I have a couple of featured sites that I would like to share with my audience. While I am factual about how to deal with the IRS and audits, this is information you will want to have!
www.truthattack.org
Watch his insightful video. All of this information will help you to stand up for your rights whe it comes to the IRS.
http://www.youtube.com/watch?v=fWXFT3aadbw
Thanks,
Shannon
Friday, July 31, 2009
Thursday, July 30, 2009
Keeping records for the IRS Audit
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.
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
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.
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
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.
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
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.
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
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.
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.
Wednesday, July 29, 2009
Types of IRS Audits
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.
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
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.
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
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.
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
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.
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
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.
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.
Appealing the IRS Audit
When thinking about filing an IRS audit appeal, there are pros and cons though I think you will find that the benefits certainly outweigh the drawbacks. Remember too, that in the majority of the cases, the IRS will still get some of the penalty or fine. It may still be advantageous however, because many times, the tax bill is significantly reduced.
Out of all the research you can do, it boils down to three major reasons why filing an appeal is a “pro”. First of all, filing an appeal is simple and usually costs nothing, unless you enlist the help of a professional, which is not required, though your individual circumstance may warrant such an act. Secondly, appealing the IRS audit will delay your tax bill as long as the appellate process is in still in process. This may buy you the time needed to save or earn the money required to pay off the tax bill or allot you the time needed to make other payment arrangements. Lastly, appealing the decision generally does result in some tax savings. While this is not guaranteed, you don’t have much to lose in the attempt.
On the reverse there are some “cons”. One of the major implications to consider is that the appeals officer may find more issues that the auditor missed. If you know that there are more issues than the one that you are being fined for, and the auditor missed those all together, you will need to decide whether filing for an appeal will be worth it. Try considering which would be of greater value. Since there isn’t any set guarantee or amount, this may be a difficult guess and even a gamble. With that said, the likely hood that the appeals officer will discover more issues is slim. This rarely ever happens. If you feel that you are a candidate for more undiscovered issues to surface, go directly to tax court where the other mistakes will not be looked for or uncovered. If you decide to go straight to tax court, you may want to enlist the help of a professional, which can get expensive as well. Here you will need to consider the savings vs. the cost of such action. On the other hand if you know that you are a candidate for more fines and penalties, you may want that tax attorney anyway.
Additionally, interest will continue to accrue while you are in the appeals process. Again, consider the amount of interest being charged and the amount that you would likely save. Remember that it is not guaranteed, but usually the savings is around 50%. Figure the savings at only 20% just to be on the safe side while thinking through your options.
Out of all the research you can do, it boils down to three major reasons why filing an appeal is a “pro”. First of all, filing an appeal is simple and usually costs nothing, unless you enlist the help of a professional, which is not required, though your individual circumstance may warrant such an act. Secondly, appealing the IRS audit will delay your tax bill as long as the appellate process is in still in process. This may buy you the time needed to save or earn the money required to pay off the tax bill or allot you the time needed to make other payment arrangements. Lastly, appealing the decision generally does result in some tax savings. While this is not guaranteed, you don’t have much to lose in the attempt.
On the reverse there are some “cons”. One of the major implications to consider is that the appeals officer may find more issues that the auditor missed. If you know that there are more issues than the one that you are being fined for, and the auditor missed those all together, you will need to decide whether filing for an appeal will be worth it. Try considering which would be of greater value. Since there isn’t any set guarantee or amount, this may be a difficult guess and even a gamble. With that said, the likely hood that the appeals officer will discover more issues is slim. This rarely ever happens. If you feel that you are a candidate for more undiscovered issues to surface, go directly to tax court where the other mistakes will not be looked for or uncovered. If you decide to go straight to tax court, you may want to enlist the help of a professional, which can get expensive as well. Here you will need to consider the savings vs. the cost of such action. On the other hand if you know that you are a candidate for more fines and penalties, you may want that tax attorney anyway.
Additionally, interest will continue to accrue while you are in the appeals process. Again, consider the amount of interest being charged and the amount that you would likely save. Remember that it is not guaranteed, but usually the savings is around 50%. Figure the savings at only 20% just to be on the safe side while thinking through your options.
IRS Tax Bill and the ability to Bankrupt it.
