Tax Law Blog | IRS Tax Attorneys

Worried about a tax audit? Maybe you should be. More Americans than ever may be subject to unwanted attention from the Internal Revenue Service this season as the government pumps billions of dollars into tax collection.

More than 1.4 million Americans were audited last year, the most in a decade. Even more audits are expected as the Obama administration plans to spend $8.2 billion in tax enforcement initiatives in 2011, a nearly 10% increase over last year.

Being meticulous with your tax return may seem obvious, but many people aren’t careful enough. And with the IRS seeking to collect every penny it can this year, you could end up paying for even the smallest mistakes.

While the IRS doesn’t reveal its secret formula for flagging returns, here are some tips to avoid popping up on the auditor’s radar.

Self-employed? Prove it’s legit

With a record-high jobless rate, many Americans have turned to self employment, making the IRS increasingly skeptical of the legitimacy of home-based businesses, said Robert Willens, a professor of taxation at Columbia Business School and president of Robert Willens LLC, a tax consulting firm.

More people are trying to turn hobbies into businesses in order to bring in a little extra money, but this won’t fool the IRS. In order to prove your business is legit, you need to keep consistent and accurate records of income and expenses, said Willens.

To be even safer, he suggests maintaining a separate bank account for the business, registering the business with the proper authorities and hiring an attorney and a good tax accountant.

An activity is considered a for-profit business if the gross income for any three of the most recent five years exceeds the deductions taken for the activity. If the IRS determines that a business is not engaged in for-profit, you won’t be allowed to take deductions of more than the gross income from that activity, said Willens.

High expenses of self-employed individuals will also provoke suspicion from the auditor, who will look closely at travel, entertainment and automobile expenses relative to an individual’s income.

Overseas bank accounts? ‘Fess up

As the government cracks down on offshore bank accounts, deposits abroad are likely to catch an auditor’s eye this year.

While the IRS will spend most of its resources going after people with the largest deposits, all taxpayers with foreign accounts should take precaution and comply with the rules in order to avoid huge penalties, said Maureen McGetrick, a tax partner with BDO Seidman.

“Foreign bank accounts have been all over the press lately — it’s definitely a big thing this year,” said McGetrick.

“People need to make sure they indicate on their tax returns if they have one, and make sure they include any interest income from that bank account on their returns,” McGetrick says. If you’re required to file a U.S. tax return, you must report foreign bank deposits that exceed $10,000 at any point during the year on form 90-22.1.

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An small case ( S case) IRS tax audit is never a fun thing to face, but they do happen to individuals and small businesses. When faced with the burden of a tax audit you may want to contest it. Here are some guidelines.

Tax Court’s Small Case Division can hear disputes involving as much as $50,000 of tax and penalties excluding interest. The limit applies per tax year, therefore if the IRS assesses tax for more than one year, it is multiplied. The IRS examines three years of your past tax returns and assesses $40,000 of tax and penalties on each. You can contest your full $120,000 tax bill, plus interest that the IRS has added, which may be many thousands of dollars more, as a Small Case (S case). If the tax disputed for a year exceeds the $50,000 limit, you can concede the excess to get under the limit.

The majority of all audit disputes involving individuals and small businesses can qualify as S cases.

In an S case no tax attorneys are needed, but they can be used and cost is $60 for the filing fee.

Some have suggested that judges are often more sympathetic toward taxpayers who represent themselves in S cases than those who are represented by IRS tax audit lawyers in formal cases. However, if you lose, you can’t appeal to a higher court.

If you don’t feel comfortable contesting an IRS tax audit on your own consider hiring an IRS tax audit attorney.

A little-publicized ruling in a recent case involving the Internal Revenue Service is causing lawyers for big companies some sleepless nights the WSJ reports.

Last week, in a widely anticipated ruling, a federal appeals court in Boston said the IRS could gain access to documents created by a defense-contracting firm to determine whether the company’s calculation of its tax liabilities would pass muster during a possible IRS audit. The decision in U.S. v. Textron Inc. reversed a January ruling by a smaller panel of judges on the same court.

