Archive for category: Tax Audits & Appeals

From travel expenses to paying wages to family members, there’s no limit to what people will try to write off at tax time for the sake of their business. But where do you draw the line? Which write-offs you’re trying to write off go too far?

Tax Write-Off: Personal Expenses

This is a category business owners can easily get into trouble with if they’re not careful.

• Key Issue: You simply can’t deduct services of a purely personal nature that aren’t related to your business.

• How to Do It Right: Getting an opinion from a tax professional as to whether an expense is deductible for your business makes most sense. The cost of high-speed internet service should be deductible but you can’t deduct such homecare services as gardening, landscaping and tree removal simply because you work out of a home office.

Tax Write-Off: Guard Dog

Believe it or not, this is a legit write-off if taken correctly. In order for a dog to qualify as your company’s guard dog, it helps if you’re a little afraid of the animal yourself (picture a Rottweiler, Pit Bull or German Shepherd).

• Key Issue: You will only be able to deduct that portion of the dog’s total time devoted to “guard-dog” duty.

• How to Do It Right: Though it may seem rather obvious, your dog most also be guarding your inventory. Knowing the percentage of time devoted to guard-dog duty, applying this business use percentage you can deduct expenses relating to the dog but you can’t deduct the dog itself. You can however depreciate the dog over its expected lifespan as determined by a local breeder.

Tax Write-Off: Work-Related Uniforms or Costumes

The dos and don’ts of this tax write-off are fairly simple.

• Key Issue: If the costume or uniform is something you could wear outside your job, you shouldn’t write it off. If, however, it’s obvious you can only wear it for the duties of your specific job, then it qualifies as a write-off.

• How to Do It Right: A new suit wouldn’t qualify since you can wear it other places outside of your work environment. A perfect example of some rather unusual clothing you can write-off would be a clown suit. Even a Las Vegas showgirl with tight, sequined costumes she purchased for her performances should qualify. In this case a picture is worth a thousand words.

Tax Write-Off: Paying Wages To Family.

When employing a spouse, child or close relative, be careful not to give them any extra-special treatment.

• Key Issue: Make sure the responsibilities of their job description are commensurate with their age and experience. Pay them the same salary you’d pay anyone else doing the same job.

• How to Do It Right: Just like any other employee, maintain a personnel file and include them on your worker’s compensation coverage. Report them on the business’ employment tax returns and issue W-2’s at the en of each year.

What Should You Do?

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

What is an Eggshell Audit?

An eggshell audit is one in which the taxpayer has filed a fraudulent return in a prior year and the auditor is not aware of potential evidence of civil tax fraud or a criminal tax violation. A tax return is fraudulent if an additional tax is owed due to (i) a deliberate intent to evade tax or (ii) there is a willful and material submission of false statements/documents in connection with the return. It is considered an “eggshell” audit because of the care one must take – i.e. walk on eggshells – to guide the examination and prevent suspicion by the auditor.

What are the Risks of an Eggshell Audit?

A typical IRS audit may lead to a tax deficiency assessment whereby the taxpayer owes the underpaid tax plus interest and penalties. A deficiency is assessed when the underpayment was due to a mistake, inadvertence, reliance on incorrect technical advice, honest difference in opinion, negligence or carelessness. Because an eggshell audit includes a fraudulent tax return, an additional risk exists that the audit could lead to civil fraud penalties and the auditor may even refer the case to the IRS Criminal Investigation Division (CID) to pursue criminal tax fraud. If this eventually leads to the filing of criminal charges for tax evasion, your freedom may now be at stake.

What are the Differences Between Civil Tax Fraud and Criminal Tax Fraud?

Technically, the difference is the degree of proof required. Civil fraud cases require the government to prove fraud by clear and convincing evidence. Criminal tax fraud cases require the government to present sufficient evidence to prove guilt beyond a reasonable doubt. Clear and convincing evidence must prove that something is highly probable or reasonably certain, whereas evidence that is beyond a reasonable doubt can leave no doubt that would cause uncertainty in the mind of the person examining the evidence.

Civil fraud results in remedial action taken by the government such as assessing the correct tax and imposing fraud penalties such as fines. These civil fraud fines are generally greater than those associated with a tax deficiency and are owed in addition to the deficiency penalties. Furthermore, interest accrues on the penalty from the due date of the return. If convicted, criminal tax fraud includes the possibility of imprisonment in addition to the unpaid taxes, interest, and penalties. A tax fraud offense may result in both civil and criminal penalties.

What is the Role of a Tax Attorney in an Eggshell Audit?

An auditor is supposed to protect your rights as a taxpayer. However, an auditor is unlikely to inform you if the examination escalates from a civil examination to a criminal investigation. In fact, there can be an ongoing criminal investigation being carried out in conjunction to the audit and the auditor is collecting evidence for the criminal investigation. This is known as a “reverse eggshell audit”. Even if there is no concurrent criminal investigation, an auditor may nonetheless be conducting an examination with the objective of gathering evidence to establish proof of fraud without your knowledge. A tax attorney can intervene at any stage of the audit, ensure that the audit is conducted properly, and limit your future exposure.

