TAX AUDIT REPRESENTATION

Are you facing a Federal, State, or Local Audit?

The threat of a federal, state, or local tax audit can make even the most principled bookkeeper extremely nervous — and with good reason. Every year, millions of American citizens and businesses are audited, and every year, the IRS uncovers billions of dollars in income and revenue that isn’t accounted for. These IRS audits can lead to liens, levies, garnishments, and even foreclosures and closed businesses — as well as a heavy emotional toll on families and employees.

Not only can audits leave taxpayers broke and exhausted, but they could even lead to criminal charges if the IRS determines that you have been fraudulent or evasive in filing your tax returns. While rare, criminal penalties for tax fraud and tax evasion can result in massive fines and even lengthy prison sentences.

If you’re facing a current or potential personal or business IRS tax audit, you need experienced and proven tax audit representation. Before choosing your tax audit representation attorney, though, keep reading to learn why the IRS audits citizens and businesses and what your options are as you navigate this difficult situation.

Why Does the IRS Audit Individuals and Businesses?

The IRS and/or State of Maryland can conduct an audit to determine whether or not the amount of taxes you’ve filed is accurate. In most cases, this is due to some sort of issue with your returns (see below), but that doesn’t necessarily mean you’re in trouble. In fact, individuals and businesses frequently receive larger refunds following an audit due to simple miscalculations or basic errors.

The IRS is fairly tight-lipped when it comes to why they choose to audit certain individuals and businesses. The agency claims that most of their audits are chosen at random, but there seem to be a number of red flags that can trigger an audit — for both businesses and individuals alike.

Here are a few of the most common reasons why the IRS audits individuals and businesses.

Underreporting or Failing to Report Income

All taxpayers are required to report all income in their tax return, but that doesn’t mean that all taxpayers do. Sometimes it’s a simple accounting mistake while other times it’s based on a misunderstanding of tax law. Either way, failing to report income or revenue on your tax return is an obvious sign to the IRS that they need to examine your tax filing further. (Note that the IRS receives copies of all your income reports, so they’re fully aware of any discrepancies between what you report and what you actually earned.)

The good news is that most Maryland auditors understand that people make mistakes, and they’re willing to work with taxpayers to resolve their debt. As you do so, it’s extremely helpful to have an experienced tax audit representation lawyer on your side to advocate for you and minimize any damage you might have unknowingly (or knowingly) done when you filed your returns.

Excessive Business Expenses

Reporting abnormally high business expenses, home office deductions, or charitable deductions can get you in hot water with the IRS quickly — especially if these expenses or deductions are blatantly incommensurate with your personal income or business revenue.

Claiming a $20,000 charitable deduction against your $80,000 salary is extremely suspicious, as is listing $10,000 in office supplies when you bought a computer, monitor, and workstation. And if you’re claiming expenses that aren’t directly relevant to your occupation, the IRS will take note.

Always be sure to keep an honest, accurate, and up-to-date accounting of all your finances and save receipts for every relevant expense.

Clerical or Math Errors

Not many business owners or individuals would list filling out their tax returns as one of their favorite hobbies. It’s kind of a pain and can be really tempting to complete haphazardly. This is a really bad idea, as even the simplest math errors or profile mistakes could trigger an IRS audit.

If the IRS notices that you’re continuously rounding your numbers or that there are inconsistencies among your figures, they’re going to take notice and take action. The good news is that if you’ve made basic errors on your tax returns, you can take appropriate action to correct those mistakes and get back in the IRS’ good graces. Contact a Maryland IRS tax audit attorney today to help right the ship; you can still file an amended return to correct any errors you might have made.

What Is the Tax Audit Process?

The IRS uses objective and subjective analysis to choose who to audit. They have various computer programs and algorithms to identify discrepancies, and they also enlist good old-fashioned human analysis to determine whether or not to audit an individual or business.

We discuss their primary methods below.

The Discriminant Function System (DIF)

The Discriminant Function System is a computer program that analyzes each taxpayers’ tax return to ascertain the accuracy of their filing. The DIF is a proprietary model that the IRS does not disclose, but we do know that there is a sophisticated algorithm flagging certain tax returns for audit based on how their income or revenue matches their returns.

The Unreported Income Discrimination Function (UIDIF)

Another IRS algorithm, the Unreported Income Discrimination Function examines a different set of data to determine whether or not an audit might be necessary. In a nutshell, the UIDIF is a program that analyzes if an individual or business is spending more than they earn, which can sometimes indicate that this party is manipulating its numbers. Just because an individual or business is spending more than what they’re listing on their tax returns doesn’t necessarily imply any wrongdoing, so hiring legal tax audit representation can be especially helpful in these cases.

