Finances

Income Tax Audits Don’t Have to Be Scary – 2020 Review

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Written by John Marmolejo

One of the scariest letters a person can get in the mail comes from the IRS and informs the recipient that their personal income taxes are being audited. The IRS can freezer a person’s tax refund while they take their sweet time to audit the person’s current and past tax returns. If the IRS decides there were errors on the past returns, the person can end up owing thousands of dollars in adjustments, penalties, and late fees. Worst-case scenario, the IRS decides that the person knowingly and purposely committed fraud.

What to Do When the Letter Arrives

As soon as that letter shows up in the mail, protect yourself and get legal representation. The process from start to finish is explained at sambrotman.com. At the first meeting, the legal team will explain that while the IRS may act like the income tax audit is completely random, they never are. The IRS only audits when they already believe they have found an error or a discrepancy, and many times their auditors will show up with the idea and attitude that they are investigating a fraud case.

A legal team will go over a person’s tax returns with them, discuss the individual details of the tax case, and come up with a plan of action for the audit. The goal will be to have the audit go as smoothly as possible and for it to wrap up as quickly as possible. While an individual can go through this process alone if they choose, having a tax attorney on their side can make a person feel like they have fair representation during the tax auditing process. A tax attorney also knows and understands both the state laws and federal laws regarding taxes.

If while reviewing the tax returns the team spots a problem and realizes why the person is being audited, they can work with their client on a solution and a game plan. Many times, getting ahead of the problem can save a lot of hassle and headache later. Legal teams work together using their wide knowledge of tax laws and IRS procedures to help get the best outcome possible for the client.

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Prevention Works Too

Many people choose to consult a tax attorney occasionally just to ask tax-related questions. A tax attorney will be able to inform people on what types of things can trigger an IRS audit and what the high-risk audit categories are. If a person believes they may have a tax related problem in the near future, they can also put down a deposit and hold the legal team on retainer just in case they do end up needing their legal services later on. An attorney may also be able to refer a person to a reputable certified public accountant, or CPA, so they can rest assured their taxes are being completed accurately and timely.

Business Tax Audits Can Pop up As Well

In addition to personal income tax audits, there are other audits that can leave a person with a bad taste in their mouth. These types of audits include California sales tax audits and California payroll tax audits. For each of these, a person should also look into getting legal representation. Again, an auditor won’t be looking unless they already believe that there is something substantial, they are going to find. Because both of these audits involve a person’s business and their livelihood, having one of these audits go south can mean that a person has to temporarily or even permanently close their business.

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Three Years of Business Taxes Can Be Investigated

Sales tax audits can cover the last three years for the business. The auditor will not go through every single transaction, because that would be time-consuming. Instead, auditors take a sample of the business sales tax information and then use a formula to determine if something is amiss. The stakes are high in these types of cases, so it’s important to hire an experienced tax attorney so the business and the business owner are both protected during the audit.

If the audit is in regards to payroll taxes, the auditor is again there because they believe they will find errors and probably evidence of fraud. The auditor is going there to see if the wages the business owner reported were correct. The auditor wants to know if the payroll taxes paid were right, if there are any back-wage taxes owed, and if all employee types reported were correct.

If a business reports that they have no employees, only 1099 contractors, the auditor will investigate and make sure that the people listed as 1099 contractors were in fact contractors and make sure that they should not be labeled as employees. Some businesses claim people as 1099 contractors when they are, in fact, employees in the effort to save on their taxes. If this is the case, this method can backfire and mean that the business owner ends up owing back taxes and penalties for the mistake.

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Having a good law firm that understands business tax laws and regulations can mean the difference between a business continuing to operate and a business getting shut down. There are rules in place that help stipulate if the person should be classified as a 1099 contractor or a regular employee. The tax attorney can go over these regulations and help a business owner understand the difference between the two.

In conclusion, receiving notification that the IRS is auditing a person’s private taxes, business taxes, or business payroll taxes is enough to give a person a panic attack. A smart person will immediately contact a tax attorney to go over their taxes and help formulate a plan of action for the audit. This can help a person feel prepared, educated, and confident during the auditing process. This also protects the individual’s rights, as a tax attorney will know the laws inside and out and will help defend their client to the best of their abilities.

About the author

John Marmolejo