Did anybody say IRS Audit? Well there is no need to shiver in your boots. You surely are not Al Capone or Walter Anderson, so no need be frightened. Most people believe that an IRS audit is like an FBI raid on your business or your home. The IRS is just a tax collecting government body that requires you to file tax in a timely and accurate way. If there is an audit planned for your business or as an individual, then you can also hire the services of a professional tax lawyer. He/she will be better able to explain the situation to the federal tax authorities on your behalf and will be able to defend you in the court of law, even if the tax lawyers manage to dig out some evidence against you from your office or your home.
Before we discuss about the IRS audit and who can help you with it, let us first take a look at what Internal Revenue Service (IRS) is and what does it do?
What is Internal Revenue Service (IRS)
Enforcement of tax laws within the country and the collection of income and employment taxes is the primary responsibility of the IRS. However, going back into time, it is interesting to note that it was established by Abraham Lincoln in 1862 to raise funds for the American Civil War. The name of IRS was the Bureau of Internal Revenue which was then changed to Internal Revenue Service (IRS) in the 1950s. The United States Department of the Treasury is the supervising authority under which IRS operates. Every year IRS collects approximately $2.4 trillion from the employees of our country.
What is an IRS Audit?
An IRS audit is the reviewing of the financial and accounting data of a business or individual to ensure that the information provided by the taxpayer in the 1040 form of tax return is accurate. The main aim of the IRS audit is to determine whether a taxpayer owes money to the IRS or not. The word auditing is common in the business sectors that are highly regulated to ensure that all the SOPs are being followed. Just like the regulators of the business sectors, the role of IRS is like a regulator which ensures that the taxpayer is paying the correct amount as taxes.
What Could Trigger an IRS Audit and How You Can Avoid It
Every year IRS processes 234 million tax returns. Most of them are processed without hassle, but some tax returns can result in a notice from the IRS stating that they would like to audit your individual or business account. What makes IRS audit your accounting statements? Let’s take a look.
1. Making Simple Calculation Errors
Sounds weird, but it’s true. Most of the audits that take place are because the numbers that you have entered in your annual tax return form simply just don’t add up.
2. Not Declaring Additional Income
You may work 9 to 5 in a job and you may likely be drawing a handsome salary, but if you own a trading account and invest in the financial markets part time, then the capital gain or dividend earned by you has to be disclosed in the annual tax return. Be sure that you declare all the sources of additional income in order to avoid an IRS audit.
3. Declaring Charity without Having a Receipt
An average American donates 3% of his annual income to charitable institutions per year. Donating any higher than that can also bring you under the red flag of IRS. Also most people tend to make the mistake of mentioning charitable donations with misplaced receipts. If you cannot prove the validity of your donations, then simply do not claim them for deductions on your annual tax return.
4. Rounding off your Numbers
Mentioning round numbers is another common mistake that most households make. The number that you calculate, whether it is your taxable income or any other figure, the probability is that it will be in decimal places and will not be in multiples of 100. Most households round off the numbers, say $3000.6254 to $3000 this must not be done as it will raise the eyebrows of taxation authorities.
5. Your Business Records Large General and Administrative Expense in its Books
General and Administrative Expense in accounting typically consists of utility bills, rent, insurance premiums paid, travel & lodging, meals & entertainment expenses etc. If the figures that are recorded under this head of account are abnormally high, then this would bring you under the radar of IRS. Most small businesses tend to record expensive family meals in an upscale restaurant under the expense of their business. This is illegal as it reduces the profits of the company and the shareholders are adversely affected.
Apart from all these things that can trigger an IRS audit, you can also be audited even if you do not make any of the aforementioned mistakes. This is mainly because the IRS also selects to audit cases in a random way. In 2000, this practice was banished because it was considered that it was putting so much pressure on the IRS and they were auditing cases that depicted no signs of tax evasion. But the practice was resumed in 2006. So, it also depends on luck; whether the odds are in your favor or not.
Taxpayer’s Rights amid IRS Tax Audit
If the IRS chose to audit your account because they have found some error or something suspicious in your form 1040, then you are entitled to some rights. These rights vary from state to state, but broadly almost all the states have given taxpayers the following rights.
- Right to appoint a tax attorney as an authorized representative of the taxpayer
- Right to be treated courteously and professionally by the IRS audit team
- Right to appeal the decision of the IRS in front of the court
- Right to maintain confidentiality and privacy about one’s tax matters (note that the taxpayer has to disclose the financial statements of the given tax year and has the right of not providing financial statements of previous years to the IRS)
- Right to ask for the purpose and use of the information that the IRS is demanding from the taxpayer
- Right to know what steps will be taken by the IRS if the required information is not provided within the deadline.
