Call Now (800) 681-1295

Tax Audit Lawyer

Awards & Recognition

Table of Contents

    You may feel like a brave person with 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 an essential form with your return. This type of audit is simple and not all that frightening.

    In other instances, the IRS may seek 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 terrifying situation. The attorney can negotiate with the IRS while helping you prepare a defense against the financial exposure and assisting 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 their situation. In some instances, it is indeed an action by the taxpayer that increases their odds of being audited or triggers the audit. For example, 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 provide taxpayers with tax audit help when navigating these problematic scenarios.

    However, in other cases, specific characteristics of the taxpayer make the individual an attractive target for an audit. For instance, the IRS audits 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 an audit due to specific characteristics, preparing and protecting your assets and business from the IRS is equally essential.

    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 you are under audit. The IRS sends letters and notices to taxpayers for an array of reasons. So, 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. Please consult the IRS Notice lookup tool to assess your IRS letter or notice. Taxpayers handling this limited request promptly without raising additional red flags will typically avoid a full-scale IRS tax audit unless underlying severe problems exist. An experienced tax audit attorney can often facilitate this process and reduce the likelihood that the taxpayer makes a grave mistake or a damaging admission.

    Unfortunately, some taxpayers 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.

    New IRS High Net Worth Initiatives

    On September 8, 2023, the IRS declared a significant increase in compliance efforts targeting high-income individuals, high-wealth entities, and partnerships. A notable initiative includes the plan to audit 75 of the most important partnerships in the U.S., specifically targeting those with assets averaging $10 billion or more. This move responds to criticisms of historically low audit rates for partnership tax returns. It aims to reduce the frequency of “no-change” audits through improved case-selection tools, leveraging machine learning and A.I. technologies.

    Enhanced Scrutiny and Technology-Driven Compliance: The IRS is shifting its focus toward wealthier taxpayers and away from the working class, employing advanced technologies like Artificial Intelligence (AI) to identify sophisticated tax avoidance schemes. This sweeping effort is designed to restore fairness in tax compliance, particularly emphasizing high-income earners, partnerships, and large corporations. The IRS’s improved technology and AI will enhance its ability to detect tax evasion, identify emerging compliance threats, and refine case selection to avoid unnecessary audits. In line with this initiative, the IRS has committed to maintaining stable audit rates for individuals earning under $400,000 annually.


    Table of Contents

    The High Wealth, High Balance Due Initiative: The IRS is sharpening its focus on high-income taxpayers through the High Wealth, High Balance Due Taxpayer Field Initiative. This initiative zeroes in on individuals with a total positive income exceeding $1 million and more than $250,000 in recognized tax debt. Leveraging the success of previous campaigns that collected $38 million from over 175 high-income earners, the IRS is gearing up to deploy a dedicated team of Revenue Officers for these high-value collection cases in FY 2024. This expansion will involve reaching out to about 1,600 taxpayers in this bracket, who collectively owe hundreds of millions in taxes.

    IRS Wealth Squad: The IRS’s Global High-Wealth Industry Group, known as the “Wealth Squad,” represents a significant shift in focus toward high-income taxpayers. This specialized team is dedicated to auditing and investigating high-net-worth individuals and entities, particularly on partnerships, private foundations, and offshore accounts. Their comprehensive approach examines the entire financial spectrum of taxpayers and their associated enterprises. The Wealth Squad’s targeted audits necessitate a proactive approach to tax compliance, especially for those in the highest tax brackets. The 2015 bipartisan Budget Act has further empowered the Wealth Squad, simplifying the process of auditing partnerships.

    Expanding Scrutiny on Digital Assets: In parallel, the IRS is ramping up its efforts in the realm of digital assets, including activities like the John Doe summons process and the recent introduction of proposed broker reporting regulations. The IRS’s Virtual Currency Compliance Campaign, which is set to continue, initially revealed a potential 75% non-compliance rate among taxpayers identified through data from digital currency exchanges. As a result, the IRS is preparing to develop more cases involving digital assets for in-depth compliance investigations, which are anticipated to commence early in Fiscal Year 2024.

    Intensified Focus on FBAR Non-Compliance: The IRS is escalating its scrutiny on violations related to the Report of Foreign Bank and Financial Accounts (FBAR), especially targeting high-income taxpayers using foreign bank accounts to circumvent disclosure requirements and evade taxes. U.S. persons holding a financial interest in or signature authority over foreign financial accounts must file an FBAR when the aggregate value of these accounts exceeds $10,000 at any point during the calendar year. Recent IRS analyses of multi-year filing patterns have pinpointed hundreds of potential non-filers. These individuals have accounts with average balances exceeding $1.4 million. In Fiscal Year 2024, the IRS is set to initiate audits on the most flagrant of these potential non-filer FBAR cases, reaffirming its dedication to enforcing global tax compliance.

    Addressing Labor Broker Schemes: Another area of focus is the misuse of labor brokers in industries like construction, where payments to shell companies are used to evade taxes and employment regulations. The IRS is expanding its efforts through civil audits and criminal tax investigations to improve compliance and level the playing field for law-abiding contractors.

    At the tax law offices of David W. Klasing, we specialize in navigating complex tax issues and disputes with a blend of deep substantive federal and California state tax law knowledge and a keen understanding of tax practice and procedure. Our proactive approach focuses on anticipating and planning for potential tax controversies during the transaction structuring and completion stages. When tax disputes arise, we offer confidential resolution strategies during examinations by the IRS and California state taxing authorities and in administrative appeals. Suppose you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported by an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation. In that case, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

    Our advocacy extends to sensitive tax issues, including criminal tax investigations, voluntary disclosures, whistleblower defense, fraud allegations, promoter audits, and investigations involving tax issues at both congressional and internal levels. We represent a diverse clientele, including corporations, partnerships (under TEFRA and BBA partnership audit procedures), individuals, especially those targeted by the Global High Wealth initiative, estates, and trusts. Our expertise covers a broad spectrum of domestic and international tax matters, ensuring comprehensive support for our clients in all tax-related challenges.

