IRS Audits, Internal Revenue Service Audits

How to present your case - IRS Audits

2010-06-20T07:20:00.000-04:00

It is very important that you not only put your case together with evidence, but that you have considered the presentation. If you do not know how to effectively communicate your defence, then the proof you have isn't as good as the paper it is written on.

Firs, you need to make sure you have selected the right person to represent you. You want to make sure that they have experience specifically with the IRS. You should also remember that lawyers, accountants and doctors are tax payers too and may be just as afraid of the IRS as you are. Meet with the person you have selected, and test their confidence. Depending on your situation, you may want an accountant, and attorney or both to represent you.

Once you have determined who will be representing you, or if you will be representing yourself, it is time to prepare the evidence. Make sure that you have found every relative piece of paper and no document is left un-turned. The IRS audit doesn't have to be stressful. A little discipline, time, preperation and knowledge should help you to relax. If you find that you, or your representation, needs more time to prepare, call the agent and ask for an extension. Extensions for IRS audits are generally granted for up to six months, but be aware that the possinibility of a second extension in very unlikely, therefore use your time wisely.

Here is the main documentation that you will need. This is a breif checklist that should help you begin yur document hunt.

Receipts to justify any deductions or credits that the IRS is questioning.

A list of the above reciepts, organized by date and include the amount and reason for each deduction.

A list, organized by date, of all cash expeditures. Treat this list as if it were a reciept for each purchase. List the reason for each expenditure.

Bank account statements organized by month and in order.

Reciepts for income, organized by date.

It is important to only present information that counters what the IRS is questioning. Do not offer up more information then needed and only asnwer direct questions with direct answers. This is one situation where more information is not better. The IRS auditor will give you the reasons for the audit, and a list of the items being audited. Prepare your defence based on that in question.

It is equally important to be well organized. You do not want the auditor to be required to dig through files to find the information he or she is looking for. This may uncover more mistakes or violations for the IRS to audit in the future.

With a little preperation and knowledge, you can get through the dreaded IRS audit.

Challenging The IRS Audit

2010-06-17T11:45:00.000-04:00

The IRS has audited you and the report is now complete. Take your time, read through the report carefully and if you don’t understand it, contact your auditor. Now that you understand it, you may not agree with it. If you don’t agree with, there are some actions that you can take to appeal the IRS’ decision. First, send a protest letter to the IRS within 30 days of the receipt of the IRS Audit report. While you can use standard first class mail, I would recommend sending this certified so that you have proof that they received it, The certified letter should require a signature, avoiding later concerns that your letter for an appeals hearing is being requested too late. Once you request an appeals hearing, one will be granted with an appeals officer supposedly unbiased and from a different division of the IRS. This officer is not a part of the office that originally conducted your IRS audit.

If you meet with the officer, and still do not agree with the outcome, other steps can be taken to have your side heard. You can file a petition in tax court, which is fairly inexpensive and not that difficult. You can find helpful resources online that can aid you during this process. While you can file a petition on your own, it is only suggested to act on your own behalf if your tax bill is less than $50,000. Any amount over that and it would be worth your investment to seek the advice of a tax attorney.

As a rule, contesting your audit in court is beneficial. If you are being unjustly charged your case can be heard but beyond that you may save money simply by appealing the decision. About half of the people who file a petition in tax court end up paying a reduced penalty. While there is no guarantees, it is at least worth a shot. Reducing your tax bill, filled with fees and penalties, by only 10% can add up to significant savings. Weigh your options, the amount of time that your case will take and determine if tax court in the right decision. If tax court fails, I am sorry to report, that there is little you can do other than seek advice from a tax advisor and/or attorney. At this point you have exhausted your last method, tax court, so there may not be anything either of those professionals could do either. Good Luck!

IRS Auditor’s and their Attitudes

2010-06-16T19:26:00.001-04:00

An IRS Audit is a stressful time. Your emotions may be running high. At the same time, the auditors deal with dishonest and hostile citizens everyday. While you may feel that an auditor is playing “God” because they have limited authority over you at the moment, there are some steps that can be taken to avoid a conflict which isn’t in anyone’s best interest. Also, you need to remember the position of the auditor and perhaps why he is expressing himself the way he is.

IRS auditors aren’t high paid employees, and their working environments can be stressful since they are dealing with defensive people day to day. IRS auditors are on deadlines and many times, finding the person in order to speak with them causes more and more delays, adding to their case load. Their goal is to get your case closed out as quickly as possible. Since they are underpaid and deal with other’s attitudes all day, you should expect their morale to be low.

With that said, there are ways to alleviate some of the challenge. First, don’t get upset. Try to reason with your auditor. Explain that you want to get along and assist them with getting this case closed. In the auditors mind, you are the enemy. Try changing that so that you are more of friend then a foe, helping them through their mundane and underpaid 9-5 workday.

If that attempt fails, speak kindly to the agent’s supervisor, asking to resolve the issue. Be polite and explanatory. It is the supervisor’s job, as much as it is the auditor’s to close the account. If the supervisor sees that you are attempting to work with them to get the goal accomplished, the hostilities should end.

If you are dealing with an aggressive or dishonest IRS auditor, then certainly contact the chief inspector at 800-366-4484 or write to P.O. Box 589, Benjamin Franklin Station, Washington, DC 20044-0589. This is not an interactive investigation however, and you will not be informed of the outcome. While it is rare, some auditors may imply that favors could get rid of your problem. Report this right away as it is bribery and will do nothing for your position. Either way, the best bet is to try and assist the auditor in order to get your case closed as soon as possible so that you can move on with your life and the pesky auditor will be gone.

