6 years of your tax history, the IRS can request you to extend the statute of limitations for assessment of tax. Typically, the statute of limitations imposes a 3-year limit on how long the IRS has to assess any additional tax. The statute begins to run after your tax return is filed. You do not have to consent or agree to an extension of the statute of limitations. However, if you challenge the extension, the auditor will decide what to do based on the information you have already provided and quite often will assess based on known income often accompanies by a complete disallowance of all expenses claimed on the returns under audit.
Talk to our tax dual licensed California Audit Representation Attorneys & CPAs for help. We can review your situation and determine whether challenging the audit or the extension of the IRS’s time limit is in your best interests.
IRS Audit Triggers
Taxpayers are ordinarily selected for an audit based on statistical computerized analysis of their historical tax returns against a pool of similarly situated taxpayers. Every return analyzed by the IRS supercomputers receives a score. The worst score a return can receive is a 999, the next worse is a 998 etc. The more likely the return is to understate taxable income the higher the score the return receives. The IRS starts off an audit cycle by starting with all the 999’s then moves through the 998’s then the 997’s and so on as time permits until they run out of audit budget for a particular tax year that they are currently working.
It is not uncommon for people to believe they have been selected for an audit at random. The truth is these random audits are not at all as random as they seem to be. Essentially, when tax returns do not substantially line up with what is considered statistically “normal,” an audit will eventually follow. Remember, unusual tax events might get you flagged for an audit, but it does not mean you have automatically done anything wrong. You should, however, speak with our tax audit attorneys as soon as you know you are being audited especially where you know you cheated on the returns that are under audit. Being represented will make all the difference between facing criminal tax prosecution, having to pay 75% fraud penalties, versus a civil resolution with at most, 20% negligence penalties that are statutorily required if you owe $5,000 or more in tax following your audit.
Facing a high-risk audit with criminal tax exposure will also result where your lifestyle appears excessive in comparison to your history of reported income compared to easily verifiable financial spending habits. For example, if a taxpayer is writing off proportionately large charitable donations as tax deductions, but they have relatively small income streams, this may be a red flag to the IRS, and that taxpayer will often be audited. Paying off very large debts with very low historical reporting of income is also a red flag which ordinarily leads to an IRS eggshell or reverse egg audit.
Many audits are the results of tax filing errors. Oftentimes, these errors are merely clerical. Transposing numbers when reporting taxable income could mess up your entire tax return and get you audited. Merely adding or omitting an extra zero where it does not belong could cause confusion and necessitate an audit from the IRS. All returns go through a computer matching process where all information received from third parties is reconciled to your return. W2, 1099 Int, 1099 Div, 1098, 1099-K, 1099-B etc… are matched to your return. Omitting one or more sources of taxable income will get you audited.
You could also trigger an audit if your business is suddenly and uncharacteristically not doing well. It is normal for businesses to experience varying degrees of success and failure. In some years, your business might do very well. Other years might not be so great. However, reports of business losses for more than a few years in a row might trigger an audit or the hobby loss rules.
IRS Auditing Procedures
An audit might occur in a couple of different ways. Auditing procedures in your case will depend on the complexity of your tax situation and the issue being examined in your audit. Generally, an audit will begin by correspondence through the mail. You should receive a letter from the IRS informing you of the audit and what your next step must be.
A criminal tax investigation by the criminal investigation division of the IRS will often begin in complete secrecy and two or more years normally goes by before they surprise you in person while you are half asleep and walking to your car in the morning to go to the office or work site. If this happens to you the most important thing to remember is that they are going to ask you a bunch of questions that they already know the answer too hoping that you will lie to them. It is human nature to try and talk your way out of trouble and CI will often try and encourage you to do so claiming that they are there to help you clear up a misunderstanding. Don’t fall for it!!! Politely tell them that you are happy to speak to them but not without your tax counsel being present and then pick up the phone and call our office. If you do happen to fall for their trickery, write down everything you can remember you were asked and truthfully write down what your answers were to aid your criminal tax defense attorney in defending you and perform damage control.
Sometimes, especially with the surges of covid, the audit will happen entirely by mail. In such cases, you might be instructed to provide certain documentation or records to the IRS through the mail for review. These records could include but are not limited to bills, receipts, legal documents, loan agreements, financial logs, and insurance documents. Our dual licensed California Audit Representation Tax Attorneys and CPAs can help you if you are unsure how to provide certain documents or need time to gather the appropriate documents or simply have no substantiation (especially where you fudged numbers).
