Awards & Recognition
Facing an IRS Audit?
For many, an address in California and Orange County means a desirable climate, ample business opportunities, and a rich cultural tapestry to enrich your life. However, according to a study performed by the National Taxpayer Advocate, to the IRS a posh zip code can represent an enforcement opportunity for the agency. The study revealed clusters of IRS tax enforcement activity in affluent areas outside of major urban centers like Los Angeles. Small business owners and individual taxpayers in targeted areas may find it prudent to take proactive measures to guard against the increased risk of facing an IRS audit.
Facing a tax audit is a difficult situation for any taxpayer. For many, knowing that they will be facing a tax audit administered by a trained government agent is enough for panic to set in. But, panicking over a tax audit is neither heathy nor productive. Spending your energy on non-productive worry and anxiety is a surefire way to be unprepared when your tax audit does finally arrive. But, you do not have to prepare for or face the audit alone. The Tax Law Offices or David W. Klasing are dedicated to working with taxpayers facing an audit or other enforcement action. To schedule a reduced-rate consultation, call our firm at 800-681-1295 today or contact us online.
Understanding the Audit Process
The prospect of facing an audit can be intimidating, but the more you know about what is to come, the more relaxed and prepared you will feel as the examination approaches.
First, you will receive official notification from the IRS, either through the mail or by telephone. Audit notifications are not issued electronically, so if you receive an email alert, you should call the IRS immediately to report the message and clarify what, if anything, is expected of you.
The notification will include which documents the IRS wants to review, and will also supply a phone number and mailing address you can contact with any questions. You should respond to the notification by the deadline supplied. You cannot ignore an audit away, and by failing to respond in a timely matter, you merely expose yourself to the risk of wage garnishment, bank levies, and other drastic actions.
There are three main types of audits:
- Correspondence — Takes place entirely through the mail.
- Office — You go to your local IRS office.
- Field — The IRS agent comes to you, either at your home, your business, or your accountant’s office.
The process itself varies in length, depending on variables like your examiner’s caseload, the severity of your tax issues, and time allowed for mailing, responses, and so forth. When the review concludes, the IRS will send you its recommendations, with which you may either agree or disagree. If you disagree, you have 30 days from the date of your notification to file a request for Appeals or an Appeals Mediation Program. This is referred to as Letter 525, or the 30-day letter.
If correspondence with the Appeals Office fails to yield a satisfactory plan, you will receive what is called a 90-day letter, or Statutory Notice of Deficiency (Letter 531). As the nickname suggests, you then have 90 days to address the Notice of Deficiency by petitioning U.S. Tax Court.
When an IRS Audit Becomes a Criminal Investigation
Many times, audit findings can ultimately be resolved through a lump-sum payment or installment plan, and never involve criminal charges or necessitate prosecution. However, there are instances in which an audit does uncover what appears to be a willful and deliberate violation of the law. As the IRS states, “Criminal Investigations can be initiated from information obtained from within the IRS when a revenue agent (auditor)… detects possible fraud.” One sign of a potential criminal investigation following an audit is the abrupt disappearance of your agent, which can be an indicator that he or she is preparing your case for referral to CID.
There are many different tax crimes you can be charged with, with some of the most common being tax fraud and tax evasion. Criminal tax fraud, which entails deliberately lying about your financial records in order to artificially reduce or avoid your tax liabilities, is a very serious crime which can be penalized with hundreds of thousands of dollars in fines and years in prison.
Pursuant to 26 U.S. Code § 7201, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Can I be audited by the IRS for a Failure to File Taxes?
You may or may not face a tax audit for failing to file taxes, but if you were required to file a tax return you almost undoubtedly will have the IRS file your taxes for you. While to the tax layperson this may seem like a means to fool the IRS into doing your taxes for your, in reality an IRS-filed substitute for return will not take the taxpayer’s interests into account. A substituted return does not permit for reducing one’s tax burden through tax credits or deductions.
There are a myriad of reasons that can cause an IRS audit or make a tax audit more likely. Taxpayers who make math errors, round in their math, or use only whole numbers are more likely than average to face a tax audit. Likewise, taxpayers who provide implausible information to the IRS are also more likely to face a tax audit. For instance, a taxpayer who earns $30,000 a year but claims $20,000 in business expenses would likely raise red flags because it would be exceedingly uncommon to spend two-thirds of one’s employment income on business expenses. Similarly, an individual that claims $30,000 in charitable donations while earning $60,000 would also raise suspicion due to the implausibility of the numbers provided.
All of these examples are based on the IRS’ underlying assessment of the likelihood that the taxpayer under paid their taxes and that there is potential for additional revenue through a reassessment. This assessment is conducted and tabulated into what is known as a Discriminant Inventory Function (DIF) score. Higher DIF scores indicate a greater likelihood of tax noncompliance while a lower DIF score indicates a reduced likelihood of tax noncompliance. While DIF is not an indicator or predictor of guilt, the IRS claims that its metric is reliable.