    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 back to the dawn of time. If specific issues are 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 two years, your audit might only go back two years. Most audits tend to only go back about two years. However, according to the IRS, audits are fairly normal to include the last three years of your tax history.

    If your situation is unique, like where the IRS proves a 25% or greater understatement of taxable income, the IRS can extend how far back your audit may go. Generally, audits do not go back beyond six years, although this is not a hard rule. If your audit is still not resolved after examining the last six years of your tax history, the IRS can request you to extend the statute of limitations for the 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 often will assess based on known income, often accompanied 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 extending the IRS’s time limit is in your best interests. At the Tax Law Offices of David W. Klasing, we are well-versed in a wide range of domestic and international tax matters. Our team excels in navigating the intricacies of tax controversies, offering strategic, practical advice to clients embroiled in disputes with the Internal Revenue Service and California state taxing authorities like CDFTA, EDD, and FTB.

    Our proficiency in handling high-profile IRS enforcement issues is unmatched. We deeply understand tax laws and procedures, providing our clients a substantial advantage in complex tax disputes. The Tax Law Offices of David W. Klasing is distinguished for its expertise in managing sensitive tax disputes at all governmental levels.

    Our seasoned advocates are adept at developing persuasive arguments to support our clients’ positions. Our in-depth knowledge of the federal and California state tax system and our experience in tax policies and procedures gives us a strategic edge in resolving tax disputes efficiently and effectively.

    We offer comprehensive tax representation services, including sensitive (eggshell) audits, tax compliance, reporting positions, employment tax issues, estate, and gift tax disputes, cases involving unreported income, civil fraud, negligence, accuracy-related penalties, and other tax-related penalties. We specialize in complex offshore tax issues and non-compliance, guiding clients through domestic and offshore voluntary disclosures, streamlined filings, tax injunctions, tax shelters, and promoter investigations.

    Understanding the scope and limitations of IRS audits is crucial in tax disputes. Our dual-licensed Tax Audit Representation Attorneys & CPAs are here to help. We can assess your situation and advise on the best course of action, whether challenging the audit or extending the IRS’s statute of limitations. Trust us to navigate these complex issues and work towards a favorable outcome for your tax concerns.

    How many years of returns are at risk during an audit?

    The IRS typically restricts the scope of a potential audit to three years from the due date or filing date of the most recent return, whichever is later. This restriction does not, however, apply if fraud is allegedly involved, if a return was not submitted, or if the taxpayer is accused of materially omitting or concealing items of gross income. Therefore, all can potentially lead to the examination of additional tax years and tax deductions not initially mentioned in the audit letter.

    IRS Audit Triggers

    The federal tax gap, estimated at approximately $441 billion annually, represents a significant challenge for the IRS and a potential risk for taxpayers. The substantial tax gap in the United States, representing the difference between taxes estimated to be owed if everyone filed properly and taxes paid, has prompted significant action from the federal government over the years. Congressional hearings are underway to explore strategies for recouping these lost revenues, focusing on offshore tax evasion and sophisticated domestic tax avoidance schemes. The IRS’s increased focus on sophisticated tax evasion schemes means the risk of audits and investigations is higher than ever.

    The tax gap is primarily fueled by non-filing, intentional underpayment, and intentional underreporting of income. These are statistical issues and the leading reasons for IRS audits and criminal tax investigations. The IRS’s aggressive pursuit of reducing the tax gap means that non-compliance can lead to severe civil and criminal tax consequences, including penalties and interest charges, even for what you may believe to be unintentional errors.

    The Biden administration’s plan to bolster the IRS’s budget by $80 billion over the next decade signals a new era of intensified civil and criminal tax enforcement. This increased funding is expected to enhance the IRS’s capacity to aggressively target and investigate tax evasion. For taxpayers, this means that compliance is more crucial than ever. The risk of audits and investigations will likely rise, particularly for those with complex tax situations or offshore interests.

    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 worst is a 998, etc. The more likely the return is to understate taxable income, the higher the score the return receives. The IRS starts an audit cycle by starting with all the 999s, then moves through the 998s, then the 997s, 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 common for people to believe they have been selected for an audit randomly. The truth is these random audits are not at all as random as they seem to be. When tax returns do not substantially align 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 and paying 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 in your lifestyle appearing excessive compared to your history of reported income compared to easily verifiable financial spending habits. For example, suppose a taxpayer is writing off proportionately large charitable donations as tax deductions but has relatively small income streams. In that case, this may be a red flag to the IRS, and taxpayers will often be audited. Paying off very large debts with very low historical income reporting 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. Often, 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 confuse 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 over a few years might trigger an audit or the hobby loss rules.

    Common Reasons for the IRS to Conduct a Tax audit

    An automated DIF score is used to select three-quarters of all returns for audit. The taxing authority’s automated rating system, DIF, or Discriminate Function, generates a score (DIF). Each return is subjected to statistical analysis to rate the return’s likelihood of substantial misrepresentation. Underreporting income or overreporting deductions might lead to an underestimated return.