In nearly all audits, the IRS may wish to conduct an in-person interview as part of your audit. IRS agents are often required to do this to aid them in identifying which areas of your tax returns are more likely than not to contain misstatements and to help them gain an understanding of your business. The interview process is high risk because lying to a federal agent is a felony by itself. Interviews are more critical in cases where your audit deals with complicated tax issues or if the documentation required is so voluminous it cannot practically be sent by mail. For example, if the IRS wants to conduct a full audit of your business records, it might make more sense for someone from the IRS to meet with you and your accountant to go over the extensive records at your place of business or your home if that is where you keep the records. We generally try and prevent our client’s from being interviewed where possible and where it is not, we thoroughly prepare our client’s in how to successfully cooperate with the auditor while not creating additional exposure by providing a poor interview or one that is interpreted by the auditor as fraudulent.
Once the audit is complete, the IRS will reach a determination about what happens next. This could include assessing additional taxes, penalties, and interest, refunding overpaid taxes, or simply issuing the ever allusive no change audit. You will be given a chance to agree or disagree with the findings of the audit. If you disagree with the audit, speak to our dual California licensed Tax Litigation & Appeal Attorneys and CPAs for assistance.
Types of IRS Audits
Audits may be conducted for any number of reasons. As stated above, audits may be triggered by suspicious financial activity, or a routine computer screening could flag you. However, there are generally three types of audits. These types of audits were discussed above as part of audit procedures, but there are a few important distinctions to make between them.
The first type of audit is an audit by correspondence. This type of audit happens entirely through the mail. You are sent a letter from the IRS notifying you of the audit and what kind of documentation, if any, is required of you. Once you send any necessary documents or records to the IRS, the audit will commence, and you will be notified again when it is completed. This is more common for less complex audits.
Field audits occur when someone working for the IRS comes to you for a face-to-face interview as part of your audit. A field audit might be necessary for a few different reasons. Field audits are often conducted because the records required for the audit cannot be sent by mail.
An office audit is like a field audit because you are meeting with an IRS employee face-to-face in a local IRS office. However, you will go to them in a local IRS office instead of the IRS employee coming to you. The reasons for each type of audit will vary from case to case. Speak with our dual California tax audit representation lawyers and CPAs for more information.
What to Do If You Get Audited
If you get audited, you should begin by speaking with a lawyer as soon as possible especially where you know for a fact your cheated on the returns under audit. Many taxpayers do not realize the full extent of their rights when it comes to being audited. The IRS can be intimidating, and many people believe you have no rights in an audit. However, you can challenge the results of an audit if you believe they are incorrect or unfair.
You must also begin preparing to provide any necessary documents, records, or other information to the IRS. Not everyone is good at keeping organized, thorough records, and you might need some extra time to get everything together. Our dual licensed Tax Audit Representation Attorneys & CPAs can help you communicate with the IRS and arrange for any necessary extensions of time while cooperating with any information document requests (IDR).
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.
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 Triggers a Tax Audit?
Pinpointing all the potential triggers of a tax audit is practically impossible. However, there are indeed some tax audit triggers that are more prevalent than others. If you received a notice from the IRS or a state taxing authority that you will be the subject of an audit, it may be for one of the following reasons.
Discriminant Information Function
The IRS and many states use various types of software to enforce the many provisions of the tax code. The IRS’s Discriminant Information Function (DIF) is one such program that is used to identify statistical anomalies in a taxpayer’s annual return. The DIF system additionally looks for several types of questionable and or conflicting data, such as a taxpayer claiming a home office deduction and at the same time deducting rent on an office outside the home.
Any red flags that are raised by the DIF will be further analyzed by IRS examiners should your return be selected for audit.
Taxpayer’s Income Level
The IRS primarily performs tax audits on those who have an income level of over $500,000 per year. Alternatively, those that earn between $20,000 and $200,000 were rarely under the audit microscope.
Additionally, if you earn more than $500,000 and you attempted to wipe out a large portion of your taxable income through deductions, this may be used as an anomaly to support a tax audit.
Depositing Large Sums of Money
Another red flag that could trigger a tax audit is when a taxpayer frequently makes deposits of at least $10,000 into their accounts. If a taxpayer does not have a reasonable explanation for why they could make cash deposits of over $10,000, the IRS may use this as evidence the taxpayer is engaged in illegal activity.
Additionally, if a person tries to evade triggering an audit by purposely depositing funds less than $10,000, such as $9,999, this will also trigger bank and IRS reporting regulations and possibly a criminal tax prosecution for structuring.