The Information Returns Processing System (IRP)

Yet another computer system the IRS implements to flag potential audits, the IRP is a computer protocol that cross-references your tax return against numerous third-parties — including your bank, your employer, the Social Security Administration, and even any brokerage firms that you do business with. The IRP is the primary computer system through which the IRS can identify any income or revenue underreporting.

Related Entities

The IRS is extremely thorough in their investigations. When they identify an individual or company that has been less-than honest, they also examine their colleagues and partners. Most importantly, they examine the financial transactions they’ve had with pertinent businesses. This is yet another reason why it’s so important to save relevant documentation and keep an accurate book. Even if you’ve done nothing wrong, the IRS could look into your operations based on someone or some entity that you’re involved with.

Incriminating Associations

An extension of the previous headline, if you’ve done business with any entity that is under suspicion for criminal activity, there’s a very good chance that the IRS is going to examine you or your business. Again, even if you’ve done nothing knowingly wrong, the IRS will pursue your records if you’re involved with any organization that is under their suspicion for illegal activity. The IRS can even petition the courts for documents related to you or your company respective to the suspected party.

The Difference Between Tax Fraud, Tax Negligence, and Tax Evasion

If you’ve received a letter of intent signifying that you’re being audited or if you suspect that you might soon be audited, it’s important to note the distinction between tax fraud, tax evasion, and tax negligence. Each has a different meaning and can result in different penalties if determined that you’ve committed an offense.

Tax Fraud: According to the IRS, tax fraud is “an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing.” In other words, the taxpayer likely knew they were reporting and paying less taxes than they would owe had they been forthright on their return. If convicted, you could face fees up to as much as 75% of what you didn’t pay on your return (as well as your original tax bill) and even do jail time. This is a serious issue, but it’s solvable with the right tax audit representation attorney.

Tax Negligence: The United States tax code and corresponding tax documents are confusing and convoluted, so it’s only natural that people are going to make occasional mistakes or take shortcuts. Unlike tax fraud, tax negligence is loosely defined as any activity tax return activity that is entered as an honest mistake or willful ignorance. Still, even honest errors can trigger an IRS audit, which could result in significant fees — no matter how honest your mistake.

Tax Evasion: The third element in a potential IRS audit infraction is tax evasion, which is distinct from tax avoidance. Whereas tax avoidance is an attempt to lower your tax bill through legal means, tax evasion occurs when a taxpayer tries to avoid paying taxes through illegal deceit or concealment. This is essentially another form of tax fraud; it’s just usually more subtle and/or subversive.

In some cases, the IRS might view your tax filing as evasive, but you were simply trying to optimize your return to pay as little as possible legally. In these instances, an experienced tax audit representation is invaluable in sifting through the finer nuances of your accounting and your case to provide the best possible resolution.

How to Deal With a Tax Audit

The chances of being audited are relatively small, but that doesn’t mean you can or should play fast and loose with your personal or business finances and filings. If and when the IRS audits you or your business, they will examine every aspect of your finances and filings to the letter.

Still, if you’ve done your best to be honest and forthcoming, you’re probably in good shape — especially if you continue in that spirit of trust and accuracy throughout the process. Regardless, if the IRS or State of Maryland comes knocking, here are a few proven best practices for dealing with an IRS tax audit.

Expect the Unexpected

The IRS will never contact you by phone to alert you of an audit. They will either send you a letter or conduct an in-person interview (usually both). If you receive a phone call informing you of an IRS audit, its is almost certainly fraudulent and should be reported to the proper authorities.

The letter the IRS sends to inform you of your audit will likely include instructions to respond with information related to income, expenses, and deductions. Depending on the size of your return, you can request an in-person audit to review your books.

What to Provide the IRS

The IRS should state which figures and documentation they want to see explicitly in their audit letter. Thankfully, the IRS will accept electronic responses of most documents they’re requesting, so you can either email or fax the paperwork at your disposal. United States tax law requires all taxpayers to maintain all tax records used to prepare your tax return for at least three years, so you should have this information at your disposal. If not, give us a call and we can help you gather this information.

Contact a Tax Audit Representation Lawyer

Regardless of how the IRS conducts their audit or how you respond to their requests, you have rights as a taxpayer. Contact a proven and experienced tax audit representation lawyer immediately to help you make sense of this challenging time. Any good tax lawyer is going to know exactly how to proceed no matter what your circumstances and will be there for you in the most troubling times.

Contact S.H. Block for Proven Tax Audit Representation

If you’re currently dealing with the IRS regarding an audit or have just received a notice that you’re being audited, we’re here to help. S.H. Block has decades of experience with tax audit representation and are dedicated to providing empathetic and actionable legal service on your behalf.

To schedule your free consultation, please contact our skilled tax audit representation attorneys today by calling (410) 872-8376 or completing this brief form.

Together, we will get through this.