    Additionally, the tool flags return that incorrectly state information the taxation authority has received from other parties regarding your taxable income, such as 1099, 1098, and W2 forms. They begin the audit selection process by choosing audit reports with the lowest DIF scores, or 999s, and then move on to the 998s, 997s, and so forth until they reach their audit budget cap.

    The opposite quarter’s results are chosen based on data gathered from a third party or source that suggests a return could be understated. Newspapers, open records, and informants are a few of these sources. Taxing authorities are known to match an individual’s perceived quality of living to establish if a taxpayer’s lifestyle makes economic sense given their stated income level. Authorities may use various sources of information against their reported income.

    IRS Auditing Procedures

    The following variables increase a taxpayer’s audit risk:

    • Reported or omitted amounts materially differ from information gathered by the taxing authorities from third parties on the return. (i.e. W2’s 1099’s 1098’s 1099R’s)
    • Complex and large dollar investments or business expenses on the tax return.
    • Previous audit that resulted in a tax deficiency.
    • Complex tax transactions that lack sufficient explanation on the tax return.
    • Itemized deductions on the tax return that are disproportionate to the income or outside the taxing authorities’ statistical parameters.
    • Taxpayer owns or works for a business that receives large amounts of cash in the ordinary business.
    • Taxpayer has claimed substantial cash contributions to charities that are disproportionate to their income.
    • Taxpayer is a shareholder or partner in a partnership or corporation currently under audit.
    • An informant or whistleblower has given information to the IRS.
    • Taxpayer has extensively used offshore credit cards, investments, and bank accounts, or filed high-income returns.
    • Taxpayer is self-employed and thus viewed as more likely to under-report taxable income and overstate tax deductions. Additionally, self-employed individuals who report Schedule C losses are often selected for audit.
    • Taxpayer’s engagement in employment tax schemes, such as employee leasing, paying in cash, and filing false payroll tax returns.
    • Taxpayer’s that underreported alimony. (The IRS matches alimony deducted by one ex-spouse to the income reported by the other ex-spouse)
    • Non-filers. Each taxing authority has its strategy to identify non-filers. Most non-filers are discovered via computers that attempt to match the taxable income obtained from documents provided by third parties.

    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 go by before they surprise you in person. If this happens to you, the most important thing to remember is that they will ask you many questions they already know the answer to, hoping 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 fall for their trickery, write down everything you can remember you were asked and truthfully write down your answers to aid your criminal tax defense attorney in defending you and performing damage control.

    Sometimes, especially with the surges of COVID-19, 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, 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. 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 to prevent our clients from being interviewed where possible. Where it is not, we thoroughly prepare our clients to cooperate successfully with the auditor while not creating additional exposure by providing a poor interview or one that the auditor interprets as fraudulent.

    Once the audit is complete, the IRS will determine what happens next, including assessing additional taxes, penalties, and interest, refunding overpaid taxes, or simply issuing the ever-allusive, no-change audit. You will be allowed to agree or disagree with the audit findings. If you disagree with the audit, ask 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. 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, which 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 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 visit 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.

    In an era where the risk of an IRS audit is unprecedented, understanding the evolving landscape of tax enforcement is crucial for every taxpayer, especially those with uncertainties in their tax affairs. With its intensified focus on criminal tax enforcement and expanding scrutiny of cryptocurrency transactions, the IRS has significantly raised the stakes for compliance. At the Tax Law Office of David W. Klasing, we recognize the anxiety and challenges of facing an audit or potential criminal charges. Our extensive experience and proactive strategies have consistently safeguarded our clients, ensuring that none have faced jail time in tax audit cases. We’re here not just to navigate the complexities of tax law for you but to restore your peace of mind, helping you to sleep soundly once again, knowing your tax issues are being expertly managed.

    IRS’s Intensified Criminal Tax Enforcement

    When facing actual or merely potential criminal tax allegations, the difference between a mistake and a crime can have significant consequences. In an era where the risk of an IRS tax audit is unprecedented, understanding the evolving landscape of tax enforcement is crucial for every taxpayer, especially those with a history of cheating on their tax returns. With its intensified focus on criminal tax enforcement and expanding scrutiny of cryptocurrency transactions, the IRS has significantly raised the stakes for non-compliance. At the Tax Law Office of David W. Klasing, we recognize the anxiety and challenges of facing an audit & potentially facing criminal tax charges. We have never had a client go to jail following a tax audit. We encounter these situations frequently and have developed effective strategies to handle them. We’re here not just to navigate the complexities of tax law for you but to restore your peace of mind, helping you to sleep soundly once again, knowing your tax issues are being expertly managed.

    Under former Commissioner Charles Rettig (2018-2022), the IRS marked a significant return to stringent criminal tax enforcement. This shift was particularly relevant for high-income individuals, and businesses now face increased scrutiny. Notably, this has been due to the following:

    • Enhanced Techniques in Tax Fraud Prosecution: The IRS’s renewed focus includes a comprehensive approach to identifying and prosecuting tax fraud. Agents are now better equipped with forensic accounting skills and supported by fraud technical advisors, enhancing their ability to build strong criminal tax cases from what started as civil tax audits, meaning that taxpayers with complex financial portfolios are now at a higher risk of criminal tax investigation & subsequent prosecution:
    • Unannounced Visits and Global Enforcement Initiatives: Additionally, the IRS has initiated a program involving unannounced visits to high-income tax filers, likely leading to more audits and criminal tax referrals. This initiative addresses the disparity in criminal tax cases between low-income and high-income filers. Other enforcement measures under Commissioner Rettig include enhanced collaboration with foreign tax authorities and a significant recruitment drive in the IRS criminal investigations department to bolster enforcement of U.S. tax law violations globally.
    • Increased Tax Fraud Referrals to CI: In mid-2019, the IRS announced a new initiative to increase the number of tax fraud referrals to IRS-CI, the IRS’ criminal tax division, which was initiated because the federal government lost billions of dollars to tax evasion It bodes poorly for taxpayers who are behind on their taxes or are out of compliance with offshore asset and taxable income reporting laws, such as FATCA. If you have unfiled tax returns, failed to report income, failed to pay taxes, or failed to disclose foreign assets, your risk of being referred for an IRS criminal investigation dramatically increases.

