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.
Showing posts with label IRS tax court. Show all posts
Showing posts with label IRS tax court. Show all posts
Wednesday, August 5, 2009
Wednesday, July 29, 2009
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.
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