From the Tax Law Offices of David W. Klasing - When Should you Hire a Tax Lawyer to Represent You in Your Audit?

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Tax Law Offices of David W. Klasing, PC

Jan 27, 2022, 06:37 ET

IRVINE, Calif., Jan. 27, 2022 /PRNewswire/ -- You may feel like you are a brave person who has a handle on fear. Then you receive an official letter, notifying you of an IRS audit of your income taxes, and you have a new respect for fear.

An IRS tax audit can occur for a variety of reasons. Perhaps you made a simple error in entering data, or you may have omitted a key form with your return. This type of audit is simple and not all that frightening.

Why you should use an Attorney to represent you in an audit

In other instances, though, the IRS may be seeking extensive information about your income and tax situation, leaving you in danger of owing a much higher tax bill with late payment penalties.

A tax attorney can help with this extremely scary situation. The attorney has the ability to negotiate with the IRS on your behalf, while helping you prepare a defense against the financial exposure and assist with any subsequent collection action.

If the audit does not go your way, a tax lawyer can help with an appeal of the assessment of additional tax, penalties and interest.

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 dual licensed Tax Attorney & CPA

For many taxpayers, there are few things as concerning and anxiety-inducing as being selected for a tax audit or taking some action that raises red flags and triggers an audit by the IRS. Many taxpayers will suffer through countless sleepless nights before reaching out to a tax attorney for guidance regarding the severity of the situation they face. In some instances, it is indeed an action by the taxpayer that increases their odds of being audited or triggers the audit. For instance, the individual may have forgotten to include one or more sources of income and was identified by the IRS from information matching procedures. The tax lawyers and tax professionals of the Tax Law Office of David W. Klasing can taxpayers tax audit help when navigate these difficult scenarios.

However, in other cases, certain characteristics of the taxpayer makes the individual an attractive target for an audit. For instance, the IRS is known to audit small business owners, businesses that deal extensively or exclusively in cash, and high-income individuals at higher rates than the general population. If you face audit due to certain characteristics, it is equally important to prepare and protect your assets and business from the IRS.

How Far Back Can the IRS Audit?

If you are faced with a potential audit by the IRS, rest assured that your entire tax history is likely not under investigation unless they discover fraud in which the statute of limitations becomes open all the way back to the dawn of time. If there are specific issues being examined, your audit might only go back just far enough to when the issues are believed to have arisen. For example, if you are being audited in connection with your business but have only owned the business for the last 2 years, your audit might only go back 2 years. In fact, most audits tend to only go back about 2 years. However, according to the IRS, it is fairly normal for audits to include the last 3 years of your tax history.

If your situation is unique, like where the IRS proves a 25% of greater understatement of taxable income, the IRS is permitted to extend how far back your audit may go. Generally, audits do not go back farther than 6 years, although this is not a hard rule. If your audit is still not resolved after examining the last 6 years of your tax history, the IRS can request you to extend the statute of limitations for assessment of tax. Typically, the statute of limitations imposes a 3-year limit on how long the IRS has to assess any additional tax. The statute begins to run after your tax return is filed. You do not have to consent or agree to an extension of the statute of limitations. However, if you challenge the extension, the auditor will decide what to do based on the information you have already provided and quite often will assess based on known income often accompanies by a complete disallowance of all expenses claimed on the returns under audit.

IRS Audit Triggers

Taxpayers are ordinarily selected for an audit based on statistical computerized analysis of their historical tax returns against a pool of similarly situated taxpayers. Every return analyzed by the IRS supercomputers receives a score. The worst score a return can receive is a 999, the next worse is a 998 etc. The more likely the return is to understate taxable income the higher the score the return receives. The IRS starts off an audit cycle by starting with all the 999's then moves through the 998's then the 997's and so on as time permits until they run out of audit budget for a particular tax year that they are currently working.

Facing a high-risk audit with criminal tax exposure will also result where your lifestyle appears excessive in comparison to your history of reported income compared to easily verifiable financial spending habits. For example, if a taxpayer is writing off proportionately large charitable donations as tax deductions, but they have relatively small income streams, this may be a red flag to the IRS, and that taxpayer will often be audited. Paying off very large debts with very low historical reporting of income is also a red flag which ordinarily leads to an IRS eggshell or reverse egg audit.