    If you have been chosen for an IRS audit, are concerned about potential criminal tax charges, or have unresolved issues such as unfiled income tax returns, it is crucial to address the problem immediately with guidance from a trusted tax professional. At the Tax Law Office of David W. Klasing, we have more than three decades of experience handling civil and criminal tax cases, enabling us to approach any tax issue – no matter how sensitive – from a strategic standpoint focused on mitigating penalties, minimizing damage, and achieving tax compliance successfully.

    IRS-CI’s Expanding Focus on Cryptocurrency

    As IRS-CI expands, one of its top priorities is to increase taxpayers’ compliance with cryptocurrency reporting requirements – and, as the IRS has already demonstrated by taking aggressive enforcement actions against crypto users and exchanges, that translates to real consequences for taxpayers, including penalties, auditing, and even criminal tax charges. If you are a cryptocurrency user, you need to be prepared for a Bitcoin tax evasion crackdown – which will likely only intensify as IRS-CI grows in size:

    • IRS-CI’s Centennial Shift to Cryptocurrency Enforcement: As the IRS Criminal Investigation Division (IRS-CI) celebrates its centennial, it is simultaneously expanding its enforcement focus to include cryptocurrency users. This move signifies the IRS’s determination to address intentional/fraudulent tax evasion in the rapidly evolving digital currency domain.
    • Increased Scrutiny on Cryptocurrency Transactions: Cryptocurrency, once seen as a relatively anonymous financial realm, is now a primary target for the IRS-CI. With enhanced tracking technologies, the IRS actively targets individuals who fail to report their cryptocurrency transactions accurately. The stakes are high, with consequences ranging from audits and substantial penalties to potential criminal charges for deliberate evasion.

    If you have a Bitcoin account or wallet, you should come forward before it’s too late. By reporting Bitcoin transactions accurately, you may be able to avoid or minimize penalties (or prevent yourself from being prosecuted).

    Work with the experienced Bitcoin tax attorneys at the Tax Law Office of David W. Klasing for trusted cryptocurrency tax help, including Bitcoin-related tax audit representation and criminal tax defense representation.

    Understanding the Implications of the 2022 IRS-CI Tax Crime Statistics

    The 2022 report from the IRS Criminal Investigation Division (IRS-CI) presents a clear picture of the agency’s formidability and effectiveness, with recent statistics underscoring their relentless pursuit of intentional/fraudulent tax evasion:

    • Aggressive Enforcement Tactics: IRS-CI executed a significant number of warrants, 1,210 in total, and referred an impressive 1,837 crimes for criminal tax prosecution. This aggressive approach highlights the serious risks for those involved in fraudulent tax evasion.
    • Exceptional Conviction Rate: Despite budgetary challenges, IRS-CI has maintained an extraordinary conviction rate of 90.6%, resulting in 1,564 convictions. This high success rate sends a clear message about the consequences of intentionally engaging in tax crimes.
    • Dominant Focus on Tax Crimes: Most of IRS-CI’s efforts, a striking 71.7%, are concentrated on investigating tax crimes, which focus far exceeds their involvement in non-tax (15.2%) and narcotics crimes (11.6%), reflecting their commitment to uncovering and prosecuting fraudulent tax fraud, which amounted to $5.7 billion last year.
    • Rigorous Tax Crime Prosecutions: Out of 1,388 investigated tax crimes, 789 were referred for criminal tax prosecution, leading to 699 individuals being sentenced. These cases cover a broad spectrum of tax fraud, including employment fraud, payroll issues, abusive schemes, refund fraud, and more, demonstrating IRS-CI’s thoroughness in tackling tax evasion.

    Even minor oversights can lead to severe consequences, so ensuring tax compliance is paramount. The IRS-CI’s use of advanced data analytics and its proficiency in tracing digital currencies like Bitcoin means taxpayers must be more vigilant than ever in their financial and tax affairs. While laws and statistics have changed, IRS-CI’s high conviction rates have remained consistent, signaling danger for taxpayers facing fraud allegations. Even an initial civil tax audit can lead to an IRS criminal investigation if fraud indicators exist, such as unfiled returns, multiple delinquent filings, improperly claimed tax credits, fictitious dependents, falsely inflated deductions, or other red flags for tax evasion.

    At the Tax Law Offices of David W. Klasing, our team handles criminal tax investigations at federal and California state levels, including those initiated by the IRS Criminal Investigation Division (CID) or the California Tax Recovery and Criminal Enforcement (TRaCE) Task Force. We are equipped to tackle various criminal tax issues, from tax evasion and willful failure to file tax returns to preparing false returns and aiding in tax fraud. We specialize in resolving cases before they escalate to criminal referrals or arrests, offering a proactive approach to safeguard your interests. Our track record of successfully handling criminal tax investigations and charges speaks to our expertise. Whether it’s crafting a robust defense, negotiating plea agreements, or providing crucial guidance in grand jury proceedings, our team is equipped to deliver optimal outcomes. We understand the intricacies of tax law, which is vital in these cases, and often collaborate with other criminal defense lawyers to fortify your defense. Choosing our office means opting for a team that not only aims to defend you effectively but also strives to prevent criminal charges through strategic negotiations with tax authorities.