What Should I Do After Being Notified of an IRS Audit?
While it is undoubtedly true that a tax audit can give rise to uncertainty and anxiety, working with an experienced tax professional can eliminate the guess work and answer your questions. For instance, taxpayers are often concerned about the first step they should take after receiving an audit notice. While every tax matter is unique, there are certain steps a taxpayer can take in any matter.
First, all tax audits will require the taxpayer to locate, analyze, compile, and use a wealth of financial, tax, and other documents. Taxpayers are required to produce all documents relevant to their tax audit. Records related to assets held by or under the taxpayer’s control should be kept for the duration of the ownership or control of the asset, plus an additional three years. Tax records should be retained by the taxpayer for at least six years. Payroll tax records are required to be kept, by law, at an accessible location or facility for a minimum of four years. If the taxpayer is unable to produce relevant tax or financial documents, the taxpayer may not only harm his or her chances to reduce or eliminate the consequences faced, but also open the taxpayer up to additional charges for record keeping failures.
What Happens in an IRS Tax Audit?
If you are chosen for an audit, you will be notified via mail with an IRS letter. The type of letter you will receive depends on why you are being audited and what documentation the IRS is seeking. There are three types of IRS audits that you may be chosen for. The simplest and least extensive type of audit is generally a correspondence audit, which is carried out via mail. Another type of audit is the office audit, in which the taxpayer or their representative comes to a local IRS field office to be interviewed. There are two IRS offices in Orange County: one office located in Laguna Niguel, and one located in Santa Ana. The most comprehensive type of tax audit is a field audit, in which the auditor or “revenue agent” will physically visit the taxpayer’s residence and/or place of employment to gather information. The field audit is typically used in situations where there seems to be a major error. Any of these types of audits can double as an “eggshell audit,” meaning there has been a substantial misstatement on the return in question, or as a “reverse eggshell audit,” meaning that a civil IRS audit and criminal tax investigation are occurring concurrently.
Appealing the Results of an IRS Audit if You Disagree with the Outcome
There is bad news and good news for taxpayers who have been audited by the IRS. The bad news is that, in many cases, audits result in the assessment of additional taxes, interest charges, and/or civil penalties resulting from issues such as delinquent tax payments or return filings. The good news is that, if these outcomes are based on IRS errors as to the law or facts at issue, the taxpayer can request appeals, thereby opening a process that enables the taxpayer to challenge the auditor’s initial findings. Our Orange County IRS appeals attorneys and CPAs are here to facilitate this process and have a great track record, especially where the law and fact were demonstrably on our client’s side. We will also advise you when an appeal is not in your best interest because of a low probability of success or based on cost-benefit type analysis.
To request an appeal successfully, the taxpayer must submit specific materials to the IRS (collectively known as a “letter of protest” or “written protest” or file a tax court petition. Ethier approach typically including copies of IRS notices, a list detailing the specific items in dispute, fact or law-based reasoning for disputing each item, and the taxpayer’s contact information. If, when combined, the assessed tax and penalties in dispute amount to $25,000 or less, it may be possible to file a Small Case Request as an alternative to filing a request for appeals. However, taxpayers should also be advised that Small Case Requests are not available for certain business entities, including partnerships and S corporations.
Federal Tax Return Audit Lawyers and CPAs Serving Orange County, CA
Supported by a dedicated team of dually licensed Tax Attorney and CPAs, our Orange County tax return audit and IRS appeals lawyers and CPAs provide trustworthy guidance and unwavering support throughout all stages of auditing. From helping you prepare before the audit begins, to negotiating and advocating on your behalf, to appealing the results once the audit concludes, we will stand by your side to uphold your rights, minimize your tax liabilities, and mitigate the civil and or criminal tax penalties you are facing. To discuss your income tax return question in a reduced-rate consultation, contact us online, call the Tax Law Office of David W. Klasing in Irvine at (949) 681-3502, or call our main office at (800) 681-1295.
Rely on our Tax Audit Experience in Orange County
Whatever initially triggers an examination, one fact remains the same: audits have earned a fearsome reputation, and can become highly stressful, confusing, and complicated procedures. The IRS is notorious for imposing some of the most stringent, comprehensive, and financially complex taxation rules in the world, and as a result, effectively navigating your way through an audit without experienced professional help can be a serious challenge. Furthermore, if you disagree with the IRS’ findings and wish to appeal the results, you may eventually find yourself involved in tax court litigation.
If you have been chosen for an audit, you should know that you have a right to legal representation as part of the process. As an experienced dual tax lawyer and CPA, David W. Klasing combines the aggressive client advocacy of an attorney with the financial acumen of an accountant, and will guide you through the entire examination process to both minimize your liability and bring you into compliance with state and federal law. To arrange for a reduced-rate initial consultation with an Orange County tax audit attorney, call The Tax Law Offices of David W. Klasing at (800) 681-1295 today.
