ARE YOU BEING AUDITED?
Credit for establishing IRS goes to President Abraham Lincoln in the year 1862 and is covered under the authority of United States Department of Treasury. It has the prime responsibility for collection and enforcement of taxes and its prime area of concern is individual and corporate taxes along with estate, excise and gift taxes.
This vast organization with its headquarters at Washington, D.C, controls over the services of taxation of all Americans and brings trillions of dollars as tax revenue.
One of the most important areas covered by the Internal Revenue System (IRS) is audit process.
What do you mean by IRS audit?
It is the process followed by IRS to examine the individual and corporation’s tax returns and to verify about its correctness. Three different modes are adopted for audit purpose details are mentioned below:-
- Office Audits: Taxpayer is called at local office of IRS.
- Audit by way of Correspondence: IRS sends mail to the taxpayer to get additional information.
- Field Audits: IRS officials visits place of business of taxpayer to investigate about corporate tax return.
It is always recommended to keep records in support of your return as there are every chances of audit in respect of that particular return and you must have proper and accurate record book to prove all your details as mentioned in the return.
Most Common Questions relating to IRS Audit :
Why I am selected for an audit?
What To Do If The Irs Audits Your Tax Return?
What Actually Happens When You’re Audited?
What To Do If Your Receive An Audit Letter From Irs?
How To Deal With (and Survive) I.r.s. Income Tax Audits?
How To Avoid Tax Penalties After An Audit ?
How Many Years Back Can Irs Audit?
How audit is performed?
What is the statute of limitation on an audit?
Is appeal is possible in audit process?
What are the different types of audit?…………..and many more.
What are the different reasons that make your tax return to get verified by IRS?
Every year IRS receives several filled tax returns and most of them are ignored and only small percentage of those returns are taken by Internal Revenue System for audit purpose. If your tax return is amongst ignored category, don’t take it as granted and it can be in the line of audit at any time, so all your details mentioned therein be correct and you must have supporting document to prove your entries in tax return.
There are different factors responsible to increase chances in relation to your return being audited by IRS:-
- Your total level of income.
- Your claimed deductions and loses.
- Nature of your business.
- How much foreign assets you own?
Why Are You Being Audited? – INFOGRAPHIC
If you are the attraction point of IRS, there is no way to escape from audit but we can provide you help as we have highly qualified tax attorneys in our group. There are different zones that brings you to become central point of attraction of IRS:-
INCREASED INCOME: –
As your income increases there is every chance of your tax return being audited by IRS. This organization is doing its best to cover rich persons in its ambit. Persons whose income is $200,000 or more than this amount are covered under this category and the chances of audit of tax return is higher which comes to 3% or two out of every 35 returns. Taxpayers whose income is less than $200,000, chances of audit rate drops. Only 0.80% of these returns were subject to auditing as per survey conducted by IRS in the year 2014.
This does not mean that you should not work hard and make less money, but the only concept is that the more income you show in your return more it will attract the attention of IRS. Therefore you should be very well prepared with proper proof in your support in respect to concerned entries in the return.
YOUR PROTEST AGAINST TAX COLLECTION: –
Collection of tax is country’s right and people’s protest is illegal. If it appears to IRS that deductions on your return are excessive as compared to your income, your return may be reviewed by IRS. If you have proper documentation in your custody there is no need to afraid to claim it. You have to pay actual tax to IRS.
NON DISCLOSURE OF INCOME: –
Non- disclosure of the income is the easiest way to avoid tax payment. It is of utmost importance for any institution which disburses any amount to individuals to report it to the IRS. In whichever country you have your account its details must be brought before IRS. The more income sources you have, the more difficulty you face to keep its record. Record is required to be kept in an efficient manner. You can also take the services of qualified lawyers to help you in the matter.
SELF EMPLOYED NOT REPORTING THEIR INCOME SOURCES: –
Schedule C being used by the self employed mentioning his loss for 2 years out of 5 years is not considered genuine by IRS. Its agents are very well qualified and experienced to find that they are claiming excessive deductions without reporting all their income. Regular corporations and small liability companies comes under its ambit.
Other categories of persons like washermen, car cleaners and persons working in bar and showed their losses in schedule C are also covered under this category and special scrutiny is done to find out whether their losses are genuine or otherwise.
For audit purpose IRS is diverting its attention from regular corporations to these small liability companies in the hope that they will be able to collect more from these corporations.
CLAIMING FOR HIGH DEDUCTIONS: –
If you are claiming deductions that are on the higher side than your income, you will certainly attract the attention of IRS audit towards your side. This is because IRS is very well aware about the level of deductions at your income group.
LOSS FROM REAL ESTATE: –
If you have given any property on rent basis and suffer losses thereby and claims the same, you will certainly attract the attention of IRS audit, as it considers real estate as passive activity. Meaning thereby to say that you are limited in the amount of loss which you are claiming.
In some cases rental income comes under active category if you prove to IRS that you are real estate professional by proving them that you have spent more than 750 hours in a year in this sector and spent half or more working time on your property.