    Voluntary Disclosure: A Pathway to Avoid Criminal Tax Prosecution

    In an era marked by the IRS’s escalated scrutiny and sophisticated enforcement tactics, taxpayers navigate an increasingly complex and rigorous tax landscape, especially those in high-income brackets and involved in large partnerships. From the IRS’s targeted initiatives on large partnerships and the meticulous work of the IRS Wealth Squad to the expanding focus on cryptocurrency and the rising tide of criminal tax investigations, the need for astute tax compliance has never been more critical. This landscape, characterized by advanced AI-driven tax audits, a keen focus on high-net-worth individuals, and stringent measures against FBAR violations, underscores the importance of proactive measures. Among these, voluntary disclosure emerges as a pivotal strategy, especially for those with a history of cheating on their tax returns. It offers a pathway to tax compliance for those who may have inadvertently or willfully strayed, providing a shield against the harsh realities of criminal tax prosecution while navigating the complexities of today’s tax environment.

    As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.

    You must hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.

    Moreover, tax attorneys possess thorough expertise in navigating IRS audit procedures, adeptly conducting audits, and contesting audit findings when taxpayers challenge them. We are uniquely positioned to handle tax audits with underlying complexities or potential criminal tax implications. Our independent analysis and proactive approach in audit defense not only aim to limit the scope of the audit but also work diligently to minimize potential tax liabilities and prevent the audit from expanding into additional years. With the Tax Law Offices of David W. Klasing, you gain a defense well-versed in tax law and dedicated to vigorously protecting your rights and interests.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys & KovelCPAs, our firm provides a one-stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and net worth.

    What is an IRS civil examination?

    Civil tax audits may take many different shapes, and they usually vary depending on the audited individual and how complicated their tax return is. One common audit method is the IRS or FTB correspondence examination, which is usually just a phone conversation or written contact with the IRS or FTB addressing very simple issues, such as how the person supported a certain deduction. The IRS or FTB will want documentation supporting any queries they raise on a tax return. The IRS or FTB will predictively simply refuse to grant the appropriate deduction if the audited taxpayer cannotprovide the requested supporting documentation. Still, a pattern of unsupported deductions can lead to an inference that tax fraud has occurred.

    A filed audit occurs at a taxpayer’s business or home. The revenue agent conducts a “field inspection” to review the taxpayer’s books and records. The IRS and FTB field agents often conduct a more comprehensive examination than an “office/campus auditor” because of their higher level of training.

    What to Do If You Get Audited

    If you get audited, you should begin by speaking with a lawyer as soon as possible, especially when you know you cheated on the returns under audit. Many taxpayers do not realize the full extent of their rights regarding 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 the IRS with necessary documents, records, or other information. Not everyone is good at keeping organized, thorough records, and you might need 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).

    Is it your right to know why you were selected for examination?

    The IRS Restructuring and Reform Act of 1998 (RRA 98) Section 3503 stipulates the general criteria and procedures for choosing which taxpayers to examine must be published. The IRS examiner must give the taxpayer an answer as accurately as possible without disclosing restricted information if the taxpayer is under examination or his attorney asks why the taxpayer was chosen for examination.

    Top Reasons for Tax Investigations and Audits

    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 your submitted information due to your failure to file or other problems with your taxes.

    In some instances, taxpayer characteristics may mean 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. 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 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 taxpayers reporting between $5 million and $10 million in income and facing an audit rate of 10.53 percent.

    Similarly, taxpayers who own small businesses, are involved with a business dealing mostly in cash, or see big changes in their finances are also more likely to face an audit. Finally, in light of the IRS and DOJ’s push to stamp out offshore tax evasion, holders of foreign assets and accounts and those who file international tax returns also face an elevated audit risk.

    The second common reason people face an audit is that the IRS identifies a problem with their taxes. All tax returns are scored using a “Discriminant Function System” or DIF. According to the IRS, DIF functions by:

    “…rat 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 screening and identification mechanisms so that the 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 are much more likely to be audited. The audit rate for individuals reporting zero income is surpassed by the rate of high-income taxpayers reporting 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 right to know why they were selected for an audit. 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 why they were selected for audit. Once the taxpayer or his or her tax attorney makes this request, the IRS must provide a reason for the audit that is as accurate as possible in light of the 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 making admissions or other mistakes that may result in the case being referred for criminal prosecution.

    How the IRS decides which tax returns are audited

    The IRS, in a Fact Sheet from 2006, outlines how several criteria are used to choose returns:

    1. Potential participants in abusive tax avoidance transactions

    Because the IRS receives information when it audits other taxpayers involved in abusive tax avoidance transactions, some taxpayers’ returns are chosen.

    1. Computer Scoring

    Each tax return is given a “score” based on the service’s previous statistical experience with returns of a similar nature. The IRS assesses each return for the possibility of a taxable income discrepancy using its “discriminate function system.” In contrast, it rates returns for the possibility of unreported taxable income using its “unreported income function.” The IRS then chooses the highest of these scored returns for an audit.

    1. Large Corporations

    Large corporate filings are frequently examined by the IRS each year.

    1. Information Matching

    The IRS will frequently reconcile taxpayers’ tax returns with related information returns from third parties and check for errors. If errors are discovered, the return can be chosen for audit or automatically adjusted via a CP 2000 notice.

    1. Related Examinations

    Some tax returns are chosen for audit solely because they engaged in transactions or business with someone else who was audited, an instance of the IRS tracing a transaction’s “breadcrumbs.”