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IRS Tax Audit Help

With prompt, effective tax help from IRS Tax Law Attorney Kenneth L. Sheppard, Jr. and his tax professional staff, your tax issues can be resolved and you can regain peace of mind.  Contact Sheppard Law Offices today to begin the process.  We can assist you in resolving any IRS tax problem through negotiations in an IRS Tax Audit, appeals, or tax court proceedings.

Barack Obama owes his presidency in no small part to the power of rhetoric. It’s too bad he doesn’t appreciate the damage that loose talk can do to America’s tax system, even as exploding federal deficits make revenues more important than ever.

At his Arizona State University commencement speech last Wednesday, Mr. Obama noted that ASU had refused to grant him an honorary degree, citing his lack of experience, and the controversy this had caused. He then demonstrated ASU’s point by remarking, “I really thought this was much ado about nothing, but I do think we all learned an important lesson. I learned never again to pick another team over the Sun Devils in my NCAA brackets. . . . President [Michael] Crowe and the Board of Regents will soon learn all about being audited by the IRS.”

Just a joke about the power of the presidency. Made by Jay Leno it might have been funny. But as told by Mr. Obama, the actual president of the United States, it’s hard to see the humor. Surely he’s aware that other presidents, most notably Richard Nixon, have abused the power of the Internal Revenue Service to harass their political opponents. But that abuse generated a powerful backlash and with good reason. Should the IRS come to be seen as just a bunch of enforcers for whoever is in political power, the result would be an enormous loss of legitimacy for the tax system.

Our income-tax system is based on voluntary compliance and honest reporting by citizens. It couldn’t possibly function if most people decided to cheat. Sure, the system is backed up by the dreaded IRS audit. But the threat is, while not exactly hollow, limited: The IRS can’t audit more than a tiny fraction of taxpayers. If Americans started acting like Italians, who famously see tax evasion as a national pastime, the system would collapse.

One reason why Americans don’t act like Italians is that they see the income-tax system as basically fair in execution. A tax audit or a tax-fraud prosecution is still seen, usually, as evidence that someone has done something wrong. If it comes instead to be seen as “just politics” then the moral component of the system will be gone. For the system to work, people have to believe that it is fundamentally fair.

This is why the IRS is so strict with its own employees. Paul Caron, a professor at the University of Cincinnati who writes the TaxProf blog, noted in response to Mr. Obama’s remarks that the law calls for the termination of IRS employees who make audit threats for illegitimate reasons. He suggested that Mr. Obama’s “joke” might be grounds for firing if he were an IRS employee.

He’s not, of course, but as the president his words carry much more weight and he should be much more careful. That’s particularly true given that people still haven’t forgotten about the Obama administration’s other tax issues — the appointment of Tim Geithner as Treasury secretary despite an inexcusable failure to pay $34,000 in Social Security and Medicare taxes while working for the International Monetary Fund, and the scandals involving Tom Daschle and others whose appointments failed. (When the Geithner issue came up, news reports indicated that IRS employees were very upset. They can be fired over a simple late filing or a failure to report a mere $500 in income, making Mr. Geithner’s “pass” on much more serious questions quite demoralizing.)

The notion that people who are audited are probably just “enemies of the regime,” coupled with the idea that big shots get a pass — that, as Leona Helmsley is reputed to have said, “taxes are for the little people” — is a recipe for widespread tax evasion. That’s how things work in Italy, and in many other countries around the world. But do we want things to work that way here?

Mr. Obama has been accused of not appreciating the importance of financial capital to the proper functioning of the economy. But ill-chosen remarks like his ASU audit threat suggest that he also doesn’t appreciate the role of moral capital. That, too, is essential to the proper functioning of a modern economy. As he looks for ways to pay for the spending campaign he’s already embarked upon, he’d be well-advised to avoid comments that undercut the very tax system he’ll be depending on.

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The Revenue Agent’s report is not binding. You may appeal the decision at a number of levels. This may be done before the Agent’s manager, before an Appeals’ officer, and before the US Tax Court.

The ability to access these venues is limited due to the timetables involved. Make sure you stay one step ahead of the deadlines to respond so rights are not lost.
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Contact Kenneth Sheppard, National Tax Attorney.