Tips for Surviving an IRS Audit

2009-08-11T15:37:00.000-04:00

First and foremost, your goal in every tip listed in this article is to convince the IRS that you were entitled to your credits, deductions and exemptions. Additionally, you will need to convince the IRS that you reported all of your income. You should only prove or convince them of the items in question, never going above or beyond.

You should delay the process whenever you can without becoming suspicious. Request more time to gather your records or confer with a professional. You can also request more time to get your records together, and make certain that the records are presented in an orderly fashion. Regardless of why, postponing the audit is usually to your benefit.

You should never have the IRS at your home or at the place of your business. Instead, consider going to the IRS local office to conduct the Audit, or have a tax professional handle it. Field Audits, where the IRS auditor comes to your place, usually happens when there is business income. At very least, you should consult your tax professional, even if he or she will not be handling the audit for you, prior to meeting with the auditor at your home or business.

Always prepare your records in an orderly fashion, arranging bank statements by month, receipts by type or date and invoices by type and month. If you are missing a requested document, you are allowed to reconstruct records.

Do not expect to walk out of an audit without owing something. The odds in any audit are that they will find something. Also, do not attempt to negotiate on the taxes to be paid, instead try to compromise on the tax issues themselves.

Do not produce more documents than requested, keep the chatter down, only answering the questions that you are asked and do not give copies of other years’ tax returns to the auditor.

Research and know your rights. There is free IRS publications and commercial tax guides for your assistance. If you are still unclear, consult a professional. Your rights are well defined in the taxpayer’s bill of rights. If you believe that your auditor is treating you unfairly contact his supervisor and if tax fraud comes up, seek the advice of a professional immediately.

What Should I do if I get Audited by the IRS?

2009-08-11T15:34:00.000-04:00

The first thing that you should do is to remain calm. Too many times, taxpayers act in haste and make more mistakes then are already at the table. Just because you were selected for an audit doesn’t mean that you did anything wrong. It also does not mean that you need to shell out thousands of dollars for a professional, depending on your situation of course.

You can represent yourself in an IRS audit. You may be audited by mail or with a field audit. In any event simply provide the documentation in an orderly fashion as it is asked for. Answer promptly but allow yourself the time to gather the documentation that is needed. Request more time respectively if required but make sure that the request isn’t due to procrastination. Once you find the documents requested, do not send them in out of order. The auditor will assume that the disorganization of the documents represents the way in which you day-to-day business is handled and may result in a larger scope investigation.

After you take your time to assemble the documents in a neat and orderly fashion, deliver them to the IRS auditor or mail them in promptly. Never volunteer more information than is being asked for. This will likely lead into a more complicated audit. Be friendly, but concise. Also, try to not allow the agent to come to your home or place of business. IRS auditors are trained to view the return and your surroundings to see if you are living beyond your means. Inviting them into your home or business could result in a larger investigation as well.

Once all documents have been sent and the audit comes to a close, you will have a report that gives you the results of the investigation. Never sign anything before you understand it. Again, take your time before any agreements and seek professional advice if needed. If you will be seeking the advice of a tax professional, let the auditor know that and inform him that you will get back with him promptly. If you have documents that dispute the findings, such as case law or tax code, contact the auditor’s supervisor and come back to the table. If you still do not agree with the findings, you may appeal the decision or take the findings to tax court. Either way, do not fret, as the report isn’t the end of the rope.

Why is the IRS auditing me?

2009-08-05T09:36:00.000-04:00

While there are many reasons that the IRS may audit you, it must first be understood how the IRS selects a tax filing for Audit. There are audits conducted just to compile data and statistics to figure out which types of industries, deductions, income and other tax related filings will provide the highest rate of return for the IRS through penalties, taxes and fines. Once the data audit is completed, the information is entered into a computer system that formulates high-risk combinations.

Now that your return has been filed, the entire return is entered into the computer at the IRS. The secret and highly guarded formula selects returns based on the probability that the filing is fraudulent, wrong or high risk. If your filing is in fact high risk, you may be selected.

While the formula is secret, we know some of the areas that the IRS data audits have found to be high risk. They include industries that deal with large cash transactions, the self-employed and a large amount of deductions to name a few. In industries that deal with large cash transactions, many times that income goes unreported therefore the IRS generally has a good chance of collecting money from those types of returns after the audit. The self-employed have an opportunity to file beneficially to the business owner, without regard for tax law. Since there is little checks and balances when an individual is self employed it makes a good bet for the IRS. Claiming a large amount of deductions, relative to that of others in your profession or industry, may alarm that formula in the computer. If the deductions are real and provide a large amount of tax savings, then certainly claim them. If the tax savings is minimal, it may be recommended to not file itemized deductions due to the possibility of an audit.

IRS tax law is complicated and open for interpretation. With that said, once you receive an audit there is little chance that some mistake won’t be found. The best thing you can do is try to avoid the audit all together by being careful, reporting all income and making educated decisions on your deductions. If you have done everything you can to complete an honest and complete tax return, do not worry. With proper documentation, representation and education, the audit can be minimal. Simply be patient, answer the questions at hand without elaboration and confer with a tax professional.