It is a common misconception that tax bills can not be bankrupted. There are some cases where the tax liabilities are not eligible to be included, but other times, bankruptcy code does allow the tax bills to be relieved from the debtor.
One way to quickly assure that the debt is going to be yours, regardless of bankruptcy filing is to be found guilty of tax fraud. This is serious and the government will not allow you to bankrupt any of the tax fees, fines or assessments. Other situations where bankruptcy will not help you include not filing a tax return or not listing the tax bill as a liability when you file the bankruptcy.
If you filed a tax return, even if you were audited, and no fraud was determined then there does come a point when you can include the tax bill amount in the bankruptcy and have the debt discharged. Once you do this, the IRS can no longer attempt to collect the tax bill and must stop any proceedings accordingly.
The Bankruptcy code sections 523 and 527 permits IRS taxes to be included and discharged in some situations. Tax penalties for non-filing, late payments, late deposits, and tax penalties for late estimated payments can usually be included and discharged. Additionally, income tax, excise tax, and gift tax which is three years old is usually acceptable to be included in you bankruptcy filing. The key here is that the aforementioned must have been filed at least two years prior to the bankruptcy petition and/or it must have been assessed as an IRS tax audit deficiency for at least 240 days.
While including tax bills in a bankruptcy filing can be tricky, it is possible. Because tax law and bankruptcy code is so extensive and complicated, it is strongly recommended that you seek the advice and the services of a professional. Attempting to include a tax bill in a bankruptcy yourself may result in even more fines, penalties, interest and possibly even loss. Perhaps looking for a tax attorney who can file a bankruptcy or a bankruptcy attorney with tax experience may be the best idea.
One way to quickly assure that the debt is going to be yours, regardless of bankruptcy filing is to be found guilty of tax fraud. This is serious and the government will not allow you to bankrupt any of the tax fees, fines or assessments. Other situations where bankruptcy will not help you include not filing a tax return or not listing the tax bill as a liability when you file the bankruptcy.
If you filed a tax return, even if you were audited, and no fraud was determined then there does come a point when you can include the tax bill amount in the bankruptcy and have the debt discharged. Once you do this, the IRS can no longer attempt to collect the tax bill and must stop any proceedings accordingly.
The Bankruptcy code sections 523 and 527 permits IRS taxes to be included and discharged in some situations. Tax penalties for non-filing, late payments, late deposits, and tax penalties for late estimated payments can usually be included and discharged. Additionally, income tax, excise tax, and gift tax which is three years old is usually acceptable to be included in you bankruptcy filing. The key here is that the aforementioned must have been filed at least two years prior to the bankruptcy petition and/or it must have been assessed as an IRS tax audit deficiency for at least 240 days.
While including tax bills in a bankruptcy filing can be tricky, it is possible. Because tax law and bankruptcy code is so extensive and complicated, it is strongly recommended that you seek the advice and the services of a professional. Attempting to include a tax bill in a bankruptcy yourself may result in even more fines, penalties, interest and possibly even loss. Perhaps looking for a tax attorney who can file a bankruptcy or a bankruptcy attorney with tax experience may be the best idea.
Understanding the Different between an IRS Tax Audit, IRS Lein and Fraud
The Internal Revenue Service has been a powerful government entity for many years in the United States and one that is not usually reckoned. Results are rarely in the favor of the citizen. It is a frightening and stressful time because so many outcomes are possible. From jail time to house seizures, the IRS has very few limits as far as what is allowable by law to punish and collect from offenders.
If you have intentionally defrauded the IRS through false reporting or non-filing, this is handled very seriously. Tax crimes can result in high fines and even prison time. IRS Audits have went down in recent years, due to a computer program that uses an undetermined formula to randomly choose the filings that provide the IRS the largest penalties, which boosts the revenue amount for the IRS. With that said, if you are among the 1 in about 200 people that get audited every year, you may want to be a bit apprehensive. Out of those audited, 1 in 5 get away without a fine or owing anything, but the other 4 in 5 can get severe punishments, jail time and serious collection methods can be levied.
