If you run a company, you know that IRS audits are time consuming, expensive and stressful, taking away energy and time from things you should be focusing on. Having an experienced tax attorney by your side reviewing your IRS notice is very important and can help you to navigate through your various options.
No one likes to receive an IRS audit notice. But it’s important to understand how the IRS is selecting your tax return for audit.
Taxpayers often try to amend tax returns from a prior year as quickly as possible. But, amended returns are highly likely to be audited. The secret is getting a trusted tax attorney before you make an adjustment to review the tax returns.
IRS computer score
Everything on your return is utilized to give data to the IRS who in turn, scores your return. Your zip code, your occupations, income, and expenses are for the most basic things that will tip the IRS off that there was a generous change in your return or that you are not within the average business standard. The IRS is overwhelmed and tends to come up short. They choose returns they believe will have the best possibility for a tax adjustment.
A Schedule C with low revenue or high costs
A Schedule C is a page on your individual tax return where your business income and expenses are reported. As a business grows, most CPAs and lawyers will suggest that a sole proprietor or Schedule C business set up a separate legal entity for legal protection and to reduce your chances of an audit. Most Schedule C taxpayers with revenue or expenses that exceeds $100,000 have a higher probability of an audit.
In addition, there are many other ways the IRS selects a return for an audit such as payroll initiatives, tips from ex-employees/ex-spouse/ex-partner and state agency audits.
Some Important IRS Terminology
The IRS Appeals Department is comprised of very knowledgeable and experienced professionals. As a business, you have the right to appeal their decision following an audit. There are various ways of appealing an IRS audit and the strategy you take can influence the consequences of your audit. Contact our law firm and find out what your options are and what is the best way to appeal an audit decision.
The IRS Collections department comes in play when a person or business owes money to the IRS. Here are some of the ways a person or business can owe money to the IRS: currently not collectible, partial pay installment agreements, streamline installment agreements, offer in compromise, and bankruptcy. IRS matters can be very confusing and many taxpayers will often misunderstand the difference between the Assessment and the Collections side of the IRS. The Assessment side handles your account when you file a tax return or if your return is audited, while the Collections side is only preoccupied with collecting what you owe and does not get involved with “why” you were audited in the first place.
Speak with our experienced tax attorney to find out what you can expect, what the process looks like, and what your best options are.
IRS Levies & Liens
There are 3 common tools that the IRS uses to collect payments from those who owe money: IRS levies, IRS liens, and wage garnishments.
IRS Levy: In this scenario, the IRS collects the money owed directly from your bank account. This is a very aggressive method and it is only used after they tried several times to contact you and have failed to reach you. If you receive a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing,” you have little time left to contact the IRS before they freeze your account.
IRS Liens: A tax lien is the government’s legal claim to property that is held in your name. A tax lien attaches to all of your property, including property that you may acquire in the future.
Wage Garnishments: If your employer tells you they’ve received a Notice of Wage Garnishment, this notice is effective immediately upon receipt and it required that your employer must pay the IRS the proper levy amount on each payday that the levy remains in effect. Contact us immediately so we can guide on how to best navigate this scenario.
IRS International Compliance Issues: There are two entities that require you to report on foreign accounts and assets: the IRS and the Department of Treasury. Many people are not aware that they must report to both departments. Reporting to one of them and forgetting the other can cause serious penalties, as the two departments do not exchange information (reporting to one does not mean the other is also receiving the information). These are two separate reports, they use different forms, and have different requirements. If you have accounts or assets outside of United States, or if you own property abroad, ask for expert advice from a tax attorney.
Innocent Spouse Relief
Generally, you and your spouse are jointly liable for your tax debt. If you qualify for Innocent Spouse Relief you will not be responsible for the taxes, interest, and penalties. This scenario occurs when a spouse did not report or under-reported certain items on the joint tax return. This could happen even if the couple is divorced, if the error took place on a previous joint tax return.
Although many taxpayers believe they qualify, Innocent Spouse relief can be very difficult to establish. One of the hardest hurdles to overcome is that the “innocent” taxpayer did not know or did not have any reason to know there was an error or an issue with the tax returns. It is important to reach out to a tax attorney to determine if you qualify for Innocent Spouse Relief.