Every U.S. citizen has a constitutional right against self-incrimination. An experienced tax lawyer will guide the examination in a way that protects that right while ensuring that any information provided to the auditor is truthful. This ensures that you don’t have to ever speak directly with any representative from the IRS.

A tax lawyer who specializes an IRS audit representation will navigate the taxpayer through the landmines of an eggshell audit. An audit can quickly (and unknowingly to the taxpayer) become a civil or criminal fraud investigation. This risk of additional penalties and imprisonment requires the expertise of a tax lawyer who can help mitigate such consequences. Even if the audit becomes a criminal fraud case, a tax attorney may be able to suppress evidence from the investigation if the taxpayer’s rights were violated.

An experienced tax attorney should provide vital assistance during the important time of preparation leading up to the audit. As a taxpayer facing an eggshell audit, you may have possession of documents that could, if disclosed to the IRS, potentially expose you to significant civil penalties or criminal prosecution. In order to prepare the best defense for you, a tax attorney will work with you to identify this information and make sure it is protected. Again, it is essential to partner with legal counsel on this matter, not your tax preparer, to ensure that the disclosures of sensitive information fall under the umbrella of the attorney-client privilege.

Eggshell audits are potentially dangerous matters for you and your business, as the ability to minimize the scope and context of the IRS’ investigation may mean the difference between a manageable civil penalty and criminal charges or fraud-related penalties.

What should you do?

Through the use of proper strategic planning, the eggshell audit may present an opportunity for the taxpayer to avoid potential criminal liability, and prevent an unpleasant situation from becoming exponentially worse. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California has the knowledge and experience regarding eggshell audits to offer our clients the best representation in these matters. We have the tools and techniques to effectively handle eggshell audits, and reduce the chances of criminal action by the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

IRS auditors are trained to spot common types of deception and attempts to defraud the Federal government. Any of these acts are called “Badges Of Fraud”. Now the IRS in an audit expects to find a few errors on a tax return and I would agree that a little bit of fudging here or there is not going to send a taxpayer to jail—it might not even raise an eyebrow. But during the course of the audit, errors will be corrected, deductions will be disallowed, unreported income added, and a new tax liability will arise possibly including a few penalties as well as interest.

But some taxpayers go too far. Their tax returns read like a fiction novel. Therefore, IRS auditors have been trained to spot hot issues common with of dishonest taxpayers.  Here are the major Badges Of Fraud auditors look for during the course of an examination:

Unreported Income.

When it comes to income, the auditor asks for all of your bank statements from all accounts. The auditor will match bank deposits to income declared on the tax return. If you have bank deposits from unexplained sources, you can be sure that the auditor will question this. The auditor will also look for concealment of bank accounts, brokerage accounts and other property. The auditor will also check for an excess of personal expenditures. For example, if you are spending $100,000 per year and only making $50,000 per year, the auditor will believe you are omitting an entire income stream from your tax return. The auditor will also check out internal information compiled by other departments of the IRS such as the IRS department which organizes data received from foreign banks to detect whether you have unreported foreign bank accounts.

Overstated Deductions.

If you fudge in the area of expenses or deductions, it could be explained as simply making a best estimate rather than totaling receipts. But if there is a substantial overstatement of deductions, it will set off alarms. Some taxpayers attempt to deduct personal expenses as business expenses or claim fictitious deductions. This will only cause an auditor to dig deeper and possibly want to open other tax years for examination.

Self-Employed Taxpayers.

If you are self-employed, the auditor may cut the audit short if you keep a good set of books on a computerized software system or a set of books maintained by an outside bookkeeping service or accounting firm. But if you do not keep books, or the auditor discovers that you are keeping two sets of books, you will subject yourself to more scrutiny.  Other badges of fraud in this area include false entries, backdated or postdated documents and false invoices. And of course if you refuse to make records available or if your books and records don’t match income and expenses reported on the tax return you will send up a red flag. The auditor will also check for improper allocations of income. For example, a distribution of profits to fictitious partners or shareholders, or including your income or deductions in the return of a related taxpayer to optimize your own tax liability.

Questionable Transfers Of Assets.

Auditors also look for the transfer of assets for purposes of concealment or diversion of funds and/or assets by officials or trustees. They can tap into public records and your State’s Department Of Motor Vehicles (DMV) in order to discover assets you may attempt to hide.

Social Media.

Auditors have also been known to look at your activity on social media websites like Facebook and Twitter to gather information on your lifestyle and major transactions like vacations, jewelry and extravagant social celebrations which they will incorporate in a cost-of-living analysis to determine if you under-reported your income.

