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