Things to Look For Before Hiring a Tax Attorney
If you have committed some mistakes while filing your tax return, and if you have received the notice indicating an IRS audit, then the first thing you should do is to look for an IRS tax lawyer. When looking for a tax lawyer, who will be handling your tax related matters, you should critically evaluate him on the following rubrics.
1. Experience of the Tax Attorney
A lawyer with 5 years of experience in criminal law is not the one for you. A lawyer who has specialized in IRS controversies and issues, and has sufficient experience in handling cases related to taxation, is your best bet. Their experience will be an asset, as they know the inner intricacies of the US Taxation laws and policies.
Looking for a lawyer who holds the license to practice law, and is a Certified Public Accountant (CPA) will be a great choice as he will be able to analyze and present the case from a variety of vantage points and can help you with an IRS audit.
2. Consider Word of Mouth
A lawyer with a good reputation is essential for your business or even for any individual. Always remember to ask your colleagues, friends and family to suggest you a good lawyer. Asking around does not mean surfing on the internet, though you will be able to find some good advice but most of it is just plain noise. Instead you must ask your local bar association they will be better able to guide you according to your requirements. Bar associations usually have a list of certified lawyers on their website who are licensed to practice the profession of law. Do remember to search your shortlisted choice on this directory of law practitioners.
3. Do a Cost Benefit Analysis
Before hiring a tax attorney ask him for a full disclosure of legal fees that will be involved in the process. Then compare this figure with what the IRS believes you owe to them. If the legal fees of defending you is $7,000 and the IRS notice says that you owe them $5,000 then you should not hire a tax lawyer, instead just try negotiating a deal with the IRS yourself. Even if you don’t exactly have any negotiating skills, you know that the worst case scenario is paying $5,000 to the IRS.
4. Communication Skills are Vital
Your tax lawyer will not be of any help if there is no communication between you and him. Before you hire a lawyer, ensure that he listens to you and is willing to help you out. Also it is wise to hire someone who is listened to and appreciated among the lawyers and in the IRS. If you are in a stressed situation, only a lawyer with good communication skills can help you out.
When Do You Need a Tax Attorney?
The most obvious answer to this question can be ‘when IRS sends an audit notice to your home’ but hiring a lawyer at the eleventh hour can turn out to be the worst idea ever because you will not have enough time to explain the whole situation to your tax lawyer and he will be bound by a time constraint to read and analyze your financial statements.
It is not that tax attorneys should only be hired if IRS sends the audit notice to your home. A tax lawyer can also be hired
- If you are planning to start a business and need tax advice
- When you are engaged in international business and want someone to draft contracts for your international parties.
- If you plan to sue IRS (that will be a bold step)
- If you are too busy to file the tax return yourself
Who Can Help me with an IRS Audit
In case you are buried in tax problems, the popular Harvey Specter might not be of much use but a seasoned tax lawyer surely will help you with the IRS audit. Make no mistake and do not involve in the logical fallacy that you will never receive a notice for an IRS audit because you have never received it in the past. Most taxpayers who receive the audit notice from the IRS have never been previously audited by the IRS except the high net worth individuals. Your tax lawyer, apart from facilitating you during the IRS audit, will also help you to take benefit of tax credits and help your business in reducing tax bills.
Apart from this, most tax disputes that arise during the IRS audit can only be professionally dealt by a IRS tax attorney. But if you are required to pay a settlement, then your tax lawyer can negotiate a deal with the IRS personnel.
Most of the IRS audits lead to ‘Offer in Compromise’. This agreement takes place between IRS and taxpayers only when the taxpayer is able to convince the IRS that paying the tax liability immediately in one lump sum will adversely affect the taxpayer and will bring economic hardships upon him. You alone will never be able to convince the tough IRS auditing and settlement team. This is where an IRS tax attorney can save you from IRS who will otherwise try their best to hand you a raw deal. Note that IRS tax lawyers are trained to handle such situations thus, you have a greater chance of getting a fair deal if you hire a tax attorney to facilitate you in the IRS audit.
From the above content we can arrive at the conclusion that a certified professional IRS tax attorney is the one that can help you with an IRS audit. Of course you can help yourself but it is recommended by most experts not to tackle this complex issue yourself, but rather appoint a tax lawyer as a representative and authorize him to handle your or your company’s tax matters. You can disclose any information that can help you build the case or any confidential information to your tax attorney knowing that they will not be forced to testify against you in the court of law.
If you have received a notice (by mail or telephone) of an IRS audit and you are looking for a professional tax lawyer who can help you with an IRS audit then you should look for professional tax attorneys. Our professional tax managers can help you in the tumultuous times of tax audit. We are a trusted taxation service provider and have been in this business for more than a decade. If you need any other advice or want to know more about our services, feel free to contact us at 407-344-1012 or visit our official website, www.freedomtaxaccounting.com, for viewing the testimonials of our clients. For requesting a call back, please email us at [email protected]