When a taxpayer is found to be deceitful during an IRS audit, the auditor will try to determine if this is intentional. If the taxpayer purposefully defrauded the IRS, it becomes tax fraud. Once this is discovered and the amount of the fine or tax bill is determined, the IRS gives the individual a certain amount of time to pay the bill off. If the person can not afford to pay the bill off or simply fails to do so, the IRS may place a lien on your credit and against you. On a lien, you are usually given 10 years to pay back the total amount owed.
While a lien isn't paid, if the back due amount escalates to a levy, this could mean certain trouble for the taxpayer, though this is a last resort used by the IRS. Once you are levied, you have 45 days to pay the total tax bill. If you still fail to comply then any property you own can be taken. If you are at or near this point, it is strongly recommended that you retain professional help such as a tax attorney and/or a tax advisor for help.
Avoiding the audit all together is ideal, but once you have exhausted the entire IRS audit process including court, it is advisable to pay up, get help or understand that life as you knew it will not be the same.
If you have intentionally defrauded the IRS through false reporting or non-filing, this is handled very seriously. Tax crimes can result in high fines and even prison time. IRS Audits have went down in recent years, due to a computer program that uses an undetermined formula to randomly choose the filings that provide the IRS the largest penalties, which boosts the revenue amount for the IRS. With that said, if you are among the 1 in about 200 people that get audited every year, you may want to be a bit apprehensive. Out of those audited, 1 in 5 get away without a fine or owing anything, but the other 4 in 5 can get severe punishments, jail time and serious collection methods can be levied.
When a taxpayer is found to be deceitful during an IRS audit, the auditor will try to determine if this is intentional. If the taxpayer purposefully defrauded the IRS, it becomes tax fraud. Once this is discovered and the amount of the fine or tax bill is determined, the IRS gives the individual a certain amount of time to pay the bill off. If the person can not afford to pay the bill off or simply fails to do so, the IRS may place a lien on your credit and against you. On a lien, you are usually given 10 years to pay back the total amount owed.
While a lien isn't paid, if the back due amount escalates to a levy, this could mean certain trouble for the taxpayer, though this is a last resort used by the IRS. Once you are levied, you have 45 days to pay the total tax bill. If you still fail to comply then any property you own can be taken. If you are at or near this point, it is strongly recommended that you retain professional help such as a tax attorney and/or a tax advisor for help.
Avoiding the audit all together is ideal, but once you have exhausted the entire IRS audit process including court, it is advisable to pay up, get help or understand that life as you knew it will not be the same.
How to Appeal and IRS Audit
After the IRS has completed their audit report, you will be given a certain amount of time to pay the tax bill. If you decide to appeal the results, the collection of your tax bill will be delayed for a long period of time; sometimes months and possibly even years. That is one of the reasons that utilizing the appealing process may work to your benefit. If you do not have the funds to pay the bill right away, file for a free appeals hearing. If that doesn’t work or you still don’t have enough money, then you can take the decision to tax court.
Appealing the audit may reduce your total tax liability, though it rarely reverses the audit report in it’s entirety. The first step is to appeal the decision with the IRS. Send a certified letter to the IRS stating that you wish to appeal the report. The appeals office will send an independent agent who is separate from the department who handled your audit.
The appeals department does not want you to take this matter to tax court. They would prefer to settle the matter themselves. Write a letter and send it to the local IRS director, stating why you are appealing it, and what your intentions are. Prepare your documents, organize them carefully and be sure that you understand exactly what is going on as well as what they are asking for and why you are appealing the IRS audit report. When you appeal, make a Freedom of Information Act Request. This entitles you to the auditor’s records, allowing you to see what they see. This will give you a better position when you go in to talk with the appeals agent.
As long as you are well prepared and you have done thorough research, you should be able to complete the entire appeals process on your own without hiring a professional. It is recommended however, that once you feel you understand all of the report as well as the appeals process and requests that you have a consultation with a tax consultant. This meeting should take place prior to meeting with the appeals officer. This may point out a few things you didn’t discover in your research stage or offer needed tips that you wouldn’t have otherwise known. This is a cheaper alternative than hiring a professional to handle the entire ordeal or even a tax attorney for court litigation.
In order to be offered a settlement, you must show the appeals officer that you would have some chance of winning or reducing your tax bill in tax court. This is why preparation and understanding is so important in this step of the appeals process.