Schedule C Self-employed businesses are also typical targets of tax audits. One reason for this is that self-employed workers are known to often incorrectly claim deductions to lower their taxable income. For instance, if a taxpayer frequently uses their vehicle to travel for business, they cannot claim that they only used the vehicle for business purposes to get a larger deduction.
Operating a Cash Business
For taxpayers who operate businesses that accept payment primarily in cash, there is a universal taxing authority concern that the taxpayer will not completely report all the income they earned. For example, if a taxpayer operates a barbershop as their only source of income and their reported expenses do not proportionality match their income, this may trigger a tax audit and possibly a criminal tax investigation and prosecution. The IRS and state taxing authorities want to ensure that a business owner is not pocketing cash payments to evade taxes on their income.
Utilizing or Having Signature Authority Over Foreign Financial Accounts
The United States is on a very short list of countries that tax its citizens on worldwide income which includes income that is earned in foreign countries. If you own or control one or multiple foreign financial accounts, the IRS wants to know that you are reporting investment, retirement and business income earned offshore and deposited offshore. They are also interested in funds inherited or received by gift and kept offshore. Taxpayers that have over $10,000 in all their combined foreign financial accounts must report this to the IRS on an FBAR.
If the IRS believes that a person is evading offshore taxable income and hiding that fact by not disclosing foreign financial accounts and failing to supply other required foreign information reporting like those that are required for foreign business entities, they may open an offshore financial account and evaded taxable offshore income focused eggshell or reverse eggshell audit.
The IRS may decide to begin a civil or potentially criminal tax audit for a myriad of other reasons. As a result, you should be sure to have a dually licensed California Tax Attorney and CPA by your side if you are facing a tax audit to protect your liberty and possibly your very liberty. Moreover, federal and state taxing authorities often view the facts and the law in a manner that benefits the taxing authority to your detriment. There is no better qualified set of credentials to take on the taxing authorities in the appeals process and potentially in litigation that a dually licensed Tax Attorney and CPA.
IRS and State Tax Audit Notices
When the IRS or state taxing authority has determined that a taxpayer should be audited, they will typically send notice of the audit through the mail and not through a surprise in-person interview or telephone call. IRS guidelines state that a tax audit will never be initiated through a phone call. As a result, be wary of any parties that may pose as an IRS or State agent and request to go over sensitive tax information over the phone or in person.
Depending on your unique circumstances, the interview with an IRS or state examiner may occur at IRS or state taxing authority headquarters or within your home or place of business.
When initiating an audit, the IRS or state taxing authority may request additional information regarding you or your businesses finances. For instance, the representative may want to know more about your personal expenses or the reasons you claimed a certain business deduction.
It is imperative that you respond timely to a federal of state tax audit notice. If you ignore all correspondence from the IRS or state taxing authorities, you could quickly find yourself in serious legal trouble. You could be assessed penalties for your failure to respond, and the IRS or state taxing authorities may seek more extreme options like referring your case to the Justice Department for DA for criminal tax prosecution.
Call a dually licensed California Tax Attorney and CPA that could easily guide you through the various steps of a tax audit including an appeal or litigation if necessary.
Factors That Trigger an IRS Audit
Please include attribution to https://klasing-associates.com with this infographic.
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IRS Audit Trigger #1. Undisclosed Foreign Account Holdings
IRS Audit Trigger #2. Discovery of Unreported Income
IRS Audit Trigger #3. Undisclosed Cryptocurrency Transactions
IRS Audit Trigger #4. Cash Intensive Business
IRS Audit Trigger #5. Payroll Tax Errors
IRS Audit Trigger #6. Difficulty of Tax Compliance
IRS Audit Trigger #7. Using a Tax Prep Service That Guarantees Big Refunds
IRS Audit Trigger #8. Making Use of a Captive Insurance Company
IRS Audit Trigger #9. Failure to File Taxes.
IRS Audit Trigger #10. Being a High Net Worth Individual
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.
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 188.8.131.52 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
What Is a Tax Audit?
A tax audit is a notice from the IRS that it is going to examine your tax return to ensure information on it is accurate. Tax audits occur in different levels of complexity, but if you’re ever confused about information the IRS is requesting, you may want to contact a tax attorney to help you.
A basic tax audit may simply ask you for a bit more documentation, such as to verify your deductions for charitable giving. This simple audit usually can be done via mail and does not require meeting with an IRS agent. More complex audits may require you to verify your income levels and the various deductions you’ve claimed in a face-to-face meeting with agents.