    1. Other Methods

    Finally, when returns are part of a “local compliance initiative,” the IRS designates them for examination. For instance, the IRS occasionally chooses particular tax return preparers or companies suspected of aiding and abetting income tax evasion or simply for incompetence for audits or criminal tax investigations and checks the clientele of such preparers. Additionally, it will occasionally focus on certain markets or market segments.

    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 a program used to identify statistical anomalies in a taxpayer’s annual return. The DIF system also looks for several types of questionable and conflicting data, such as a taxpayer claiming a home office deduction and simultaneously deducting rent on an office outside the home.

    IRS examiners will further analyze any red flags that the DIF raises should your return be selected for audit.

    Taxpayer’s Income Level

    The IRS primarily performs tax audits on those with an income level of over $500,000 annually. Alternatively, those who earned between $20,000 and $200,000 were rarely under the audit microscope.

    Additionally, if you earn more than $500,000 and attempt to wipe out a large portion of your taxable income through deductions, this may be an anomaly to support a tax audit.

    Depositing Large Sums of Money

    Another red flag that could trigger a tax audit is when taxpayers frequently deposit at least $10,000 into their accounts. Suppose taxpayers do not have a reasonable explanation for why they could make cash deposits of over $10,000. In that case, the IRS may use this as evidence the taxpayer is engaged in illegal activity.

    Additionally, suppose a person tries to evade triggering an audit by purposely depositing funds less than $10,000, such as $9,999. In that case, this will also trigger bank and IRS reporting regulations and possibly a criminal tax prosecution for structuring.

    Self-Employed Workers

    Schedule C Self-employed businesses are also typical targets of tax audits. One reason is that self-employed workers 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 it 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, suppose a taxpayer operates a barbershop as their only source of income and their reported expenses do not proportionally match their income. In that case, this may trigger a tax audit, 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, including income earned in foreign countries. If you own or control one or multiple foreign financial accounts, the IRS wants to know that you report 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 with over $10,000 in all their combined foreign financial accounts must report this to the IRS on an FBAR.

    Suppose 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 required for foreign business entities. In that case, they may open an offshore financial account and evade taxable offshore income-focused eggshell or reverse eggshell audit.

    The IRS may decide to begin a civil or potentially criminal tax audit for many 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 than 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 by phone. As a result, be wary of any parties that may pose as IRS or State agents 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 the 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 business’s finances. For instance, the representative may want to know more about your expenses or why you claimed a certain business deduction.

    You must respond timely to a federal or state tax audit notice. Ignoring all correspondence from the IRS or state taxing authorities could quickly get you 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 who could easily guide you through the various steps of a tax audit, including an appeal or litigation if necessary. We bring expertise and a proactive approach to resolving complex tax disputes. We specialize in high-risk tax audits, including high-profile IRS enforcement issues, where our strategic insights and persuasive advocacy make a significant difference.

    Our areas of expertise include, but are not limited to:

    • Handling audits and reconsiderations;
    • Appeals and protests of audit results;
    • Responding to Statutory Notices of Deficiency and Notices of Proposed Assessment;
    • Defending against sales and use tax issues tailored to various industries;
    • Addressing CDTFA site visits and summons defense;
    • Representing online merchants in tax disputes;
    • Advocating for exemptions, deductions, and responsible officers;
    • Defending against civil and criminal fraud allegations, negligence, and other penalties;
    • Resolving issues related to tax shelters and promoter investigations;
    • Negotiating settlements with various tax authorities.

    At the Tax Law Offices of David W. Klasing, we are committed to delivering strategic, practical solutions to your tax disputes, ensuring compliance and safeguarding your interests.

    How Many Tax Years Does an IRS Tax Audit Cover?

    An audit will generally 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, the audit window can expand to six years. When the taxpayer has failed to file, fraud allegations are included, or the auditor discovers signs of fraud, the length of the audit period is, theoretically, indefinite. The auditor can look back and assess tax for any tax year.

    What Type of Tax Audit Will I Face?

    The IRS can launch three basic forms of an audit against a taxpayer. Determining the type of audit you face can often provide insight into the potential severity of your situation. The types of IRS audits a taxpayer can face are:

    • Field audit – A field audit is the most serious type of audit a taxpayer or taxpayer’s business can face. During a field audit, an IRS investigator will visit your home, business, or both to understand 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 opens the door to increased risks and exposure to interviews. Furthermore, when an office audit is justified, a six-year statute of limitations typically exists, and there is a greater likelihood that fraud will be discovered. If fraud is discovered or admitted, the IRS may have an open-ended statute of limitations and 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

    Suppose you suspect that your audit was triggered by a mistake or some potential wrongdoing on your part. In that case, the most important thing you can do is seek a tax attorney’s representation as soon as possible, which is essential because if you believe that you made an accidental or intentional error, a chance exists that the agent may interpret the surrounding facts and circumstances as wilful tax fraud or tax evasion.

    Consider this scenario: You enter the audit knowing that certain “mistakes” exist in your taxes. You know 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, suppose the agent discovers the errors without an explanation or mitigating factors. In that case, 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, personal income taxes, and California state tax returns. Taxpayers aware of tax “mistakes” and errors should immediately contact a tax lawyer and begin preparing 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 is based on several factors. First, taxpayers who have failed to file and pay taxes will likely 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 risk having the IRS complete taxes on their behalf. While this may sound like an appealing labor-saving approach, the IRS will typically take extremely unfavorable positions to the taxpayer and result in an inflated tax liability.