Appealing the audit may reduce your total tax liability, though it rarely reverses the audit report in it’s entirety. The first step is to appeal the decision with the IRS. Send a certified letter to the IRS stating that you wish to appeal the report. The appeals office will send an independent agent who is separate from the department who handled your audit.
The appeals department does not want you to take this matter to tax court. They would prefer to settle the matter themselves. Write a letter and send it to the local IRS director, stating why you are appealing it, and what your intentions are. Prepare your documents, organize them carefully and be sure that you understand exactly what is going on as well as what they are asking for and why you are appealing the IRS audit report. When you appeal, make a Freedom of Information Act Request. This entitles you to the auditor’s records, allowing you to see what they see. This will give you a better position when you go in to talk with the appeals agent.
As long as you are well prepared and you have done thorough research, you should be able to complete the entire appeals process on your own without hiring a professional. It is recommended however, that once you feel you understand all of the report as well as the appeals process and requests that you have a consultation with a tax consultant. This meeting should take place prior to meeting with the appeals officer. This may point out a few things you didn’t discover in your research stage or offer needed tips that you wouldn’t have otherwise known. This is a cheaper alternative than hiring a professional to handle the entire ordeal or even a tax attorney for court litigation.
In order to be offered a settlement, you must show the appeals officer that you would have some chance of winning or reducing your tax bill in tax court. This is why preparation and understanding is so important in this step of the appeals process.
What to Expect during an IRS Audit
During an IRS audit, the auditor is going to be looking for a number of items that will prove or disprove your filing. The auditor may look at your bank accounts as well as other personal records to determine if you have committed tax fraud or have filing discrepancies.
The IRS auditor will want to know if you reported all of your business sales and receipts. They will be looking for bank records to support the income amount reported. The auditor may look for large sum deposits, then ask for documentation from the month that the deposit happened in. Additionally, they are going to be suspect to any cash transactions, especially the larger ones. For sales purposes, the IRS auditor can even judge your lifestyle to see if you’re living beyond the means of the self-employment or business income that you have reported. If this is the case, they may ask how you are affording pperhaps a $6,000 monthly mortgage when your total sales per month are only $2,000. Be prepared to rebut this assumption with credit card receipts, spousal income or other possible explanations. Remember however, that money gifted to you may sometimes be required to be reported as income. Winnings are sometimes required to be reported as well. For this reason, it is not recommended that you allow the IRS auditor to visit with you at your home or office.
Additional questions that you may be asked or that the IRS auditor may be looking for is whether or not you claimed expenses for travel that were not business related. Additionally, the IRS auditor may be looking to see if you claimed personal living expenses as business or home office expenses, if you claimed large and extravagant entertainment expenses, if you properly made payroll tax deposits and if your workers are properly classified such as independent contractors or w-2 employees.
As long as you are prepared to produce the documents and you volunteer anything in question, you should be okay. Take your time to digest the requests, and then think strategy. The goal is to prove that what you stated is fact. Show the IRS auditor why the expense was for the business or why the employee is classified the way they are. Make sure that you are educated about the topic before offering or volunteering any information. Research the subject or get some advice from a tax professional if needed. Request more time if you need to comprehend what is being asked for and to gather the documentation to support your return.
The IRS auditor will want to know if you reported all of your business sales and receipts. They will be looking for bank records to support the income amount reported. The auditor may look for large sum deposits, then ask for documentation from the month that the deposit happened in. Additionally, they are going to be suspect to any cash transactions, especially the larger ones. For sales purposes, the IRS auditor can even judge your lifestyle to see if you’re living beyond the means of the self-employment or business income that you have reported. If this is the case, they may ask how you are affording pperhaps a $6,000 monthly mortgage when your total sales per month are only $2,000. Be prepared to rebut this assumption with credit card receipts, spousal income or other possible explanations. Remember however, that money gifted to you may sometimes be required to be reported as income. Winnings are sometimes required to be reported as well. For this reason, it is not recommended that you allow the IRS auditor to visit with you at your home or office.