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.

Note:

A criminal tax investigation by the criminal investigation division of the IRS will often begin in complete secrecy and two or more years normally goes by before they surprise you in person while you are half asleep and walking to your car in the morning to go to the office or work site. If this happens to you the most important thing to remember is that they are going to ask you a bunch of questions that they already know the answer too hoping that you will lie to them. It is human nature to try and talk your way out of trouble and CI will often try and encourage you to do so claiming that they are there to help you clear up a misunderstanding. Don't fall for it!!! Politely tell them that you are happy to speak to them but not without your tax counsel being present and then pick up the phone and call our office. If you do happen to fall for their trickery, write down everything you can remember you were asked and truthfully write down what your answers were to aid your criminal tax defense attorney in defending you and perform damage control.

In nearly all audits, the IRS may wish to conduct an in-person interview as part of your audit. IRS agents are often required to do this to aid them in identifying which areas of your tax returns are more likely than not to contain misstatements and to help them gain an understanding of your business. The interview process is high risk because lying to a federal agent is a felony by itself. Interviews are more critical in cases where your audit deals with complicated tax issues or if the documentation required is so voluminous it cannot practically be sent by mail. For example, if the IRS wants to conduct a full audit of your business records, it might make more sense for someone from the IRS to meet with you and your accountant to go over the extensive records at your place of business or your home if that is where you keep the records. We generally try and prevent our client's from being interviewed where possible and where it is not, we thoroughly prepare our client's in how to successfully cooperate with the auditor while not creating additional exposure by providing a poor interview or one that is interpreted by the auditor as fraudulent.

Once the audit is complete, the IRS will reach a determination about what happens next. This could include assessing additional taxes, penalties, and interest, refunding overpaid taxes, or simply issuing the ever allusive no change audit. You will be given a chance to agree or disagree with the findings of the audit. If you disagree with the audit, speak to our dual California licensed Tax Litigation & Appeal Attorneys and CPAs for assistance.

Types of IRS Audits

The first type of audit is an audit by correspondence. This type of audit happens entirely through the mail. You are sent a letter from the IRS notifying you of the audit and what kind of documentation, if any, is required of you. Once you send any necessary documents or records to the IRS, the audit will commence, and you will be notified again when it is completed. This is more common for less complex audits.

Field audits occur when someone working for the IRS comes to you for a face-to-face interview as part of your audit. A field audit might be necessary for a few different reasons. Field audits are often conducted because the records required for the audit cannot be sent by mail.

An office audit is like a field audit because you are meeting with an IRS employee face-to-face in a local IRS office. However, you will go to them in a local IRS office instead of the IRS employee coming to you. The reasons for each type of audit will vary from case to case. Speak with our dual California tax audit representation lawyers and CPAs for more information.

What to Do If You Get Audited

If you get audited, you should begin by speaking with a lawyer as soon as possible especially where you know for a fact your cheated on the returns under audit. Many taxpayers do not realize the full extent of their rights when it comes to being audited. The IRS can be intimidating, and many people believe you have no rights in an audit. However, you can challenge the results of an audit if you believe they are incorrect or unfair.

What Triggers a Tax Audit?

Pinpointing all the potential triggers of a tax audit is practically impossible. However, there are indeed some tax audit triggers that are more prevalent than others. If you received a notice from the IRS or a state taxing authority that you will be the subject of an audit, it may be for one of the following reasons.

Discriminant Information Function

The IRS and many states use various types of software to enforce the many provisions of the tax code. The IRS's Discriminant Information Function (DIF) is one such program that is used to identify statistical anomalies in a taxpayer's annual return. The DIF system additionally looks for several types of questionable and or conflicting data, such as a taxpayer claiming a home office deduction and at the same time deducting rent on an office outside the home.

Any red flags that are raised by the DIF will be further analyzed by IRS examiners should your return be selected for audit.

Taxpayer's Income Level

The IRS primarily performs tax audits on those who have an income level of over $500,000 per year. Alternatively, those that earn between $20,000 and $200,000 were rarely under the audit microscope.

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

Depositing Large Sums of Money

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

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

Self-Employed Workers

Schedule C Self-employed businesses are also typical targets of tax audits. One reason for this is that self-employed workers are known to often incorrectly claim deductions to lower their taxable income. For instance, if a taxpayer frequently uses their vehicle to travel for business, they cannot claim that they only used the vehicle for business purposes to get a larger deduction.