Payroll Tax Issues
There are many tax requirements that employers must abide by. Employers are required to timely report and deposit all employment and payroll taxes. If the employer fails to meet these requirements they will be subjected to substantial penalties and interest. Payroll taxes can also be weighed against an owner, officer or employee of the business. If you have any payroll tax issues, a tax attorney can determine what your options are and how you can resolve this very expensive area of tax law.
Trust Fund Recovery Penalty Issues
The IRS wants businesses to pay employment and income taxes timely. When an employer takes payroll taxes from an employee’s paycheck, the employer is holding the money for the government in “trust” until they pay that money to the IRS. If the employer does not make these “trust” payments, the IRS can collect the funds that were withheld from the employee from you personally. The business does not have to stop doing business for the IRS to attempt to collect from you as an individual. If you have been assessed a trust fund penalty, you have a very limited time to appeal this assessment before it goes final. A tax attorney can determine the assessment can be prevented or whether you need a timely appeal to the assessment.
Employment Development Department (EDD) Matters
EDD audits are focused on reclassifying independent contractors to employees. This audit will include a review of business records for the past three years, specifically records with special interest on documentation about your employees and independent contractors. An EDD audit may leave an impact that financially impacts the business growth and business model. After a worker is reclassified to an employee, the business will be assessed taxes, penalties and interest. Additionally, the EDD can collect from the responsible party. The business does not need to be shut down for the EDD to assess and collect personally from the owner, officer, employee, etc.
If you receive an Inquiry Regarding Records notice from the EDD, your business has been selected for an audit. Unlike the IRS notice of audit, the EDD audit notice can be inconspicuous and some business do not even know they are under audit. In addition, the EDD will send your business a Preaudit Questionnaire. The EDD requires the Preaudit Questionnaire to be completed prior to scheduling the initial audit meeting.
Once the auditor is assigned, they will request an in-person meeting. The benefit of hiring an attorney is that you do not need to be present at the initial interview. Your attorney can gather all of the documentation from the business and can handle the interview and audit without you attending the meeting. After the audit, the results are discussed through a phone call or in person. In the interview, disputes are resolved and more information that was not part of the initial audit is identified and reviewed if necessary. You also have the option of requesting a pre-assessment conference with the auditor’s supervisor if you’re not satisfied with the auditor’s terms of agreement.
The audit generally has three results:
- No indication of differences, which points to a no change audit.
- A payment that is higher than the stipulated amount, which results in a refund.
- An underpayment, with an assessment of the differences carried out.
In case you are not satisfied with the EDD assessment, it is necessary for you to file a petition with the Appeals Board. The time period for filing such petitions is usually 30 days from the notification for an audit. Consult a tax attorney so you don’t miss this important opportunity. During the appeals process, the EDD is mandated under law not to request or take any collection actions. Despite no collection taken, the interest of the unpaid proposed assessment still accrues.
There is a settlement option, similar to the CDTFA. The EDD is also in support of a settlement as it also advises taxpayer to take that option and avoid all the stress and expenses associated with a formal hearing before an administrative law judge.
When it comes to paying off a tax liability, the EDD has two plans. The first one is a payment plan and the second is an Offer in Compromise (OIC). The payment plan depends on your current ability to cover your tax liability. The EDD agent is focused on the taxpayer’s financial status at the moment, and how quickly the liability can be collected.
As a result of the heavy workload of EDD agents, collection of tax liability for taxpayers who respond late to an assessment or audit notice are sometimes carried out immediately. So it is vital that you collaborate with your Collections Agent to avoid levies and involuntary collections. In addition, you must continue to file all returns on time, make your current tax payments electronically, and respond to all requests in a timely manner.
There have been some situations where a taxpayer does not provide a timely response to an EDD notice. This allows the state agency to collect from the client automatically. When the assessment is done, the Collections department receives it, the proper notice is given, and then the EDD takes immediate collection actions. In short, if a taxpayer doesn’t respond to a notice, their bank accounts can be levied.
EDD Employer Classification Issues
The issue of whether a worker is classified as an independent contractor or an employee plays a role in the audit. Classification of a worker as an employee or an independent contractor may have a serious side effects on the company. If an error occurs in the classification, the business could be left in a state of disarray as it scrambles to pay payroll taxes that it should not owe.