Additional questions that you may be asked or that the IRS auditor may be looking for is whether or not you claimed expenses for travel that were not business related. Additionally, the IRS auditor may be looking to see if you claimed personal living expenses as business or home office expenses, if you claimed large and extravagant entertainment expenses, if you properly made payroll tax deposits and if your workers are properly classified such as independent contractors or w-2 employees.
As long as you are prepared to produce the documents and you volunteer anything in question, you should be okay. Take your time to digest the requests, and then think strategy. The goal is to prove that what you stated is fact. Show the IRS auditor why the expense was for the business or why the employee is classified the way they are. Make sure that you are educated about the topic before offering or volunteering any information. Research the subject or get some advice from a tax professional if needed. Request more time if you need to comprehend what is being asked for and to gather the documentation to support your return.
How to survive an IRS Audit
An IRS audit happens randomly, but when it does, being prepared is the best way to combat getting any fines or penalties for your returns. Be very nice to your auditor and think as if you are writing an argumentative or debate paper for college. Your goal is to convince the auditor that you stated all of your income and that all of your adjustments, credits and write-off’s were legitimate and correct. Document everything that you say or do for the IRS auditor. When possible put any correspondence in writing. Only answer for the items in question. Do not volunteer more information than needed. Do not bring or produce any other documents than what is being asked for. Keep your conversation limited, only answering the questions that are being asked by your IRS auditor.
Requesting more time is generally advantageous to you. Postpone the appointments when possible. Don’t overdue it to the point where it looks as if you are non-compliant, but take your time. You shouldn’t feel rushed or act in haste; that is when mistakes happen. Request time to retrieve your records or if extenuating circumstances have presented themselves.
Always select an outise meeting place to conduct field audits. Do not invite your auditor into your home or office. Go to the IRS or perhaps choose a restaurant to meet at. If you feel you are being pressured into having them at your place of business or even in your home, contact the auditor’s supervisor or have your tax professional handle it. If you have a tax professional, suggest meeting at their office if possible.
If the auditor is requesting documents that you do not have or cannot find, you are allowed to re-construct documents. Do not forge anything, simply reconstruct the original amount and other information as applicable.
It would be unreasonable to assume that you aren’t going to get fined or owe the IRS something after an IRS audit. The key is to negotiate the tax issues themselves with the auditor. Do not try to explain why you can’t pay that amount or compromise on the dollar amount. Additionally, you should never use the term unfair or compain about fairness in general. The tax issues themselves are the only things that should ever be negotiated or discussed.
You should always be well advised and educated on the tax law when dealing with the IRS. Look up information, read books etc. If you are still confused, contact a professional to help.
Requesting more time is generally advantageous to you. Postpone the appointments when possible. Don’t overdue it to the point where it looks as if you are non-compliant, but take your time. You shouldn’t feel rushed or act in haste; that is when mistakes happen. Request time to retrieve your records or if extenuating circumstances have presented themselves.
Always select an outise meeting place to conduct field audits. Do not invite your auditor into your home or office. Go to the IRS or perhaps choose a restaurant to meet at. If you feel you are being pressured into having them at your place of business or even in your home, contact the auditor’s supervisor or have your tax professional handle it. If you have a tax professional, suggest meeting at their office if possible.
If the auditor is requesting documents that you do not have or cannot find, you are allowed to re-construct documents. Do not forge anything, simply reconstruct the original amount and other information as applicable.
It would be unreasonable to assume that you aren’t going to get fined or owe the IRS something after an IRS audit. The key is to negotiate the tax issues themselves with the auditor. Do not try to explain why you can’t pay that amount or compromise on the dollar amount. Additionally, you should never use the term unfair or compain about fairness in general. The tax issues themselves are the only things that should ever be negotiated or discussed.
You should always be well advised and educated on the tax law when dealing with the IRS. Look up information, read books etc. If you are still confused, contact a professional to help.
What to do after you recieve your IRS Audit Report
Once your IRS audit is complete, you will recieve a report. It is important that you take your time, read through the report carefully and if you don’t understand it, contact your auditor. Now that you understand it, you still may not agree with it. If you don’t agree with the IRS report, 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 yout protest letter by certified mail so that you have proof that they have 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. If your tax liability if over that amount, it would be worth your investment to seek the advice of a tax attorney.