MAINTENANCE AMOUNT: –
Where husband and wife are separated by way of divorce or separate maintenance decree or through written separation agreement, maintenance amount or alimony given to wife by husband is taxable for the former and non taxable for the later. On the death of wife, husband’s tax liability will be resumed. It is necessary for both the husband and his ex-wife to report about maintenance amount in their respective returns, otherwise it will attract IRS towards audit. If the matter seems to complex, our team of qualified IRS tax attorneys in Los Angeles are always available to help you before IRS.
FOR CLAIMING LOSS ON HOBBY:–
Whatever income you have made from hobby, it must be reported by you and up to the level that income you can deduct the expenses. You are required to give details of losses from the hobby with the expectation to make profit. Therefore it is important for you to run your activities in proper business manner and you should have related documents in your custody.
DEDUCTIONS RELATING TO BUSINESS OR PROFESSION:-
Whether you are engaged in small business or large business and you are claiming big deductions in respect of food, entertainment etc., you will certainly become the centre figure of IRS audit. If your write off figure is big in relation to your business or profession you will certainly be encircled by IRS. Its agents are very well trained to sort out the claim that does not match with the concerned rules. If you are claiming for meal or entertainment deductions, you must have in your possession all the documents in its favor, if the expenditure is above $ 75. Without documents, your case will not be considered.
YOUR PAYMENT IS NOT SUFFICIENT: –
If you are not paying full amount towards your tax liability and offers no explanation, you can be subjected to IRS audit. In the concerned audit, they may ask for each and every detail of your payment along with proper proof. Therefore, you should be cautious in the matter.
NUMBERS IN VARIOUS FORMS MISMATCH: –
If you have filed the tax return and figure in the forms are coming different you can be subjected to IRS audit. It is therefore necessary for you to submit your return after proper check, so that later on you will not be subjected to any questioning in relation to the concerned return.
NOT REPORTING GAMBLING WINING AND LOSS AMOUNT: –
If you win any amount in gambling, it is required to be reported by you in form no. 1040, otherwise it will draw IRS attention. Likewise if you are claiming large gambling losses, you will be at risk as this amount is to be equal to the extent of your wining amount. Gambling related expenses like meals, lodging can only be written off by gamblers. IRS is very serious about those gamblers who are only reporting their miscellaneous deductions in Schedule A, Line 28 from recreational (gambling) activities, but not reporting their winning income. Tax payers reporting their losses from gambling activity on schedule C also becomes the central point of attraction of IRS examiners.
CURRENCY TRANSACTIONS DEALINGS: –
If you are dealing with currency transactions in excess of $10000 involving banks, car business dealers or other businessmen or any other suspicious activity or you have any bank account in other country and you have not reported the matter to IRS, be ready for IRS audit. You must be aware that banks and other institutions file reports on suspicious activities for compliance of currency transaction rules.
CLAIMING ON HOME OFFICE DEDUCTION: –
If you file return and write off your home office claim, you will certainly face the risk of IRS audit. You will be in great risk if the deduction shows Schedule C loss or income from wages. If you qualify for savings, you can deduct a particular percentage of your phone bills, insurance and other costs, rent or real estate taxes, which are particularly allocated to home office.
If you want to take advantage you must utilize that place exclusively for office purpose.
CLAIM IN RESPECT OF TRADE LOSSES COVERING UNDER SCHEDULE C:
Traders dealing with securities are provided more tax advantages than that of investors. Whatever the be the expenses of traders, it is fully deductible and required to be reported in Schedule C. Whatever profits be earned by traders it is subjected to exemption under self employment tax.
If you want to be qualify as trader, your selling and purchasing of securities should be continuous and you see the opportunities to make more money in short period after fully aware of price fluctuations. For your help our qualified IRS tax lawyers are always available.
What Documentation Can The IRS Ask During An Audit
You can be asked for following documents by IRS:
- You can be asked for real property escrow documents and related entity transaction documents.
- You can also be asked for bank statements, cancelled checks, all credit cards statements and invoices and receipts from your business and other itemized deductions.
It is important to note that if you are not in possession of any related document, IRS can ask it from third parties like banks or other financial institutions.
What Are The Odds Of Being Audited By Irs?
Words “IRS audit” is a fearful word for most of the tax payers. To remove the scare amongst these persons IRS makes sure to publicize its audit of famous persons. But what are the different odds for the persons of being audited? You will be surprised to know that very low for most of the people.
In the year 1963, audit of returns were high and total of 6% of the American’s tax returns were subjected to audit. Each individual knew the other whose return was audited. But with time, activity of the audit process gone less due to the reasons enumerated below:-
- Decline in the IRS workforce.
- Its workload has been increased in comparison to its workforce.
- More emphasis was put on tax payer service rather than tax enforcement. IRS began to emphasize on tax payer service rather than on tax enforcement.
- Legal changes are also one of the reasons. Congress enacted law in 1998 to prevent perceived abuses by IRS agents and auditors. This new enactment also affected the power of IRS to go after tax cheats.
