Category Archives: Tax Audit

Should I Fully Disclose To the IRS? [infographic]

Taxpayers who fully disclose income and assets to the IRS can receive assistance through the Voluntary Disclosure Program, a federal program that’s designed to help taxpayers who face severe penalties.

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What should I Fully Disclose to the IRS

IRS Voluntary Disclosure Program

Under the IRS Voluntary Disclosure Program, taxpayers can get assistance with previously unreported tax liabilities.The program offers assistance to taxpayers who would otherwise face serious penalties, including criminal prosecution that could result in incarceration. A voluntary disclosure is often a deciding factor in decisions about criminal prosecution. To take advantage of the program, a taxpayer must be willing to cooperate with the IRS in determining his/her correct tax liability, which may involve a tax audit, then make arrangements to pay the tax owed plus interest and penalties. The IRS Voluntary Disclosure Program is not available to taxpayers who do not come forward on their own merit, nor does it protect taxpayers whose unreported income is from an illegal source.

The IRS Voluntary Disclosure Program offers assistance to qualifying taxpayers with unreported income and/or seriously delinquent tax returns.

Unreported Income

The United States punishes tax evasion more harshly than most countries. Taxpayers who are caught willfully cheating on their taxes face severe penalties. Federal sentencing guidelines state that someone who evades between $30,000 and $80,000 in taxes can be sentenced to 15 to 21 months in prison, without the benefit of parole. In addition, the taxpayer will still owe back taxes, interest, and penalties. In general, criminal prosecution is typically limited to cases with a minimum of $100,000 in total tax loss.

Delinquent Returns

Taxpayers with several years of delinquent tax returns may face serious penalties, including criminal charges and prosecution. Through the Voluntary Disclosure Program, taxpayers can file delinquent tax returns for a period of six years and make arrangements to pay tax liabilities, interest, and penalties. The IRS imposes a statute of limitations of six years on prosecution for delinquent tax returns.

If taxpayers voluntarily disclose unreported income or unfiled tax returns, strict guidelines must be followed. The voluntary disclosure must be made to the Criminal Investigation Office of the IRS, where it is evaluated by a special agent who determines accuracy and completeness. The evaluation process usually takes about 10 working days. If the taxpayer is accepted into the Voluntary Disclosure Program and fails to cooperate with the IRS or make required payments, he/she may be referred back to Criminal Investigations.

Can I Just Pay the IRS and Close the Audit?

If a person is audited by the IRS and agrees with the audit findings, he/she may sign an agreement form and pay any taxes due, including applicable penalties and interest, to close the audit.

How Does the IRS Close a Tax Audit?

The IRS performs tax audits when inaccuracies or errors are located on tax returns. If a taxpayer faces an audit and agrees with the tax examiner’s findings, he/she can sign an agreement form and pay any taxes due, including penalties and interest. If the taxpayer disagrees, he/she can request a conference with an IRS manager, request mediation, or file an appeal.

In an IRS audit, the main goal of the auditor is to get the taxpayer to agree with the IRS findings, sign an agreed report, and close the report as quickly as possible. The IRS encourages tax auditors to obtain agreed reports in a timely manner. For this reason, an examiner may be willing to negotiate certain disputed items to close the audit quickly.

If a tax audit is not resolved, the IRS may request an extension on the statute of limitations for tax assessment, which is generally three years after a return is filed. Extending the statute of limitations gives a taxpayer more time to resolve taxes or file an appeal, and gives the IRS more time to process audit results. If a taxpayer doesn’t want to extend the statute of limitations, the examiner will make a determination based upon the information provided.

Paying Taxes, Penalties, and Interest

The IRS offers several ways to resolve taxes owed, including penalties and interest assessed for late payments. If a taxpayer can’t pay the full amount owed, he/she can request a payment plan or installment agreement that allows more time to pay, or an offer in compromise that allows the taxpayer to pay less than what is owed.

If a taxpayer owes money after a tax audit, the IRS has up to 10 years from the date of the assessment to collect the debt. Penalties and interest start accruing the day after the tax filing due date. However, the collection can be temporarily suspended during a request for an installment agreement or an offer in compromise. If these requests are denied, the IRS will suspend collection for an additional 30 days, and during any appeals process.