Generally, contesting your audit in court will be beneficial to your case. If you are being unjustly charged, your case can be heard. Notably however, you may save money and time by simply appealing the decision. About half of the people who file a petition in tax court end up paying a reduced penalty. While there are 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 may be excessive for the amount owed. 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. With that said, it is important that you follow each step of the appeals process to exhaust every avenue. With a little bit of luck, as well as a lot of time and research, you can save thousands of dollars depending on how much you actually owe.
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. If your tax liability if over that amount, it would be worth your investment to seek the advice of a tax attorney.
Generally, contesting your audit in court will be beneficial to your case. If you are being unjustly charged, your case can be heard. Notably however, you may save money and time by simply appealing the decision. About half of the people who file a petition in tax court end up paying a reduced penalty. While there are 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 may be excessive for the amount owed. 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. With that said, it is important that you follow each step of the appeals process to exhaust every avenue. With a little bit of luck, as well as a lot of time and research, you can save thousands of dollars depending on how much you actually owe.
How to get through your IRS Audit
An IRS Audit is a stressful time full of tension. Your emotions feel tense and like a roller coaster. At the same time, the auditors deal with dishonest and hostile citizens everyday. While you may feel that an auditor is playing superior 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. Additionally, you need to remember the position of the auditor and perhaps why he is expressing himself the way he is.
IRS auditors aren’t generally high paid employees, and their work environments can be stressful since they are dealing with defensive and hostile people everyday. IRS auditors are on deadlines and many times simply finding the person for the audit is diffilcult, causing even more delays, which quickly adds to their caseload. 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 rather low.
With that said, there are ways to alleviate some of the challenge. First, don’t get angry or upset. Try to talk reasonably and logically 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 a friend than a foe, helping them through they’re 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, just 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 case closed, 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, your best form of action is to try and assist the auditor in getting your case closed as soon as possible so that you can move on with your life and the pesky auditor will be gone.
IRS auditors aren’t generally high paid employees, and their work environments can be stressful since they are dealing with defensive and hostile people everyday. IRS auditors are on deadlines and many times simply finding the person for the audit is diffilcult, causing even more delays, which quickly adds to their caseload. 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 rather low.
With that said, there are ways to alleviate some of the challenge. First, don’t get angry or upset. Try to talk reasonably and logically 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 a friend than a foe, helping them through they’re 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, just 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 case closed, 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, your best form of action is to try and assist the auditor in getting your case closed as soon as possible so that you can move on with your life and the pesky auditor will be gone.
Should I follow-up with the IRS Auditor if I haven't Heard from them in Months?
If the IRS is auditing you and you haven’t heard from your auditor in months, this may not be a bad thing. Perhaps your auditor was terminated or transferred. Another explanation is that your file could be sitting at the IRS to be processed or the file may simply be in a pile being over looked or even better, misplaced. Either way, this could result in your favor since the IRS auditors do have deadlines.
The IRS auditors have deadlines that must be followed with regards to closing your file. This is usually within 28 months from the date you filed your return or the date that it was due which is always on April 15th. The exception to that is August 15th if you filed for an automatic extension via form 4868. If you filed for a second extension using the form 2668 then October 15th would be your deadline. If extenuating circumstances have taken place on the auditor’s behalf, the IRS legally has an additional 8 months to complete your audit. That additional 8 months is time that the IRS does not want to spend having your case open and investigated, as this time is set aside for the appeals process.
Let me give you an example. If you file your 2006 return on April 15th, 2007, then 28 months from then is August 15th 2008. The eight months remaining isn’t for investigative purposes but rather for appeals processing. If you filed for an extension then the 28 months can begin as of August 15th, making the deadline for the auditor December 15th 2008. The same applies for the second extension and so on.
Calling the IRS may result in your file being found in a timely fashion. On the other hand, leaving it alone may result in the time expiring for the IRS to complete the audit. If that happens, you may be free and clear due to your file being over looked, misplaced or the auditor’s unfortunate termination. Either way, you should always remain calm and patient. Expediting the process will not help you in any way and may even be to your detriment. Do not call, email or contact the IRS in any way. Continue to do business as normal, being sure to accurately file any taxes in subsequent years. Knowing your rights and their deadlines is imperative in this situation.