You’ll receive notice of a tax audit from the IRS by mail, rather than through other means of communication.
When Is a Tax Audit Conducted?
The IRS may choose to conduct a tax audit on any taxpayer return within a reasonable time period, which could extend as far as six years in the past. However, auditing returns so far back is rare. There are a few guidelines the IRS follows regarding auditing timeliness.
Most audits occur within a few months after you submit a return. However, the IRS requires that you keep tax records and documents for at least three years after submitting your return. Any of your tax returns within that three-year window could be selected for an audit. Should the IRS find a significant error that has been repeated on multiple returns, it could go back as far as six years’ worth of returns.
Understand that not every tax return the IRS selects for an audit has an error or problem. The IRS could simply be seeking to verify information you’ve entered.
How Is a Tax Audit Conducted?
If the IRS selects your tax return for an audit, you’ll receive notification through the postal mail. Any other means of initial notification could be a signal of someone trying to defraud you.
After receiving notification from the IRS, you’ll either be asked to submit the requested information by mail or through an in-person interview. At this point, you may want to hire a tax attorney to help you prepare your documents and to ensure the IRS treats you fairly.
Pay close attention to the exact documentation the IRS requests from you, because you don’t have to provide other types of information during the audit. It’s possible that the IRS could request additional documentation later as part of the same audit process, but you’re only required to provide the documents the IRS formally requests.
How Long Does a Tax Audit Take?
Providing the documentation to satisfy a tax audit could take as little as a few minutes, or the audit process could drag out for months or years.
When the IRS initially contacts you about an audit, it will include a deadline for you to respond to the document request. You sometimes can submit this information by mail in just a few minutes. Other times, you will have to meet with IRS agents in person, and you could end up having multiple meetings that may stretch over months.
Ultimately, the length of the audit depends on things like the complexity of the return, the type of information requested, and the availability of the taxpayer to attend meetings. Many times, hiring a tax attorney to help with the audit can expedite the process, because the tax attorney can handle the complexities that cause the process to take a long time.
What Triggers a Tax Audit?
Although the IRS may select any tax return for an audit, there are a few circumstances that may cause the IRS to flag a return for an audit. For example, if your tax return numbers fall far outside the statistical norms – such as if you have abnormal deductions – you’re more likely to be audited.
Should someone with whom you have a business relationship have his or her return selected for an audit, this could trigger an audit of your return as well. If you make a mathematical mistake on your return, or if the income data you enter on your return doesn’t match what your employer sent to the IRS, you could be subject to an audit.
Additionally, the IRS will select returns for audits randomly. However, this is a rare occurrence. More commonly, the IRS picks a return for a specific reason.
Call Tax Attorney David Klasing NOW!!! Simply put, David and his experienced staff handled all of my IRS Audit / Tax issues with the best possible results. From the initial consultation with David I could tell I was in good hands. David and his Staff handled everything directly with the IRS allowing me to sleep better at night and focus on my Family and Business. My family and I could not be more appreciative of the care, kindness, professionalism and most importantly RESULTS we received! Call David now, you will not regret it.
The IRS had mistakenly levied me with a $1.4 million dollar assessment after a retrospective audit. They were very aggressive and threatening, and I knew that I needed a strong legal counsel that could amend the situation and negotiate firmly with the IRS. After working with Dave, I am pleased that my assessment has been reduced by over 1 million dollars to approximately $280,000. David and his staff worked diligently to fight for the justice that I deserved. I would highly recommend his services and am pleased with his meticulous attention to detail and comprehensive and vast knowledge of tax law.
Ultimately resulted in a wonderful outcome of ZERO adjustments.
When I received the audit notice I initially planned to represent my small business. I know every aspect of our operations and had full documentation and justification for all financial decisions. However, when the auditor provided an Information Doc Request that covered 100% of operations and requested to conduct the audit in my home, I retained David Klasing’s firm to represent me. The team was professional and maintained realistic expectations throughout the entire engagement.
In my first meeting with the team it became readily apparent that as a proud owner-operator of a successful small business I was too emotionally invested to objectively consider an auditor’s perspective without getting overly defensive or my blood pressure shooting through the roof. Just being audited felt like a major attack on my integrity, entrepreneurship and pursuit of the American dream. Shifting the work to Klasing’s office took the audit out of my home, emotion out of the discussion, made the audit about money (not about me as a person), enabled me to sleep better at night, and ultimately resulted in a wonderful outcome of ZERO adjustments. Thanks David, Corey, and team.
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 IRS tax auditor's 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 if I don’t 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