The Cost of an IRS Audit in California
If there’s one thing I know as a tax attorney, it’s that nobody wants to even consider the prospect of an IRS audit. As a tax attorney, I’m often asked about the potential financial impacts and consequences of undergoing an IRS audit in California. The answer is: it depends; mainly on the findings and the extent of any discrepancies in your tax filings. Let’s look at the potential financial impacts you may face if undergoing an IRS audit in California.
Additional Taxes Owed — If the IRS determines that you underreported income or incorrectly claimed deductions, you may be required to pay additional taxes. This can go back several years depending on the audit timeframe.
Penalties and Interest — The IRS imposes penalties for underpayment, negligence and substantial understatements. The penalty amounts range based on the type. For example the failure-to-pay penalty starts at .5% of the unpaid tax per month and an accuracy-related penalty is 20% of the understated tax due to negligence or substantial understatement. Fraud penalties can go up to 75%. Additionally, the IRS will charge interest on unpaid taxes and penalties.
Potential Loss of Deductions or Credits — If the IRS does not allow certain deductions or tax credits, it could impact your tax liability for the audited year and possibly for future years if similar deductions were taken.
State Tax Consequences — Since California’s Franchise Tax Board (FTB) often follows IRS audit findings, any federal adjustments may result in a FTB audit. That may result in additional state taxes, penalties and interest.
Future Audit Risk — While not an immediate financial risk, once audited, it is common for the IRS to flag your business for future audits. This is especially true if they find discrepancies and if adjustments were significant.
Impact on Business Operations — If the audit targets a business, it could lead to disruptions in operations, increased scrutiny of financial records, and possible adjustments to payroll taxes or employee classifications.
IRS audits can be a scary prospect, especially if you’re a San Francisco business. It’s important to keep accurate records and consult a San Francisco tax attorney or professional. And never ignore any type of IRS inquiry. Working with an experienced San Francisco tax professional can help review your business expenses and returns to make sure there are no red flags that may trigger an IRS audit in California.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