The penalties for criminal tax fraud are very serious. They range up to 5 years in jail, plus fines of up to $500,000, plus the costs of prosecution for each separate tax crime. Once the criminal tax case is completed CID will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines.

Whether and when to answer questions from the IRS, or whether to stand on your 5^th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Many people have approached me with questions on IRS audits and so I have taken the most popular questions and laid them out in this blog with my response.

1. I received an IRS Notice informing you that your return has been selected for examination. What should I do?
The fact that your return has been selected for examination, it does not mean or imply that that you have made an error or done something dishonest. Tax returns are selected for audit in a variety of ways including random sampling. The most important thing is not to panic and instead to reach out to a tax attorney for representation. Provide us with your audit letter and the subject tax returns so we may review your situation.

2. Why should I be concerned if an audit is poorly conducted?
A poorly conducted audit can result in large additional tax adjustments and penalties and interest up to as much as 100% of the adjustment. Most local tax preparers are not equipped to represent you in an audit before the IRS. Because we focus on tax representation, we can make sure that your audit is efficiently and effectively handled and attempt to pursue an audit result with little or no additional tax assessments. We can handle everything from simply submitting missing tax documents to representing you in front of an IRS examiner. Let us do the work for you.

3. How is using a tax attorney beneficial during an audit?
Using a tax attorney to help with an audit can significantly increase your chances of getting a better outcome. Many times individuals don’t realize that audits can go both ways, you may actually end up being owed money after an audit. A tax attorney can analyze your situation and find the best approach to take in order to get the best outcome. The IRS actually prefers working with professional tax representatives because it makes their job easier and helps the process move along more efficiently, which can actually result in a more favorable decision.

4. What does your firm do for an audit representation?
Upon filing a Power Of Attorney Form with the IRS or State Tax Agency, we become the primary contact for the tax agency. You will still receive copies of all correspondence sent out by the tax agencies but you will not be receiving any calls or visits from the agent(s). In connection with the audit we will research any issues that are likely to come up, respond to the agent’s arguments by coming up with answers on your behalf, meet with the agent in person if required on your behalf, negotiate and settle taxes owed if you end up owing more money during the audit and cannot pay, and handle any unforeseen issues that may arise during the audit.

5. Why would I not want my original tax preparer to represent me in my appeal (or in my audit)?
One of the most effective defenses to the imposition of penalties and the associated interest on the penalties available to Tax Counsel, is to argue that the taxpayer relied on a tax professional in the preparation of the return at issue. This creates a potential conflict of interest between you and your original tax preparer where your interest is to protect yourself financially and your original tax preparer’s motivation may be to protect his reputation with the IRS. It therefore becomes highly unlikely that even where appropriate to do so, your original tax preparer will throw himself under the bus by admitting his errors in preparing the returns at issue for your financial benefit to his possible detriment with the IRS including the possibility of preparer penalties and detriment to his professional reputation with the IRS. No such conflict exists where you engage Tax Counsel that did not prepare the returns at issue to prosecute your Appeal.

6. How many years worth of returns are at risk during an audit?
Ordinarily, the IRS has three years from a tax return’s due date or filing date, whichever is later. However, this limitation does not apply when there is an allegation of fraud, when no return was filed, or when the taxpayer is charged with a substantial omission or concealment of items of gross income. Because an audit conducted for one tax year can trigger other tax years and can result in scrutiny of other tax deductions not originally stated in the audit letter, you should take this matter seriously and engage an experienced tax attorney to represent you.

7. What will happen if I do not respond to the taxing authorities audit notice?
Because the taxpayer has the burden of proof to prove claimed deductions, failure to respond to an audit notice usually results in the denial of these deductions leading to the charge of additional taxes along with interest and penalties. If left unchecked, an ignored audit notice and failure to pursue any appeal will result in a final assessment. Once an assessment becomes final, the IRS will start the collection process action that can eventually lead to wage garnishments, liens, levies and seizure of property.

8. What is the worst that can happen if I choose to represent myself in an audit?
Tax agents are aggressive by nature and left unchecked could potentially reach a determination that is unreasonable and inconsistent with the applicable facts and circumstances of your case or their determination may be based on erroneous applications of law. An experienced tax attorney will be able counter a tax agent’s aggressive nature, deal with the complex technical issues that arise during an audit and be an advocate on your behalf as to any factual or legal issues that arise during the examination.

Using a tax attorney to help with an audit can significantly increase your chances of getting a better outcome. Many times individuals don’t realize that audits can go both ways, you may actually end up being owed money after an audit. A tax attorney can analyze your situation and find the best approach to take in order to get the best outcome. The IRS actually prefers working with professional tax representatives because it makes their job easier and helps the process move along more efficiently, which can actually result in a more favorable decision.

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people minimize or avoid adjustments from IRS audits. Working with a tax attorney is the best bet for minimizing adjustments that would create liability to the IRS.