As per IRS Oversight Board, IRS does not have enough resources to pursue more than $ 40 billion worth of taxes that are incorrectly reported or not paid. This does not mean that you will escape from filing of tax return or payment. IRS uses sophisticated computer algorithms to decide on which return audit is required. If your return shows some suspicious entry, your chance of audit goes up.
Why The Irs Probably Won’t Audit Your Tax Return This Year?
IRS is a federal agency of the US and it is duty bound to inform its citizens about its internal working. You won’t be audited by IRS this year for the following reasons:-
- Budget cut and fewer staff is one of the main reasons for less coverage of audit of tax returns. If your income crosses $ 1 million, your chances of getting audited rise to 11% and several red flags increase the chances of IRS audit.
- Waiting time on phone for getting information from IRS agent relating to filing of tax return is too long. In 2014, forty percent of the queries went unanswered by customer care. This year for getting information relating to filing of tax return, you have to wait for thirty minutes.
- IRS failed to handle correspondence in timely manner. In 2014, fifty percent of the correspondence was not answered and in 2015, the situation got worsened, as only two million fewer correspondence than last year was dealt on a timely basis that is within 45 days.
Statute of Limitations for Tax Refunds, IRS Audits, and Collections
Statute of limitation is also termed as Assessment Statute Expiration Date (ASED). It depends upon circumstances of the tax return. In most cases IRS not go beyond 3 years unless there are specific reasons pertaining to already filed tax return. Statute of limitation starts on the original date of return, no matter if the return has been filed before due date. April 15th of every year is the period of starting of statute of limitation on which tax return was due. Different time frames fixed by the IRS are given below during which IRS can audit your return:-
- Three Year Period: This is the time period during which IRS is legally bound to audit most tax returns. This time period applies to you, if you do not fall under any of the two categories mentioned below.
- Six Year Period: If you have wrongly mentioned the income by 25% or more the statute of limitation to audit your can be extended by another 3 years.
- Unlimited time Period: If the amount mentioned in the return is fraudulent then the statute of limitation can be extended for unlimited period.
- Internal Revenue Code, Section 6501
- Section 6502 (10-year debt collection statute),
- Section 6503 (suspending the 10-year debt collection statute)
- Section 6511 (3-year refund statute).
For more information, see Internal Revenue Manual, 25.6.1, Statute of Limitations.
What Is The Time Period During Which You Can Receive Notice
When returns are received by IRS, it takes time between 12 to 18 months for audit. IRS has to complete the audit within 3 years. If it fails then the tax payer cannot be held liable for any additional tax owed. If you do not receive notice within one and half year after filing your return, there is every chance that you will not get audited.
IRS Audit Penalties
If your tax return has some suspicious figure and IRS wants to clarify in detail, it has the option of audit by examining return in detail to know its accuracy. If your return has been chosen by IRS for audit purpose, it does not mean that you have done anything wrong or you are being subjected to some other liabilities or penalties. Statistics shows that nearly 80% of the taxpayers who became the target of IRS audit owe more taxes. If you have mentioned some wrong entry in your return and it comes before IRS, burden of proof is on you to clarify it, with all necessary documents in your support.
There are different penalties you could face if IRS is satisfied that your entries are wrong in the tax return:-
Are you Wondering whether or not you will face penalties for not filing your tax return by Tax Day?
RECONSIDERATION OF AUDITS
If you are charged with more taxes during audit and you are not agreeing with the result, you can request for audit reconsideration. The concerned request should be made before you have paid any taxes, penalties or interest that is in dispute and not thereafter. If you have already paid the taxes, penalties and interest, you can ask for refund. It is not obligatory on the part of IRS to grant your request. But if you demonstrate any of the below conditions, your request for reconsideration may be approved:
- Due to reasons beyond your control you failed to appear in audit.
- Return filed by you shows the correct figure in comparison to return prepared by IRS as you have failed to file previous return.
- There is error in mathematical calculations in the return prepared by IRS.
- You have new documents in support of your claim.
IRS can expedite your request for audit reconsideration within 30 days although your wait may be longer. Your interest and penalties will continue to accrue during this period and if you are facing any financial hardships during this period, you can bring this fact before IRS and they will certainly consider your request. If you have any doubt that your request for reconsideration of audit will not be allowed by IRS, you can contact us and we will provide you our best services in solving your problem with our best professional income tax lawyers.
Is Your Request For Reconsideration Not Allowed By Irs?
In case your request is not accepted by IRS, you still have an option to ease your burden from your shoulders in the form of offer in compromise. It only settles a fraction of your total amount which you owe by way of tax penalty.
In certain cases on the basis of circumstances you can request for waiving of your penalty and the same can be either waived in full or up to certain percentage.
As soon as you receive notification of an IRS tax audit, contact the tax advisor who prepared your return. He or she can explain the audit process and help you prepare. If you are still nervous about the audit, or have a field auditor coming to your workplace, it’s a good idea to hire an experianced and professional irs tax lawyer.
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