    While the financial penalties are concerning, if signs of fraud accompany your failure to file taxes, 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 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
    • Keeping secret accounts

    If these fraud indicators are present, your audit will likely 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 that the IRS, the Department of Justice, and the entirety of the U.S. government are 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 the 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, the 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. It is likely more of a matter of when the audit will be conducted than if the IRS will audit. Offshore penalties are particularly harsh even when conduct is non-wilful and presents the potential for felony tax evasion charges.

    How Should I Prepare for an IRS Audit?

    Taxpayers need 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 agencies 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 non-existent 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, which shifts the burden of proof onto the taxpayer. The taxpayer must gather documents and records to disprove the IRS’s claims, which 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. Suppose the business owner fails to establish ground rules for the sample audit. In that case, there is a chance that the sample will not represent the company’s actual volume of business. As such, the company may be placed on the hook for taxes on income never 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 tax audit help from a tax professional as soon as possible to prepare for an audit.

    What can I do to prepare for an audit?

    Audits tend to focus on credibility, so be as organized as possible and be prepared to substantiate receipts, invoices, sales records, canceled cheques, credit card statements, bank statements, or other documents. Failure to prove to an auditor that a non-taxable deposit can also lead to your taxable income going up. If you have any missing records, immediately arrange duplicates. To be more credible, take original business documents with you, which can be copied and returned to you. Do not discuss tax returns not currently being audited.

    How to survive an audit if you have cheated on your return being audited

    If you get a letter from the IRS stating you have been selected for audit, ordinarily, it is because you have been selected through the IRS’s discriminant scoring function system. The Discriminant Function System (DIF) score rates 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.”

    The most commonly audited issues are the gross income reported, the trade or business deductions taken, bad debts, net operating losses, capital loss carryforwards, depreciation, and capital expenditures.

    If you are not entitled to certain deductions you took or if you have intentionally understated your taxable income, it is best to consult with a tax attorney before contacting the IRS. A Tax Attorney should also be able to positively identify which type of audit it is, as it could be a correspondence, office, or field audit.

    A correspondence audit is often caused by the IRS’s computerized system flagging your return. One reason could be that the system thinks you have underreported income. However, whatever the reason, if the IRS thinks a discrepancy exists, an audit will result.

    An office audit is a much more serious type of audit because of the increased chance of an interview or a 6-year statute of limitations being opened if it is found that your taxable income is understated by 25% or greater. An open-ended statute of limitations can open if the taxpayer discovers or admits fraud. At the interview, the IRS will require you to provide information on your reported net income and how you obtained the figures reported. They will further cross-check your accounting to your banking records and ask you about your payroll substantiation and 1099 reporting on independent contractors. You must be able to substantiate both your reported income and claimed deductions.

    A field audit is by far the most intrusive audit that exists. Such an audit will often involve a business and/or home visit by the IRS or FTB to interview the taxpayer and the business members at random. All business records and financial statements will be thoroughly reviewed. Often, the IRS or FTB agent will be a licensed CPA.

    You must keep and present your tax records in an organized fashion, as the IRS or FTB will shift the burden onto you to help them make sense of the records, forcing you to sort them out ahead of time. The most important thing to remember is to call your tax attorney to avoid making any criminal admission apart from other evidence they may have if you find yourself under audit after having intentionally misstated your taxable income.

    A tax attorney is also important because he/she can help avoid a situation where additional tax years are audited and attempt to limit the number of your businesses that become audited due to findings related to the initial audit target.

    Suppose you cheated on your original return and are now being audited. In that case, your original preparer is likely to become a witness for the government in the case where you had provided them with altered tax or accounting figures. You will also not have attorney-client privilege in such a situation, and any communication between the two of you can be used against you in court regardless of any promises to the contrary by your accountant.

    Warning signs of a criminal referral from an IRS audit

    If the civil auditor has strong suspicions of fraud, a criminal referral is likely to occur after the civil audit. Common fraud indicators are sometimes known as “badges of fraud “and may include:

    • Failure to disclose revenue,
    • Inability to substantiate significant amounts of claimed deductions,
    • Material overstatement,
    • The use of two sets of books,
    • Fabrication of records & substantiation
    • A technical fraud advisor will be contacted automatically if more than $10,000 in income is omitted in a single tax year to potentially develop the case before passing it on to the criminal investigation division.

    Signs a criminal referral has already taken place include:

    • A civil audit may be suspended before completion and referred to CI for criminal investigation without the taxpayer’s knowledge.
    • If the Revenue Agent becomes unreachable
    • If the Revenue Agent focuses heavily on the “intent” of the client in taking positions on a return or mentions a pattern of non-compliance on several tax returns.
    • If the Revenue Agent prepares a net worth analysis or subpoena’s bank records
    • If the Revenue Agent gathers an excessive amount of documentation or makes excessive copy requests
    • If the Revenue Agent makes undisclosed contact with third parties
    • If you receive a summons for records or an appearance
    • If more than one revenue agent, an attorney from the chief counsel’s office, and a court reporter attend a client interview
    • When an appointment is canceled, or the civil auditor fails to return taxpayers’ calls.
    • If An officer of the IRS wearing a gun and a badge approaches you and reads you something similar to a Miranda warning (this is likely an IRS special agent from the criminal investigation division of the IRS). If you are ever faced with one, demand that counsel be present for your questioning and remain silent.

    Should I Consult My Original Tax Preparer Before 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 prudent. The fact is that anything you disclose to an accountant or tax preparer is not protected. 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 for protecting their license, reputation, and livelihood.

    Instead, taxpayers should seek 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 while 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, a lawyer’s skill set is more appropriate and likely to be effective.

    Can California FTB, EDD, or BOE Audit Me After the IRS Is Completed?