California Department of Tax and Fee Administration (CDTFA) Matters
When it comes to sales taxes in California, the California Department of Tax and Fee Administration (CDTFA), formerly known as the State Board of Equalization (SBOE), focuses on sales tax audit. The CDTFA generally reviews retailers who sell items at a retail price. The tax calculation is based on the gross receipts obtained from the retail sales.
The CDTFA is known for its distinctive audits. The CDTFA carries out its audit by employing a variety of tests and techniques, and the test is influenced by the type of business being audited. The initial test carried out by the CDTFA is an in-depth comparison of the sales recorded in the taxpayer’s records and the sales reported on the taxpayer’s sales tax return.
In addition, the CDTFA can perform a mark-up test, cash vs. credit test, use tax test, alcohol pour test, Amazon sales test, hot vs. cold, in store and to-go test, etc. Each industry has a its own set of standard tests. The CDTFA audits are very aggressive and clients are presented with a very detailed Excel summary that can be very difficult to understand. Reach out to a tax attorney to help you navigate a sales tax audit and advise you on your options if you obtain a large sales tax bill.
When a taxpayer wants to appeal their audit, the Office of Tax Appeals (OTA) now handles it as opposed to The Board, which formerly handled it.
The Notice of Determination is issued after the Sales Tax Audit is completed. In this situation, it is necessary to contact an attorney for guidance in filing a petition as there is a 30-day deadline to appeal.
There are similarities between a sales tax and a payroll tax assessment. A sales tax liability can also be carried out against a responsible individual. The CDTFA is always on alert when it discovers the inability of a corporate taxpayer to pay off the sales tax it owes. In this situation, a “dual determination” will be issued and the CDTFA can enforce an assessment of unpaid sales tax against the individuals of the organization who are in charge of filing and/or payment of the sales tax. The individuals can be the officers and shareholders of the corporate taxpayer. Although issuance of this “dual determination” is not dependent on the position of the official in the company, the dual determination can also apply to other corporate officials, employees and owners. Knowing all this makes it more important to challenge an audit by the CDTFA if errors where noticed in its assessment. Contact a tax attorney to review your audit to help you avoid this personal liability.
Avoidance of tax liens, levies and garnishments should be of the utmost importance to you. The aggressiveness of tax collection used by these agencies makes it necessary for you to reach out to an experienced and well-educated tax attorney who will help you out of these issues.
If you miss your filing deadline after the Notice of Determination is issued, you will be transferred to Collections and the full liability must be paid.
CDTFA Settlements and OICs
The only benefit to a CDTFA audit is the CDTFA Settlement program. The agency carefully reviews the audit and allows the taxpayer an option for settlement. You can settle your case with the agency’s settlement division once the petition has been filed. A lot of cases arising from sales tax have been amicably resolved at the CDTFA settlement division. Other options for resolving a California Sales Tax Audit involves an informal hearing by a CDTFA hearing officer.
Franchise Tax Board (FTB) Matters
Much like the IRS, California has another department, the Franchise Tax Board, that also conduct audits to determine the state income tax that a business or individual must pay. These audits are more narrow in scope. For example, a common and recent one is “residency” audit. As the name suggests, this audit determines the residency, which is an important factor that in turn determine the state income tax that must be paid. The way the residency is calculated is very tedious and confusing. If the FTB is auditing you or your business, consult with an experienced tax attorney today!
As with the IRS, the FTB has a thorough appeals process. It’s important to contact an experienced tax attorney as soon as you receive your FTB determination so you do not miss any of your appeal rights.
While the IRS can go back as far as 10 years to collect money owed, the state of California has a different rule – they can go back as far as 20 years. This reinforces why you need a strong and knowledgeable attorney to represent you. The tax authorities in the state of California can be very aggressive when it comes to collecting owed money and the process is confusing for many. To avoid their harsh collection strategies, it is important to hire an experienced law firm. Call Allison Soares today and find out how what is best for your situation.
FTB State Voluntary Disclosure Programs
This is a special program that wants to ensure all entities, shareholders, members, beneficiaries, and partners who qualify, limit their exposure by disclosing their liability. This stems from an unpaid California tax liability or an unfulfilled filing requirement. Always consult a professional tax lawyer to check avenues that can lead to a positive outcome.
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