The traditional view of an IRS tax audit is a face-to-face contact with an IRS auditor. About one-third of IRS “tax audits” are in the form of letters asking for explanations of various tax items on a tax return or supporting documentation. If you receive a tax audit letter from the IRS, examine your records to determine the nature of the tax audit issue. The IRS may want to audit the entire tax return or could audit just a portion of it, for example, meals and entertainment or automobile and travel expenses.

If the issue concerns documenting a tax deduction or a tax credit, send the IRS copies of the appropriate documents. Do not send the IRS originals, as they may get lost in the mail or at the IRS. If the tax notice concerns your entitlement to a tax deduction or questions a tax position taken on the tax return, consult your tax advisor before responding to the IRS. A satisfactory explanation can end the matter quickly. In any event, it is important to respond to the IRS in writing.

If only a portion of the tax return is to be audited by the IRS you should  bring only those tax records pertaining to that part of the tax return being audited by the IRS. A full tax audit will request all tax return information for that tax year.

IRS tax audits are often prompted by large business losses over a period of several years, raising the question of how the owner made a living during that time. Large tax deductions for travel, entertainment and automobile expenses that don’t appear to relate to the company’s sales volume also can trigger an IRS tax audit. Only about 2% of small businesses’ tax returns are audited by the IRS nationwide.

There is also a Taxpayer Compliance Measurement Program (TCMP) IRS tax audit, which is the most thorough of all IRS tax audits. Persons selected for TCMP tax audits must verify all data on their tax return. This information could include birth certificates for children, a marriage license for a spouse, and complete documentation of all tax deductions taken on the tax return.

To prepare for the IRS tax audit, a business owner needs to recall the events of that business tax year, who was employed by the company at that time, and any problems encountered that tax year. The best way to prepare for any IRS tax audit is to do a good job of record keeping during the tax year prior to filing  your tax return. Then, if the tax return is selected for an IRS tax audit, the tax information needed to answer the IRS agent’s questions will be at hand.

As soon as notification of an IRS tax audit is received, contact the tax adviser who prepared your tax return. He or she can explain the IRS tax audit process and help you prepare for the IRS tax audit.

If you are audited by the IRS or are subject to an IRS tax collection procedure, you have a number of rights.

At the end of the IRS tax audit, the IRS agent will cite any problems with the tax return.

After the IRS agent informally advises you of any tax adjustments needed on the tax return a formal report is filed.

If you owe money on one tax issue and the IRS owes money on another tax issue, the two tax  amounts can be netted. In a small number of tax cases, the IRS tax audit results in a tax refund for the taxpayer.

If the IRS agent’s tax decision is unsatisfactory, you can appeal to the IRS agent’s supervisor, the Appeals Division of the IRS, and if necessary, the U.S. Tax Court.

The most general definition of an audit is an evaluation of a person, organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system’s internal control. The goal of an audit is to the person/organization/system etc. under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors.

Traditionally audits were mainly associated with gaining information about financial systems and the financial records of a company or a business (see financial audit). However recently auditing has begun to include other information about the system, such as information about environmental performance. As a result there are now professions that conduct environmental audits.

In financial accounting, an audit is an independent assessment of the fairness by which a company’s financial statements are presented by its management. It is performed by competent, independent and objective person or persons, known as auditors or accountants, who then issue an auditor’s report on the results of the audit.

Such systems must adhere to generally accepted standards set by governing bodies that regulate businesses. It simply provides assurance for third parties or external users that such statements present ‘fairly’ a company’s financial condition and results of operations.

1.an official examination and verification of accounts and records, esp. of financial accounts.

If you receive an audit notice from the IRS, it is very important that you know the rules and even more important to let the IRS know you are not an uninformed taxpayer. The more rights you assert, the better off you will be. You begin to assert those rights by being the one to establish the ground rules of an audit. Here are three ground rules right now.

1. You have the right to conduct the audit at a time and place that is convenient to you. Use this right to prepare and avoid being caught off guard.
2. You have the right to record an audit as long as you give the IRS the same right. Using this right prevents the IRS from changing the rules midway through the audit.
3. You have the right to limit the scope of the audit to avoid time and trouble discussing issues not relevant to your tax liability.
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