    Yet another reason it is so important to work with a tax lawyer from the outset is 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, they will likely share this information with the sister agency. Thus, it is common for taxpayers to face a federal and subsequent state tax audit and vice-versa.

    Suppose the party under audit is a business, and the IRS audit raises issues relating to understated income or payroll tax. In that case, it is reasonably common for the California Employment Development Division to audit. It will typically assert employment tax obligation problems and require the business to produce, at minimum, the records required by California state law under Sections 1085 and 1092 of the CUIC. EDD will likely dig deeper into the company finances if the business has not kept these records or is unprepared to provide them and other requested documents.

    Can I Appeal the Results of an Audit?

    Following the audit’s close, you will likely receive several 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 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 laws supporting your tax position.
    • Authentication of the appeal documents under penalty of perjury.

    Several collection-specific appeal options exist if your appeal is premised on mistakes made during the IRS collection process. 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 taxpayers’ rights to further appeal. A tax lawyer can help a taxpayer determine if the appeal is appropriate and, if so, the form of appeal that is reasonably likely to result in a successful appeal.

    Right to disagree with IRS tax auditor’s findings

    You will receive a report outlining the proposed adjustments and any penalties and interest associated with the proposed changes after the audit is complete. The report may also cite the Internal Revenue Code and other important sources of authority.

    You shouldn’t sign anything that you do not understand, seems unfair, or seems incorrect, even if you feel coerced. It’s a good idea to ask the auditor for enough time so that you may discuss the suggested adjustments with your accountant or lawyer before deciding whether or not to accept them. To decide whether to accept the proposed adjustments, file an appeal, or even bring legal action against them, your Tax Council can assist you.

    What is involved with appealing disagreements?

    You can speak with the examiner’s manager if you disagree with an IRS examiner’s findings. If, after doing so, you cannot come to a compromise, the service will give you documentation outlining your right to ask for a meeting with an Appeals Officer. Appeals conferences can be held in one of three ways: over the phone, in person, or through correspondence.

    You have the option of choosing to represent yourself or to hire a Certified Public Accountant. If you choose not to file an appeal with the IRS or cannot reach an agreement with the Appeals or Settlement Officer, you may appeal certain decisions in court.

    What are your appeal options if you disagree with the IRS?

    Three options exist for the taxpayer after an audit,

    • Appeal before an IRS supervisory conference with the auditor’s manager,
    • Appeal within the IRS administrative system or
    • Appeal using the court system, where the taxpayer can bring his case to the U.S. Tax Court, the U.S. Claims Court, or the local U.S. District Court.

    Taxpayers can employ a mix of strategies. They could first meet with the examiner or the manager of the examiner. He will then have 30 days to decide what to do, given no agreement has been reached at the closing meeting. The taxpayer should give the IRS’s proposed revisions to the audit within that 30-day interval.

    Suppose the taxpayer does not respond to the IRS’s suggested adjustments after 30 days. In that case, the IRS will issue a “statutory deficiency notice,” starting the clock on the taxpayer’s 90-day window to file a petition with the Tax Court. Unlike the Claims Court and the District Court, Tax Court does not mandate that the taxpayer pay the tax arrears first before filing an appeal with a refund action following the IRS’s denial of an administrative refund claim.

    A taxpayer must not pay their deficiency before filing an administrative appeal with the IRS. The U.S. Court of Appeals or the Supreme Court may consider matters after the Tax Court, but only if those courts do so.

    Payment Options After Being Audited

    If you can’t pay the taxes the IRS says you owe but do not disagree with the determination, relief may still be available. If your tax audit preceded a recent divorce or separation, innocent spouse relief may be relevant to your circumstances. Relief may be available when 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 several payment agreements and arrangements possible. While the programs a taxpayer qualifies for vary based on 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. 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 – This is the name of several IRS policies and procedures intended to encourage taxpayers to come forward and settle tax debts. IRS policies and procedures offer taxpayers the opportunity 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 contemplating their “reasonable collection potential” is perhaps more likely than average to be granted this relief. Essentially, an offer-in-compromise can permit taxpayers 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 to determine if relief is likely 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 a tax lawyer’s professional and experienced guidance. 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 is on the line? If you have underlying tax problems or 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 our Los Angeles and Orange County tax law firm offices.

    Tax Help Videos

    Representing Clients from U.S. and International Locations Regarding Federal and California Tax Issues

    Main Office

    Orange County
    2601 Main St. Penthouse Suite
    Irvine, CA 92614
    (949) 681-3502

    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

    Outside of our 4 hour initial consultation option, we do not charge travel time or travel expenses when traveling to one of our Satellite offices, or surrounding business districts, where it is necessary to meet personally with taxing authority personnel, make court appearances, or any in person meeting deemed necessary for the effective representation of a client. To make this as flexible, efficient, and convenient as possible, David W. Klasing is an Instrument Rated Private Pilot and Utilizes the Firms Cirrus SR22 to service client’s in California and in the Southwest by air. Offices outside these areas are serviced via commercial jet airlines. None of these costs are charged to our clients.

    Satellite Offices

    (310) 492-5583
    (760) 338-7035
    (916) 290-6625
    (415) 287-6568
    (909) 991-7557
    (619) 780-2538
    (661) 432-1480
    (818) 935-6098
    (805) 200-4053
    (510) 764-1020
    (408) 643-0573
    (760) 338-7035
    (602) 975-0296
    New Mexico
    (505) 206-5308
    New York
    (332) 224-8515
    (512) 828-6646
    Washington, DC
    (202) 918-9329
    (702) 997-6465
    (786) 999-8406
    (385) 501-5934