The IRS auditors have deadlines that must be followed with regards to closing your file. This is usually within 28 months from the date you filed your return or the date that it was due which is always on April 15th. The exception to that is August 15th if you filed for an automatic extension via form 4868. If you filed for a second extension using the form 2668 then October 15th would be your deadline. If extenuating circumstances have taken place on the auditor’s behalf, the IRS legally has an additional 8 months to complete your audit. That additional 8 months is time that the IRS does not want to spend having your case open and investigated, as this time is set aside for the appeals process.
Let me give you an example. If you file your 2006 return on April 15th, 2007, then 28 months from then is August 15th 2008. The eight months remaining isn’t for investigative purposes but rather for appeals processing. If you filed for an extension then the 28 months can begin as of August 15th, making the deadline for the auditor December 15th 2008. The same applies for the second extension and so on.
Calling the IRS may result in your file being found in a timely fashion. On the other hand, leaving it alone may result in the time expiring for the IRS to complete the audit. If that happens, you may be free and clear due to your file being over looked, misplaced or the auditor’s unfortunate termination. Either way, you should always remain calm and patient. Expediting the process will not help you in any way and may even be to your detriment. Do not call, email or contact the IRS in any way. Continue to do business as normal, being sure to accurately file any taxes in subsequent years. Knowing your rights and their deadlines is imperative in this situation.
IRS Audits While Filing
If you receive notice for an IRS Audit, and are about to file your taxes for this year, it is strongly recommended that you wait. While this may create some tension and stress, getting through this time can be realtively easy if you know your rights and obligations. Filing a new return can result in that return being audited as well if your case is still open. For right now, file for an automatic extension which gives you until August 15th to file your new return. The automatic extension form 4868 needs to be sent in by April 15th however. To avoid further IRS audit issues, pay all taxes due by April 15th.
Once you have filed for the extension, and the deadline arrives, it is possible that you IRS Audit will still open. If the IRS audit is still going on in August and you are near your automatic extension deadline, file for another extension. This can be done using IRS Form 2688. This form will need to be sent to the IRS no later than August 15th. The second extension will then give you until October 15th to file your return if the extension is granted. Hopefully, the case will be handled and closed out by your the time second extension deadline rolls around.
But what happens if the second deadline of October is quickly approaching and the case is still open? In this case, don’t file your taxes until after the audit is complete. As long as you are not defrauding the IRS and are paying any applicable taxes by deadline, you will not be charged penalties or interest. If you find that you owe more money than what you sent on April 15th , send that in by the extension deadline of October 15th and write a note to apply the monies to your un-filed taxes for the 2008 year, as an example. If the Auditor asks you about your tax return for the current year, let them know that you are not ready to file. An auditor can not make you file your tax return.
The key to any IRS audit is to be educated and don’t be afraid. As long as you are paying applicable taxes and keeping the IRS aware of your status, you should be fine. If you feel that you are over your head, contact an IRS attorney and/or a tax advisor. Either way, the key step is to stay informed of your obligation as well as what an auditor can and can not do.
Once you have filed for the extension, and the deadline arrives, it is possible that you IRS Audit will still open. If the IRS audit is still going on in August and you are near your automatic extension deadline, file for another extension. This can be done using IRS Form 2688. This form will need to be sent to the IRS no later than August 15th. The second extension will then give you until October 15th to file your return if the extension is granted. Hopefully, the case will be handled and closed out by your the time second extension deadline rolls around.
But what happens if the second deadline of October is quickly approaching and the case is still open? In this case, don’t file your taxes until after the audit is complete. As long as you are not defrauding the IRS and are paying any applicable taxes by deadline, you will not be charged penalties or interest. If you find that you owe more money than what you sent on April 15th , send that in by the extension deadline of October 15th and write a note to apply the monies to your un-filed taxes for the 2008 year, as an example. If the Auditor asks you about your tax return for the current year, let them know that you are not ready to file. An auditor can not make you file your tax return.
The key to any IRS audit is to be educated and don’t be afraid. As long as you are paying applicable taxes and keeping the IRS aware of your status, you should be fine. If you feel that you are over your head, contact an IRS attorney and/or a tax advisor. Either way, the key step is to stay informed of your obligation as well as what an auditor can and can not do.
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