Does An IRS Audit Impact My Credit Score? [infographic]

The IRS does not report tax audits to major credit bureaus, but can it affect your credit score? Failure to pay back taxes and penalties can trigger tax liens that negatively impact credit ratings.

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What Happens in an IRS Audit?

Tax return discrepancies typically trigger audits. The IRS performs audits to review the accuracy of a taxpayers’ reported income, deductions, and other declarations.

If an audited taxpayer owes significant sums, he or she can work out an IRS payment installment agreement. If the taxpayer can’t pay the full amount, an offer in compromise (OIC), which reduces the owed amount, may be possible. Note, however, that taxpayers who can fully pay the liability through an installment agreement or other means, typically won’t qualify for an OIC.

How Does an IRS Audit Impact Credit?

The IRS does not report tax audits to credit bureaus like TransUnion, Equifax, and Experian. However, if auditors finds that taxpayers owe money, the IRS may file tax liens, which remain on credit reports for seven years. Unpaid tax liens can stick for 15 years. With back taxes of $10,000 or more, the IRS is required to file an automatic Notice of Federal Tax Lien in a taxpayer’s credit file, even if the debt is paid.

Tax liens show up as derogatory marks on credit reports. They can lower credit scores, depending on the tax liability and repayment efforts. Tax liens can negatively impact creditworthiness, increase interest rates on existing credit cards, and raise insurance premiums. Negotiating an installment agreement or an offer in compromise with the IRS can prevent tax liens.

What Civil Penalties Might Apply If I don’t Disclose My Foreign Assets And The IRS Examines Me?

FBAR attorney in Chicago Illinois

Failure to file an FBAR (Foreign Bank Account Report) can cost a pretty penny. Even if the IRS unearths unintentional violations, it can still smack you with penalties.

Hire An FBAR Attorney To Help With International Tax Reporting

Under United States tax laws, expats, permanent residents, and citizens associated with overseas financial holdings — whether directly or indirectly — must submit documentation to the IRS if the amount is equal to or over $10,000 at any time during the year.

A person who willfully fails to file an FBAR faces penalties up to $100,000 or 50 percent of the total balance in foreign accounts.

In 2011, the U.S. started imposing penalties on taxpayers for willful nondisclosure of foreign accounts, including bank accounts, mutual funds, brokerage accounts, securities, and other international assets.

Once the IRS notifies a taxpayer of delinquency, he/she has 90 days to pay up. If its not paid within 90 days, an additional $10,000 per month is imposed per item, maxing out at $50,000 per return.

FBAR filings can be complex, especially if a person has varied financial interests. An FBAR attorney can make sure you file timely, accurate tax returns.

What can happen if you don’t use a tax lawyer to sort through complicated matters? To give you an idea, the IRS can smack you with a 20% to 40% fine. In the case of fraud, that percentage can scream up to 75%.

The Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is an IRS program designed to help taxpayers who owe back taxes on foreign accounts and may be eligible for reduced penalties. OVDP protects participants from criminal liability.

In 2014, authorities modified the OVDP. As a result, taxpayers who submitted OVDP paperwork before 2014 may be able to have their cases reconsidered. For case reviews, taxpayers must request a review in writing.

Taxpayers with undisclosed foreign assets should use the OVDP to avoid substantial penalties or criminal prosecution. Moreover, parties that don’t submit voluntary disclosures are likely to catch an audit.

Tax Evasion and Criminal Charges

In addition to civil penalties, the IRS can bring criminal charges for failing to file tax returns, filing a false tax return, and tax evasion. Taxpayers convicted of criminal charges can face serious consequences.

What Happens If I’ve Failed To Report Income?

tax audit lawyer in ChicagoFailing to report income can result in severe penalties including fines and incarceration. You must account for all income sources and it is rare for the IRS to waive penalties on unreported gains. Statutes allow the IRS to pursue unreported income for up to six years. Analysts estimate that unreported income may be as high as $370 billion per year.

How the IRS Finds Unreported Income

The IRS has numerous tools at its disposal to uncover hidden income. These include analyzing the individual’s financial accounts, bank accounts, tax returns, and e-commerce platforms. For self-employed individuals, the IRS may compare gross income and profit ratios to root out unreported income. The IRS will look for discrepancies between deposits, withdrawals, and tax payments. The greater the discrepancies that are uncovered, the more scrutiny the IRS will exert.

Civil Penalties

The IRS applies civil penalties when individuals understate their income. These can amount to as much as 5% for each month following the date the tax was due. This is limited to a maximum of 25%. Individuals who owe taxes on unreported income may opt for an installment payment plan. Be aware, though, that interest will accrue until you satisfy the tax debt.

Criminal Penalties

Penalties for fraud and deliberately attempting to hide income are much higher than for simply forgetting to report income. In cases where fraud and tax evasion are the motivating factors, the penalties can be as high as 75% of the amount due. Typically, the IRS does not pursue incarceration in cases where the taxpayer owes small amounts or attempts to pay the taxes owed prior to the launching of a criminal investigation.

Avoiding a Tax Audit

The best way to avoid a tax audit is to meet with a tax lawyer before the IRS sends notice that an individual is under investigation. A tax lawyer in Illinois can help prepare the necessary financial statements and tax forms to report the income to the IRS. Because the income error penalties can be significant, taxpayers shouldn’t go it alone.

What must the government prove to establish my guilt?

beyond a reasonable doubt tax crime lawBeyond a reasonable doubt is the standard of proof that must be met to secure a criminal conviction in the United States.

The Burden of Proof: Beyond a Reasonable Doubt

To convict a taxpayer for evasion or fraud the government must prove that the accused’s actions surpassed simple negligence. The burden of proof rests solely with the government. It’s investigators duty to gather and present evidence that establishes their case. For tax cases, this means proving that deductions, statements, and supporting documents, such as receipts and canceled checks, were purposely filed with the intent of illegally reducing the defendant’s tax liability.

In criminal tax trials, the court presumes innocence on the part of defendants. It’s the prosecutors responsibility to build and present a case. In fact, the Fifth Amendment allows defendants to remain silent throughout a trial. The courts don’t even require defendants to present countering evidence. However, the government doesn’t extend this privilege partnerships or corporations.

Judges’ Instructions on “Beyond A Reasonable Doubt”

Judges instruct juries to consider all presented evidence when deliberating a criminal case. In the face of reasonable doubt, judges instruct jurist not to convict. However, judges walk fine lines when defining reasonable doubt to juries. In cases where the judge’s instructions go beyond the basic definition, appellate courts have overturned verdicts and the Supreme Court has ruled that doing so violates the Due Process Clause of the US Constitution.

 

Do You Need The Advice Of A Tax Lawyer?

Gordon Law Group regularly guides individuals and businesses through various tax controversy matters. We can help you negotiate offers in compromise to settle back taxes beyond your budget. We also represent people going through audits, and everything in between.

Let’s talk about how we can help sort out your tax problems while saving you money.

 

Fraudulent Tax Deductions: Can I Go To Jail?

fraudulent tax deductionsWhen auditors discover fraudulent tax deductions they asses hefty fines — and in the most egregious cases pursue criminal charges.

Fraudulent Tax Deductions: Overstatements

Sometimes called “padding,” typical overstating deductions tactics include claiming charitable donations, deductions for dependents, and business losses that don’t qualify per IRS guidelines. The IRS can also charge parties who overstate deductions with tax fraud. The IRS can also smack down $5,000 penalties for frivolous tax returns.

The Penalties for Negligence & Fraud

The IRS can tack on a 20% penalty in tax deduction fraud cases. The IRS will assess this penalty if the total amount of deductions claimed is greater than 10% of the owed amount, or if the amount understated for the total tax liability exceeds $5,000.

One of the most common problems is the home office deduction. If the IRS believes you have erroneously claimed a home office or other deduction, it can ding you for anywhere between $500 and $5,000. This penalty can jump to 75% if the taxpayer deliberately and fraudulently attempts to reduce their tax liability.

Fraudulent actions such as falsifying social security numbers, maintaining two sets of books, and embellishing expenses can invite criminal charges and jail time.

Penalties for Failing to Pay & Tax Evasion

The “Failure-to-Pay” penalty is .5% of the amount owed for every month past its due date. This maxes out at 25% of the amount owed.

A charge of tax evasion is considerably more serious. Fines are the most common penalty, but tax evasion can land you a 5-year jail sentence and $250,000 fine.

Preparing for an Audit

Individuals whose personal or corporate taxes are being audited should consult with a tax attorney who can help guide the individual through the tax audit process. Avoid maximum fines and criminal liability by working with an audit attorney.

Our team has helped countless businesses and individuals with various tax law matters. We negotiate down tax debts and save clients money. Let’s talk about how we can help you. Get in touch today to begin the conversation. The consultation is on us.

Red Flags That Increase the Chances of a Tax Audit

Chicago Tax Audit LawyerSeveral things can trigger a taxpayer’s worst nightmare — an audit. While the odds of an IRS audit are surprisingly low (less than 1% for people earning between $25,000 and $100,000 per year), some taxpayers are at a higher risk than others. Although the IRS doesn’t formally disclose which tax returns are more likely to be singled out, a closer look at the agency’s track record reveals a few clues.

Red Flags that May Trigger a Tax Audit

Avoiding these triggers can reduce the risk of an IRS audit.

Failing to Report Income

The IRS receives copies of all W-2 and 1099 forms and compares them to the income reported on tax returns. When discrepancies arise, the IRS is more likely to take a closer look. Though some taxpayers are audited immediately, others may not receive an audit notice for months or even years after filing. Ordering a wage and income transcript can help taxpayers verify the information that has been reported to the IRS. Unfortunately, taxpayers may not have access to their transcripts for the current year until about 3 to 6 weeks after they have filed their returns.

Claiming Questionable Credits and Deductions

Certain types of deductions, especially those that are out of the ordinary for the average taxpayer in the same general income bracket, can cause the IRS to raise a few eyebrows. Charity, entertainment and travel expenses, and deductions for bad debts are often triggers. It’s perfectly fine for people to take legitimate credits and deductions, but they should be prepared to back them up in the event of an audit.

Reporting Millions in Income

The IRS performed tax audits on approximately 16% of tax filers who reported over $10 million in coming in 2014. Apparently, the IRS considers people with the most money as those who have the most to hide.

Reporting No Income

Taxpayers who report no income due to operating losses and the like have a higher than average chance of being audited by the IRS as well. Approximately 5.3 percent of taxpayers who reported no income faced tax audits in 2014.

Filing an International Return

The IRS has significantly increased scrutiny of taxpayers who file international returns in recent years. Agents scrutinized about 4.8% of international returns in 2014.

The IRS Is Auditing Me! Please Help!

Is the IRS knocking on your door? If so, we can help. Our team of tax controversy attorneys has assisted countless individuals and businesses with all manners of audits. We know how to negotiate with the IRS and are often able to reduce clients’ tax debt amounts.

Let’s chat about what we can do for you. Get in touch today to begin the conversation. The consultation is on us.

Tax Penalties: A Quick Overview

If a person, partnership, or corporation is selected for an audit, the IRS can impose financial and criminal tax penalties. But don’t worry, affected parties can choose from several payment and abatement plans.

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Most Common IRS Penalties

Failure to File: 5% per month to a 25% maximum. After sixty days the minimum IRS penalty is the lesser of $135 or 100% of tax due.

Failure to Pay: 0.5% per month, not exceeding 25% in aggregate.

Accuracy-Related: 20% to 40% of the underpayment.

Fraud: 75% of the underpayment attributed to fraud.

USC General Fraud Penalties

If a person, partnership, or corporation is fraudulently non-compliant with tax reporting there may also be serious US Code consequences that can include a jail term, fine, or both — plus costs.

Attempt to Evade or Defeat Tax

Maximum prison sentence of five years or $250,000 ($500,000 penalty for corporations) or both, plus prosecution costs.

Willful Failure to File a Return, Supply Information, or Pay

Maximum prison sentence of 1 year or $100,000 ($200,000 for corporations) or both, plus prosecution costs.

Fraud and False Statements

Maximum prison sentence of 3 years or a $250,000 ($500,000 for corporations) or both, plus prosecution costs.

OVDP Penalties

The 2014 OVDP (Offshore Voluntary Disclosure Program) carries a 27.5% penalty on undisclosed assets; 50% penalty if your bank is on the IRS’ “bad bank” list. However, the “Streamlined” OVDP program has a penalty of 5% of the maximum aggregate bank account balance during the disclosure years.

For both of these programs, the above penalties only apply to taxpayers who start the program voluntarily. If the IRS audits a taxpayer and unearths undisclosed foreign assets or bank accounts, the penalties are severe! For undisclosed bank accounts, the typical penalty is $10,000 per year per account.

Partnerships

The 2015 Bipartisan Budget Act can affect partnerships starting in the 2018 tax year. At that time, authorities will asses tax deficiencies at the partnership level.

Liabilities for any penalties will be determined also at the partnership level, rather than individually, as was previously the case. Unless the partnership elects to pass the adjustments through to its partners, the partnership itself is liable for penalties.

The implementation of this new act may require diligent planning with the help of a tax attorney.

A Tax Lawyer Can Help You Get Relief

Taxpayers have a right to challenge IRS decisions in court. A tax attorney can guide you through the process. Gordon Law Group represents many clients with penalty abatement requests and appeals.

If a tax matter splatters in your lap, we can help clean up the mess. Get in touch today to begin the conversation. Let’s sort out your tax tangle.

What Should Do If I’m Audited By The IRS?

IRS audit

The IRS pegged you for a tax audit. Now what?

Below, we’ll review some basics.

If you got a letter, are freaking out, and need to speak with someone, get in touch with our tax law team. We’ll guide you through the process and get you safely to the other side. The consultation is free.

What is a Tax Audit?

Primarily, during an audit, the IRS looks into the the subject’s federally-filed taxes. If the review proves that the party initially filed a sound tax return, the IRS won’t dig further. However, if agents find errors, either innocent or purposeful, the taxpayer may incur interest penalties and fines.

Types of Tax Audits

There are different types of tax audits, each with specific requirements. A correspondence audit requires checks, receipts, and people mail documents to an IRS service center; local IRS outposts conduct local audits; field audits take place at a taxpayer’s home or place of business.

The most complicated type of audit is the Taxpayer Compliance Measurement Program (TCMP). It requires every part of a tax return to be supported by documents, including  birth and marriage certificates. A TCMP audit is typically conducted to update the IRS’ computer scoring program data.

Reasons for a Tax Audit

Typical reasons for tax audits include:

Tax Audit Process

The IRS informs parties by mail of impending audits.

All IRS letters or notices contain a number in the upper right-hand corner that references specific issues with the tax return.

Typically, document gathering is the first procedural step. If necessary documents are missing, request duplicates; tax auditors won’t accept excuses for missing or lost records. Moreover, mailed materials should be copies, not originals.

If the IRS audits you, hire a tax attorney. Never answer an IRS examiners questions without counsel. Contact Gordon Law Group at 847-580-1279. We can guide you through the process and get you safely to the other side. Our team also works with people struggling with back tax debt.

I’ve Been Selected for An IRS Audit, Should I Represent Myself?

It happens: The IRS picks you — YOU of all people! — for a tax audit. First things first: Find an attorney to speak on your behalf. Why? Because an audit-gone-wrong could result in criminal charges.

Certified public accountants are trained to audit tax returns, but they’re not the best option when it comes to negotiating with the Internal Revenue Service — a tax controversy lawyer is.

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Voluntary Disclosure Cases

Non-compliant taxpayers can make voluntary disclosures to get back on track. This may involve reporting back gains or previously unreported foreign holdings. When a person makes a voluntary disclosure, his or her representative should secure an agreement from the IRS that no criminal charges will be filed.

A good representative also won’t allow the IRS to question their client. Why don’t lawyers want the IRS questioning taxpayers? Because they might inadvertently say something incriminating, which could result in harsher punishments.

Enrolled Agents, CPAs, and Lawyers: Who Is The Best Representative For An Audit

Enrolled agents can represent small businesses and individuals before the IRS. To become an enrolled agent, you must take and pass an exam. Enrolled agents do not have any educational requirements.

Certified public accounts conduct and analyze audits, but negotiating with the IRS isn’t necessarily their strong point.

Similarly, lawyers who don’t have a tax law background may not be an appropriate choice for tax audit assistance. People embroiled in IRS tax controversies do best with a tax lawyer on their side. Choosing a qualified tax representative may save you thousands of dollars and avoid criminal charges.