IRS Audit Closing Conference

2009-08-05T09:31:00.000-04:00

Out of all the meetings that you have had with the IRS so far, by far the most important to your bottom line may be the closing conference. This is generally performed when you have been part of an IRS field audit. At the closing conference, you can expect for the auditor to present the IRS’ side, and the conclusions from the audit. Additionally, the auditor will likely have a report of any changes that are required to be made to your tax return along with the penalties and interest that are now due. The report will also contain more important information for later research, such as Internal Revenue Code and other legal resources that support the proposed claim.

Do not feel pressured to agree or sign anything on the day of the conference. If you do not understand something in the report, or if you feel it is incorrect or unfair, request more time from the auditor. It is common for someone who is representing him or herself, to request additional time in order to confer with a professional. You may want to set up a second meeting with the auditor. Now that you have the report in hand, your audit team has time to review, research and prepare calculations, discrepancies, questionable issues or arguments on your behalf.

Even after all that work, an audit team and a second meeting to discuss what your audit team found, you may not be able to reach an agreement with the auditor. Don’t get upset, this happens. Since tax laws are complicated and subject to interpretation, there are appellate processes and tax courts that may see things from your point of view. Speak as little as possible, but be polite and straightforward. Inform the auditor that you and/or your company may want to exercise it’s right to an appeal and/or to tax court. End the meeting on good terms and even shake hands.

Remember that it is not the IRS’ job to make your life difficult. It is their job to enforce the code that makes each of us responsible for taxes equally. There position’s makes the tax code fair and even across the board. Simply cooperate the best you can and if you cannot come to an agreement, simply appeal it. While this may be easier said than done, it is worth trying and may prevent a headache in the meantime.

Properties that are exempt from Seizure after and IRS Audit

2009-08-05T09:18:00.000-04:00

The tax laws are quite complex, and the section of the Taxpayers Bill of Rights exempting certain properties from IRS seizure is no exception. If you have questions after reading this article or other research, contact a tax professional.

The weekly amount of wages that are exempt from IRS seizure are those that is equal to your standard tax deduction plus allowable personal tax exemptions divided by 52. The amount of exemptions varies from one type to another. For example, the amount of personal property exempt from IRS seizure is $6,250.00 for fuel provisions, furniture and household items. The amount of tools, books, machinery or equipment used in a business or profession that can be exempt is $3,125.00. Non-exempt business property may not be seized unless an IRS district or IRS Assistant Director determines that the taxpayers' other assets are insufficient to cover the tax liability or that the collection of the tax is high risk.

A personal residence is exempt from IRS seizure if the unpaid amounts is less than or equal to $5,000. When the tax liability amount exceeds the $5,000 rule, the IRS must obtain written approval from the U.S. District Court Judge to seize the taxpayer’s personal property. The IRS must then give a (30) day written notice of intent on seizing the property in order to give the taxpayer a chance to contest the tax levy if it is erroneous. During the waiting period, however, the IRS may freeze the taxpayers assets.

The tax notice must meet certain criteria including a clear description of the tax levy procedures, the options of avoiding the tax levy such as installment payments of overdue tax, and steps for redeeming your property in the event that the IRS seizes it. The bank will hold your account for (21) days after receiving notice of an IRS tax levy before releasing the money to the IRS. This freeze allows you the time needed to contact the IRS. If the IRS attempts to tax levy your property and you have already paid the overdue tax bill, if the statute of limitations has expired, or if the property is exempt under the bankruptcy rules, then you should file an appeal with the IRS to release the tax levy. Make sure that you send a written statement to the IRS district director in the district where you live and the lien was filed, informing the director of the grounds of the appeal.

Bill of Rights during an IRS Audit

2009-08-05T09:06:00.000-04:00

It used to be that the IRS had a final say and a lot of rights when it came to the power over the U.S. Taxpayers. Today however, the rights of taxpayers have been increased through the Taxpayer Bill of Rights. The first act was instituted in 1989 and the second was enacted in 1996. The last of the three was implemented in 1998. While it has always been an expectation that the IRS would deal with taxpayers in a professional manner, they must now also follow another set of code of conduct policies.

Remember the following information and certainly appeal or complain if the IRS does not follow these guidelines.

First, the IRS must give you the tax information and any help that you need in order to comply with the IRS tax laws.

The IRS must always ensure your personal and financial confidentiality.

They must treat you in a courteous manner.

The IRS must provide clear explanations in any tax notice or mail inquiries and provide additional information as requested.

A non-technical statement of your taxpayer rights and information pertaining to the IRS collection and tax appeals procedures is required to be placed in all correspondence during an IRS audit.

The IRS must collect the tax fairly. If the IRS threatens to collect in a manner that will cause you significant hardship, you can apply for a Taxpayer Assistance Order by filing IRS tax form 911 with an IRS Problem Resolution Office in the IRS district where you live. While your filed 911 form is being reviewed, the tax collections and enforcements will be suspended.

The IRS must agree to a (3) year installment payment schedule if the taxpayer owes $10,000 or less, exclusive of interest and penalties if requested and certain conditions are met.

Approval from a supervisor must be acquired before the IRS can file a tax lien or levy and the IRS must provide notice, which includes the amount of tax owed, the IRS’ proposed action, and notify the taxpayer of their right to a hearing within (30) days within (5) business days of such action. The tax notice must also include the IRS levy procedures, the availability of IRS administrative appeals, the IRS appeals procedures, and the alternatives to the proposed tax levy such as an installment agreement and the rules for obtaining a release of the tax lien.

Certain properties are exempt from IRS seizure under the taxpayers Bill of Rights.

Legal costs may be recovered if you win in court against the IRS and the burden of proof may shift to the IRS during court procedures with respect to factual issues relevant to determining tax liability. The IRS must also issue a tax refund of overpaid tax and must provide at least 30 days notice prior to altering, modifying or terminating and installment agreement.

While this is an abbreviated overview of the IRS tax payer's Bill of Rights, many of them can help and possibly prevent you from owing the IRS an enormous amount of penalties and fines after the IRS Audit. It is important that every citizen get treated fairly and equally. It is important that you always know your rights when dealing with an IRS Audit.

Preparing for an IRS Audit

2009-08-05T08:48:00.000-04:00

When preparing for an IRS audit the key is to not be scared or act in haste. Read over all documents thoroughly, do some research and then begin to prepare. Familiarize yourself with what type of audit you are going through, what the IRS is requesting and why you filed the way you did. If you are unclear about anything, contact an accountant, attorney or anyone else who is registered to practice in tax court.

There are some common courses of action, which the average taxpayer is unaware of. First, you can tape record your audit meeting, but you have to notify the IRS within ten days of the tax audit meeting. Another item that you will want to educate yourself about is the ability to appeal the decisions, such as tax liens, tax levies and property seizures. Perhaps the IRS is lacking crucial information pertaining to your case, or maybe you are eligible for hardship relief.

While it isn’t necessary to appoint an accountant or registered agent, if you do enlist the help of a professional, you should give them “power of attorney”. This could be to your advantage because you wouldn’t be required to be at the meeting unless subpoenaed by the IRS. If this is the case, your registered agent can stall the process by needing to confer with you on some issues since you are not required to be present. This gives you the upper hand by giving you time to rebut the claim without being placed "on the spot".

Generally, the IRS tax audit notice will provide you with details on which part of the return is being questioned. Only provide that amount of information to the IRS. Do not volunteer or provide more documentation that what is being asked for. A simple measure, but one that many people overlook is making certain that the documentation is in the order of the request. For example, perhaps the IRS wants receipts for itemized deductions A, B and C, and they want copies of your bank statements for all of 2007. When preparing your file for your face-to-face audit, have copies, not originals, in the order of the request. Have on top the receipts for itemized deduction A, B and C labeled as such. Then follow that with copies of you bank statements from January through December in order. Paper clip those together with your request letter on the top. Appearing disorganized to an auditor will be to your detriment. The auditor will assume that your business is handled in an unorganized fashion and may feel that more mistakes may be found, which will result in higher tax penalties benefiting the IRS. The auditor may then extend the scope of the investigation. While many of the actions that you will take to combat the IRS audit, each are of high importance and can greatly affect the results. Take your time and be prepared.

Ways to get your IRS Audit Penalty Dismissed

2009-08-05T08:37:00.000-04:00

If you asked the IRS for tax advice, and the advice that you recieved resulted in an audit, then you may not have the tax penalty any longer. They key will be to provide accurate tax information when the IRS asks for it and show proof that you received erroneous advice.

While it is our responsibility to be informed before filing our tax return, even if we need to seek the advice of a professional, if you have made an honest mistake you may be able to have the penalty dropped. In order for this to be successful, you would need to send the IRS a check for payment of the tax and interest due, along with a letter explaining how the mistake happened. Also, ask to have the penalty eliminated. If the explanation is clear and it is easy to understand how this could be an honest mistake, the IRS may relieve you of the penalty.

There are other ways that you can avoid a tax penalty. For example, you can show that you had substantial authority for the treatment of a given tax item. To show the substantial authority some research may be needed. Research the Internal Revenue Bulletin, Court Cases, Private Letter Rulings issued by the IRS and congressional reports. Once you have found a document pertaining to your situation, and making sure that is supports your position. Be sure that the documentations that you use has substantial relation to the weight of authorities supporting the opposite tax treatment. You can then submit the documentation to the IRS along with a letter as to why you took the position you did and how your documentation reflects your situation.

You can always appeal the IRS’s decision along with taking their decision to tax court. You have the right to representation. Additionally, the period of time while you are appealing the decision your penalty will be suspended until the ruling on your case. The tax penalty for filing a fake tax return is not based on your liability and will be assessed immediately and added to any other penalties incurred.

Staying informed, conducting research and seeking advice is the best way to combat an IRS audit after it happens. Being as truthful and forthcoming as possible will aid you in the process but with caution to not provide the IRS with any more information than needed. From a letter, to some research, all the way to tax court, you have the right and the opportunity to have your case heard and ruled on by an independent party.

High-Risk Audit Areas; Unreported Taxable Income and Self-Employment

2009-08-03T21:23:00.000-04:00

Remember that any taxable income is reported to the IRS. From banks reporting taxable interest income, to employers supplying their copies of W-2’s, all information is entered into the IRS computer system. When you file your return, you social security number is entered into the IRS computer system, checking against what others have reported. If information comes back that you have not reported on your filing, this is an immediate red flag. Always report all income; failure to do so automatically places you in the high-risk area. The bottom line is that those 1099’s that you receive from investments, banks and other entities are just as important as any other tax document you receive.

If you are self-employed, you have a greater flexibility to cheat on your taxes by way of not reporting taxable income and inflating your deductions. The IRS knows this and has found that self-employed individuals are more likely to cheat on their taxes then a salaried employee. If you are working full time, and you receive a W-2, chances are that you are not going to change the W-2 and that you don’t have time to earn other income. With that said, the self-employed are high risk and are carefully monitored by the IRS. Additionally, others that receive a 1099 such as waitresses, cab drivers, and even house cleaners are held in the same respect because they typically receive cash payments. The IRS does look at a self-employed individual’s income and determine if the reported income can support their lifestyle. IRS manuals are available to the public and teach auditors about 100 of the most popular self-employment industries and what to look for within each industry.

While there are legitimate reasons to claim a home office deduction, it may not work to your benefit. Since the rules about claiming a home office deduction are complicated, a CPA should be used to see if you qualify. If you do qualify, it may not be worth the small tax savings that you may be entitled because this move puts you in the direct view of an IRS audit. People who claim a home office deduction are considered high risk. Since tax laws are so complicated, an audit may result in more money being spent in penalties than a home office deduction could save you for years. If you are absolutely entitled to this deduction, you have consulted a CPA, and it would result in significant tax savings then take the deduction. Just consider the fact that you will be placed in high-risk status before making that move.

How Large Deducitons Play into IRS Audits

2009-08-02T19:34:00.000-04:00

If you anticipate claiming large deductions, there is nothing wrong with that as long as you have the receipts to prove it. If your tax deductions exceed the average amount of deductions for your income level, then you may get audited. Additionally, if you have an excessive amount of itemized deductions, you may fall into a high-risk category therefore raising your chances of getting audited. While the formula used is secret, we do know that a large amount of Itemized Deductions places you in the higher probability category.

When you file your return with the IRS, a secret computer score, known as the Discriminate Information Function (DIF), is immediately used to determine whether additional taxes, fees, penalties or fines could be collected. If the DIF score returns high, you are more likely to receive an audit.

An area that most taxpayers don’t even think about as being a high-risk error in reporting, that may get them audited, is the failure to report alimony as income. When a former spouse pays the alimony, they claim it on their taxes. Likewise, you should also claim it as income. Failure to do so will result in a high-risk score, and we know what that means by now. Since the other party generally reports it, catching such errors is relatively easy.

The IRS doesn’t usually just pick taxpayers to audit. Since the IRS has little resources and to boot, they are understaffed, choosing returns that will yield the highest rate of return in the way of fines and penalties is essential. The IRS has budgets and expenses, like any other business; therefore they must cover their expenses without passing the costs of doing so on. There is a fine balance between not allowing people to get away with underpayments, which would bankrupt our system, but on the other hand not spend the taxpayer’s money frivolously. This is why the IRS has the computer system and formula available to them, to ensure that they are auditing cheating taxpayers where money is available. While it may not be ideal, an audit may be scary, and it certainly isn’t pleasant, if the IRS did not put in place checks and balances imagine what that would do to our taxes. Our individual taxes would continue to rise until the system would entirely break, leaving the taxpayers without the common things everyday that we take advantage of paid for by tax dollars. No one would be afraid of the repercussions of being dishonest on their tax returns, and very little would pay.

High Risk IRS Audit Areas

2009-08-01T19:01:00.000-04:00

While IRS audits are down due to lack of personnel and resources, there are areas that can be tweaked to avoid an IRS tax audit. Since taxpayers are now more intelligently selected in order the catch the biggest cheaters, there are some areas that we know throw up red flags.

One of the high-risk audit areas is high wages. If you make more than $100,000 your odds of being audited increases by almost half. Your chances of being audited by the IRS increases if you have a large amount of itemized deductions, especially if they exceed the IRS target amount. Another flag is if you claim tax shelter investment losses on your tax return. You may be audited if you have complex investment or business expenses on your return. If you own or work in a business that receives cash and/or tips in the ordinary course of business, then you may get audited. Other audit flags are if your business expenses are large in relation to your income on your tax return, rental expenses, a prior IRS audit which resulted in a tax deficiency, you have complex tax transactions without explanation on your return, you are a share holder or partner in an audited partnership or corporation or if you claim large cash contributions to charities in relation to your income on your tax return. Of course with any taxpayer, if an informant has given the IRS information, you can expect an audit.

With that said, you should not exclude a deduction or beef up your wages just to avoid getting audited. While less than 2% of tax payers are audited every year, it does happen and sometimes just because your industry was chosen for data purposes. Always be honest and accurately report income, deductions, losses and gains, just make sure that you have the documentation to support what you have filed in case of an audit. While these areas place you at high risk, it does not mean that you are doing anything wrong. Always take your time, read and re-read your return before signing and sending and make sure that your documentation is clear, precise and accurate.

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2009-07-31T07:56:00.000-04:00

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Keeping records for the IRS Audit

2009-07-30T23:57:00.000-04:00

It has always been assumed that you should keep tax records for seven years after the date that you filed. While this may be safe, this isn’t exactly necessary. Tax records such as receipts, invoices, cancelled checks and other documents that can prove to the IRS that your tax filing was correct should be kept until the statute of limitations runs out.

Usually, the statute of limitations is three years from the date that the tax return was filed. An exception to this is if you paid your tax bill for a specific year over the course of time, making the time to keep the tax records from that filing year two years after the tax bill was paid. There is not however, a statute of limitations when a tax return was falsely prepared or fraudulent. Also, there is no limitations if a tax return was not filed. Some items, such as property tax documents should be kept indefinitely.

Everyone needs a guide so here are some pointers that will help you in the event that you get audited. You should keep verifying documents for property, real estate or stocks, until the recognition of a gain or loss from the sale plus the three-year limitation on the tax return where you reported the gain or loss. Keep all copies of the actual return that you filed with the IRS indefinitely. Retain tax records that show a tax refund credit based on bad debts or losses on worthless securities for seven years. Keep tax records showing net operating losses until the losses are used to offset taxable income and the carry forward term expires, plus the three-year limitation from the time you filed. The carry forward term can be up to 20 years.

The statute of limitations is extended by six years if you understated your gross income by more than 25%. If you employ others, you must keep the employee’s tax records for four years from the date that the tax is paid or filed, which ever is later.

There is no clear definition on how long to keep your records. The bottom line: keep all tax filings for ever, keep back up documentation for four years and if you are high risk for a fraudulent accusation keep all back up documentation indefinitely.

Frequently Asked Questions Regarding IRS Audits

2009-07-30T16:51:00.000-04:00

There are many questions and concerns that pop into a taxpayers mind when they find out that they are being audited. One of the more commonly asked questions is whether or not the IRS can take their house. Yes, the IRS can take a person’s home to collect on unpaid tax bills. This is usually a last resort however, and the taxpayer’s Bill of Rights discourages the IRS from seizing a primary residence. That doesn’t mean however, that if you own rental property or a second home that these properties will not be seized. The IRS can not just take your home though. There are standard procedures that they must go through first. They must obtain a court order, which you can contest. You can also request the Taxpayer Advocate Service to help you in stopping the seizure. Taking someone’s home gathers negative publicity when local news agencies find out. The IRS doesn’t like this kind of image, so a call to the newspaper, TV Station or government officials may be helpful.

Another frequently asked question is if one can make a deal with the IRS to pay less then the total tax bill. This is a possibility though other measures are recommended. If you absolutely want to try this path, start by filing a 656 form, which is an Offer in Compromise. This will open up your finances for thorough investigation before they decide if settling for less than what you owe would be in the best interest of the IRS. Just about half of the offers made are eventually accepted, but notably after negotiations. Rarely will the taxpayer get what he/she originally asked for. In most cases, the IRS will determine an amount that they believe is fair. Generally, contesting the IRS audit will end up with you owing less then the Tax Bill anyways, so sometimes it just pays to contest it from the beginning.

Lastly, people want to know how likely it is that they will be charged with criminal tax fraud. Fewer than 2% of taxpayers are investigated for tax fraud. Additionally, the majority of those prosecuted for tax fraud work in some type of organized crime or are public figures. Being found guilty of tax fraud by your auditor and being criminally charged with it are two different things. Out of the 2% that are investigated for it, the majority ends up paying fines.

IRS Representation and why it is Important

2009-07-30T05:22:00.000-04:00

Getting a tax advisor can help when dealing with IRS problems. In the beginning, when you consult with an advisor, you will have a good idea of what you can expect from the IRS auditor during this stressful time. You will be informed of what kinds of questions you will be asked and what documents they will request to see. The tax advisor has probably, or at least should have, experience in dealing with an IRS auditor.

Getting through an audit is much like playing a game of chess. Knowing your opponent’s next moves are critical, and having a game plan or strategy will help your situation. Since tax advisors have played this game before with this opponent, they are usually better qualified at limiting your burden.

During the audit, an attorney, public accountant or enrolled agent will meet with the auditor in your place. Your representative is less emotionally involved, less defensive but most importantly they are able to negotiate on the law. Since they speak the same language as the IRS auditor, they have a better chance of reeling in the prize, which unfortunately for you just means less scrutiny and/or penalties.

Once the audit has been completed and the report is final, you may be asked to sign some documents. It is vital at this stage that you have your representative review the form before placing your “John Hancock” at the bottom. You should fully understand and agree to what you are signing before you sign. Your signature is your word that everything in the documents for which you are signing is true and correct. Having someone carefully review and explain to you the repercussions of signing the document is your right so you should use it.

Make sure that your line of communication is always open with your representative. It is imperative that he/she knows everything about your return, situation or documentation received. If you are represented, it is recommended that you do not correspond with the auditor in anyway unless directed to do so by your representative. While an IRS audit is tough, you will get through it with some patience.

Internal Revenue Tax Audit, IRS Audits

2009-07-30T04:56:00.000-04:00

Being audited by the IRS is very stressful. One of the best methods of combating a bad situation is to be educated and informed. You should know what the infractions and penalties are that you could get hit with.

If you get a late filing infraction, your tax penalty could result in 5% per month of the net tax due to the IRS with a maximum of 25%. If you IRS tax return is more than 60 days late, the minimum IRS tax penalty is the smaller of $100 or 100% of the tax owed. If the late filing is due to fraud, you will get a tax penalty of 15% per month of the net tax due to the IRS with a maximum of 75%.

If you make late tax payments to the IRS, your penalty could be 0.5% per month of the unpaid tax due to the IRS with a maximum of 25%. This amount increases to 1% after the IRS issues an IRS tax notice of their intent to levy.

For negligence or disregard of IRS tax rules and regulations you could get a penalty of 20% of tax underpayment that would otherwise be due to the IRS. If you were being fraudulent then the penalty would increase to 75% of the tax underpayment that would be due to the IRS. If you substantially understate your income, which is greater than 10% of the correct tax liability or $5,000, then your penalty could be 20% of the tax underpayment due to the IRS.

If your infraction was overvaluating by 200% or more but less than 400% of the correct amount then your penalty could be 20% of the tax underpayment due to the IRS. Over Valuations of more than 400% would be subject to a penalty of 40% of the tax underpayment that would be due to the IRS.

If your infraction deals with Estate and gift tax under valuation or 50% or more of the correct valuation and if the tax underpayment exceeds $5,000 then 20% of the tax underpayment would be due to the IRS. If the same is true but the under valuation is 75% or more and the tax underpayment exceeds $5,000 then the tax underpayment penalty due to the IRS becomes 40%. I hope this helps you to determine what penalties could result from your IRS audit.

IRS Audit Representation

2009-07-30T04:44:00.000-04:00

If you decide that you need to enlist the help of a representative, there are some items that he/she should be taking care of. For example, the representative should be able to handle your audit in such a way as to limit your exposure. The less the auditor sees of you and your business means the less vulnerable you are to further probing. Additionally, the representative should lower the risk of the auditor probing into higher risk areas, other than the specific requests for documentation made in the initial audit notification.

Tax laws are quite complex and many are left open to interpretation. With that said, a representative should be able to limit the scope of the auditor’s investigation. For example, an auditor may request to look at material deductions. The representative’s job should be to limit what the auditor considers “material” to a dollar amount with the highest threshold possible. Perhaps the representative, through the use of interpretation, can convince the auditor to examine all documents, which have a higher value than $1,000. The less documents that have to be produced is limiting your exposure and preventing you from being audited any further.

Since an auditor can go back and request prior years tax returns and documentation, it is important to produce the documents requested, and only those listed, in a timely and organized fashion. The representative should appear professional and well organized. The more timely you are in your replies and the more organized you present it, the more likely the auditor will assume that your business is handled professionally and with scrutiny.

If you choose to handle the audit without a representative, there are some tips to consider. Never leave your original documents with the IRS, never give the IRS agent more or less information than what is requested, be organized, respond timely, answer questions honestly but briefly, do not argue or be belligerent, insist on getting copies of information in their files and of anything you sign. If you have a representative accessible, have them review any documents prior to signing them. Having a representative is up to you, but being informed either way is essential.

Types of IRS Audits

2009-07-29T23:52:00.000-04:00

There are four different types of IRS audits. While none of them are pleasurable, there are notable differences. Each type of audit is unique in the way it is handled. Additionally, each type of audit is specifically aimed toward a select group of taxpayers being audited.

The first type of audit is a correspondence audit. You will receive a letter from the IRS requesting that you provide certain documentation in order to verify information that you have stated on your return. This information is to be sent back via the mail service and no in person meeting is required. This type of audit usually happens to individuals and is not geared towards complex tax returns or business entities.

The second type, an office audit, is where the IRS sends a letter requesting that either you or your representative bring certain documentation to the local IRS office. This type of audit usually applies to small business or sole proprietorships where sales are less than $500,000. In an office audit, a local auditor will examine the documentation produced.

The third type of IRS audit is the field audit. This audit usually happens to incorporations and partnerships. The IRS auditor will call the owner, partner or agent, inform them that they have been selected for an audit and set up an appointment to meet in person. This type of audit is called a field audit because the auditor will want to meet at your home or place of business. Inviting an auditor into your home or place of business is discouraged whenever possible. Try to arrange the meeting at your tax advisor’s office or other professional agent that you use. The auditor will want to interview the principals of the business and determine where your records are located. It is strongly recommended that you obtain representation if you receive a field audit, as this is usually a “fishing expedition”.

The last type of audit is a Taxpayer Compliance Measurement Program audit. This is used to update the scoring program the IRS uses to select future audits. You business will be audited on every line item and this is very time consuming. Records, invoices, checks, time cards and receipts will have to be produced. In a TCMP audit, a full audit is conducted, and every piece of documentation must be produced.

HOw the IRS determines who will get an Audit

2009-07-29T23:41:00.000-04:00

If you have received a notice that you are going to be audited by the IRS, don’t panic. There may have been several reasons for the selection. Perhaps an employee was angry and called you in, or your type of business may be a test selection for your area to compile data on the average amount of deductions etc. Generally however, audits are determined by a computer system and calculated by a numerical number. You have the right to ask why you were selected for an audit.

When the IRS receives your filing, the information is placed in a computer. The computer then uses a secret formula to “score” your return. While we don’t know exactly what formula is used, we do know some of the items that could make your “score” go up. Think of the score as a percentage that the computer gives back showing the likely hood of a mistake or cheating. Most of the time, the higher scores are a result of how far above or below average each line item is. For example, your score may go up if you have reported a lower than average gross profit margin compared to other businesses in your industry. Other items that can make your score go up include a high auto expense, high business use of automobiles, the number of automobiles used in your business, high travel and entertainment deductions and little or no profit from business operations.

Interest has recently been added to the high-risk audit item. Interest can be claimed as either business or personal use. The IRS has added that, which results in an IRS auditor assuring that the interest was in fact business and not personal.

It simply comes back to the higher the number; the more deductions that you have that vary from the average or norm. When this is computed, the IRS sees a greater chance for an error on that return. The returns with the highest numerical score get chosen first for the audits.

Remember that it is your right to know why you are being audited. Aside from the computer numerical system, there are other reasons that you may be getting audited. It could be an informant; your relationship with another audited taxpayer, being part of a targeted special group, or part of an IRS trial such as auditing all employers who use contract labor.

Tax Audits and the Self-Employed

2009-07-29T20:40:00.000-04:00

There is no wonder that the self-employed are targeted, who in fact many times do cheat, on their IRS returns. After all, they are not subject to a typed W-2 that is submitted to the IRS by an employer. Cash and Checks are simply given to the company, which is usually controlled by the owner in smaller companies. Many times, cash goes unreported, but one of the mistakes that the IRS auditors commonly catch is larger cash deposits going into the bank without that amount ever being recorded in the books. Additionally, it is easy for the self employed to claim just about everything as a write off. You would be surprised by how many self-employed individuals claim a sound system as a write off.

Another red flag is when all of the small company’s employees receive a 1099 instead of a W-2, yet they work for them regularly or more than half of the year. It may be a common mistake, but one worth learning the laws when it comes to sub contracted services versus company employees.

Many times, the small self-employed business owner is overwhelmed with tasks, and usually hasn’t taken a course on how to handle their books, taxes or accounting practices. Making the correct payroll tax deposits is essential when it comes to IRS audits. This will be one of the first things that the auditor looks for. Additionally, keeping receipts, documenting mileage and deciphering between what was used for business purposes or individual needs are all tedious tasks but necessary to get through the dreadful IRS audit.

There is tax and accounting software that will aid in keeping track of your deductions, expenses, and even employee payments if your are self-employed. This may be a better investment then the tax bill you could receive if the IRS audits you. Once the audit happens, mistakes will more than likely be found. Hopefully, the mistakes aren’t large enough for the auditor to refer you for criminal investigation. Two of the common “mistakes” that are easily avoidable are to not withhold income information and don’t take deductions for items that you didn’t have to pay for. Claim all of your income. These two suggestions are minimal efforts but could save you a thousand dollar headache. Lastly, don’t be foolish enough to deposit unreported income. The tax auditor will have access to you banking information and other financial documents.

The Different between IRS Negligence and Fraud

2009-07-29T16:30:00.000-04:00

There is a fine line between intentionally defrauding the IRS and making honest mistakes. While it isn’t comforting that your tax return may get audited and referred to the criminal investigation unit, it may make you feel a bit better to know that only 2,472 Americans were convicted of tax crimes last year. That is a very small number when you consider the amount of people who do the tedious task of filing every year on the dreaded date of April 15th. It is estimated that 17% of all taxpayers cheat their taxes in some way, or at least break some of the tax rules. Who is doing most of the cheating? Individual tax payers, mostly middle income earners. Corporations are only responsible for about 25% of all the tax crimes committed in the U.S.

Most of the cheating is done when people intentionally underreport their income. Most of this crime comes from those who are self employed, generally those who own restaurants, clothing stores, and car dealers. Other self employed common culprits include telemarketers, sales people, doctors, lawyers, hairdressers and even accountants. Underreporting income comes in first by far when it comes to how people cheat on their taxes. According to the IRS, only about 6.8% of deductions are overstated or phony. Once you are caught cheating, you may be assessed civil penalties and fines or worse, be referred to the criminal investigations department.

When you receive an IRS audit, one of the first things that the auditor does, and is trained to do, is look for tax fraud. To get this accusation pinned to your filings, you must have willfully and intentionally defrauded the IRS beyond the common and honest mistake. If you are keeping two sets of books, claiming a disabled dependent when you are single, or using a fake social security number, you are definitely in trouble and may want to call a lawyer right away. While the auditors do look for fraud while conducting your IRS audit, they rarely walk in suspecting it. Generally, the auditor understands that tax laws are complex, and mistakes do happen. An honest mistake usually gets you a 20% penalty to your tax bill, but all out fraud can result in a 75% civil penalty. Most tax crimes do not end in jail time although that can happen. The line between committing tax fraud and making an honest mistake is blurry, even for the auditor unless you were gutsy enough to alter checks, keep two sets of books or use falsified information.

Appealing the IRS decision in Tax Court

2009-07-29T16:10:00.000-04:00

So the IRS audited you and perhaps you have even went through the appeals process. Taking this matter to court can be relatively easy and inexpensive if you know what to expect.

While the small claims court may not be user friendly, informal or inexpensive when it comes to trials, the small case division of the federal tax court is. This division is intended to help taxpayers solve small disputes.

A small dispute can be classified as anything that is owed less than $50,000 for one tax year. In other words, let’s assume that you received an IRS audit for three years and each year you were assessed a fine or penalty of $50,000, you would qualify, even though the total bill is $150,000. If you were assessed fines, penalties or fees in excess of $50,000 for any one-tax year than your case will not qualify for the Small Case Division. Once you qualify, your case will be given an “S” designation.

The IRS will receive notice that you have filed in the Small Division of Tax Court. The IRS may then contact you to settle the amount owed prior to your trial date. If you so choose, and it is recommended that you do, you will be asked to meet with the IRS attorney to reach a settlement amount. Most small cases end without ever going to court, through this settlement process before trial. Out of those that file a small case in the federal tax court, more than half will usually receive some tax liability reduction from what the IRS claims that you owe. Remember however that the IRS attorney does not represent you. Any information discussed should be limited. If the IRS does offer to meet and settle, you may want to enlist the help of a tax professional at least for that meeting. The IRS tax attorney will be prepared, and you should be as well.

There is no need to be stressed out about walking into the Small Case Division of the Federal Tax Court by you. The name may be intimidating but the court operates much like a small claims court. You simply walk in and talk to a judge. The judge realizes that you do not know about legal proceedings or jargon. You simply state your side, present the evidence and you are done. The IRS will have an attorney present to argue their side. If it would make you feel more comfortable or if you feel that your case needs a representative, you can either hire a lawyer or a CPA that is admitted to practice before the tax court. The typical case is short, only lasting for about an hour or two.