Operating a Cash Business

For taxpayers who operate businesses that accept payment primarily in cash, there is a universal taxing authority concern that the taxpayer will not completely report all the income they earned. For example, if a taxpayer operates a barbershop as their only source of income and their reported expenses do not proportionality match their income, this may trigger a tax audit and possibly a criminal tax investigation and prosecution. The IRS and state taxing authorities want to ensure that a business owner is not pocketing cash payments to evade taxes on their income.

Utilizing or Having Signature Authority Over Foreign Financial Accounts

The United States is on a very short list of countries that tax its citizens on worldwide income which includes income that is earned in foreign countries. If you own or control one or multiple foreign financial accounts, the IRS wants to know that you are reporting investment, retirement and business income earned offshore and deposited offshore. They are also interested in funds inherited or received by gift and kept offshore. Taxpayers that have over $10,000 in all their combined foreign financial accounts must report this to the IRS on an FBAR.

If the IRS believes that a person is evading offshore taxable income and hiding that fact by not disclosing foreign financial accounts and failing to supply other required foreign information reporting like those that are required for foreign business entities, they may open an offshore financial account and evaded taxable offshore income focused eggshell or reverse eggshell audit.

The IRS may decide to begin a civil or potentially criminal tax audit for a myriad of other reasons. As a result, you should be sure to have a dually licensed California Tax Attorney and CPA by your side if you are facing a tax audit to protect your liberty and possibly your very liberty. Moreover, federal and state taxing authorities often view the facts and the law in a manner that benefits the taxing authority to your detriment. There is no better qualified set of credentials to take on the taxing authorities in the appeals process and potentially in litigation that a dually licensed Tax Attorney and CPA.

Can Foreign Assets, Trusts, and Accounts Trigger an Audit?

Few taxpayers should be surprised at the fact that the IRS, Department of Justice, and entirety of the U.S. government is focused on identifying and halting offshore tax evasion. That is, starting just after the Great Recession the U.S. Congress became increasingly interested in closing the "tax gap." Wealthy Americans who used offshore accounts and trusts to conceal income were identified as a main cause of the difference between expected and actual tax revenues. Therefore, while the Report of Foreign Bank Account (FBAR) obligation has existed since the 1970s, stringent enforcement only began circa 2008. Furthermore, Foreign Account Tax Compliance Act (FATCA) was passed in 2010 and more than 100 nations have agreed to provide the IRS with their foreign financial data.

If you have undisclosed foreign accounts or assets, the risk of an audit is extremely high. In fact, it is likely more of a matter of when the audit will be conducted rather than if the IRS will audit. Offshore penalties are particularly harsh even when conduct is non-willful and present the potential for felony tax evasion charges.

Should I Consult My Original Tax Preparer Prior to an Audit?

While it may seem tempting for a taxpayer to ask the person who "broke it" to "fix" their taxes, this is not typically a prudent approach. The fact is that anything you disclose to an accountant or tax preparer is not protected. That is, if the tax preparer or CPA is subpoenaed in a subsequent criminal tax proceeding, they will be compelled to reveal any wrongdoing you admitted. Furthermore, accountants and tax preparers who come under scrutiny often blame their clients to protect their license, reputation and livelihood.

Instead, taxpayers should seek out tax audit help from a criminal tax defense lawyer as soon as possible. Only the attorney-client privilege and the attorney work-product rule can protect the disclosures you may make in the course of seeking legal advice. Furthermore, a tax attorney can bring in consulting accountants while providing them with derivative attorney-client privilege through a legal device known as a Kovel letter. Last, the focus of an attorney is advocacy while the focus of an accountant is accuracy. Once matters have moved into questions of tax law and tax controversies, the skill set of a lawyer is more appropriate and likely to be effective.

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

Yet another reason why it is so important to work with a tax lawyer from the outset is the fact that the IRS and State tax agencies like the California Franchise Tax Board, Board of Equalization, and Employment Development Division are all known to share information. If an IRS or California state agency audit discovers problems or other improprieties, it is highly likely that they will share this information with the sister agency. Thus, it is not uncommon for taxpayers to face a federal and subsequent state tax audit and vice-versa.

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Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC