How To Avoid An Audit From The IRS
What Is An IRS Audit?
An IRS audit is the process of reviewing your tax return. The audit is the result of discrepancy of information received by the IRS and the information that you have reported on the tax return.
What triggers an audit is the continuous misreporting of transactions for a period or several years that the system of the IRS realized or discovered that there is a misreporting of income or an over reporting of expenses and because of any of these 2 options or a combination of the 2 the consequence of this is the trigger of an audit and this could be to a person and to the business. That’s one of the reasons the IRS audits someone.
Many times, the taxpayer not even knows that he is underreporting or over reporting, don’t know that they have inflated expenses or deflated income, they don’t know how to read a financial statement and are not interested in knowing otherwise they will do their taxes by themselves, especially if they don’t have a qualified CPA, tax attorney or enrolled agent.
Accountants or tax preparers must help clients and maximize their returns they inflate or overreport the expenses or omit some income with the objective of getting the maximum return. Same thing with business, reducing the revenue or the sales and increasing the expenses with the only objective of getting a larger amount of refund or reducing the amount the taxpayer must pay to the IRS.
The second reason an audit is triggered, this specific tax preparer they usually have many clients so when the IRS checks the approved check, they discover there is one single route for this reporting, so they go to the route belonging to the tax preparer and then they are going to audit the rest of the clients of that same tax preparer. So sometimes you get audited when you’re not supposed to get audited because the IRS discovered one client that has misreported information and belongs to that same tax preparer.
The third way you get audited happens when the IRS discovers a misreporting with another client this is for example when a client dies and there is the final tax return to be filed, the IRS requests information to support whatever is on the state return and many times the person representing the deceased client is not familiar of the IRS forms and when there is a lot of taxes to pay, the revenue is in charge of reviewing the state tax return.
Many documents are given without knowing to the revenue officer and in that documentation, there is information incriminating another party so even though the other party was not supposed to get audited there exists information that provoke an audit as well.
Whenever you receive a letter from the IRS, is not an audit there are letters is just to let you know that the IRS found something in your report that is not supposed to be there or that the records of the IRS are not as the ones that you presented. If there is no answer to that letter, the IRS will send another letter that is a bill saying how much you owe because you didn’t answer and then you must decide if you pay that or you send your documents to the IRS saying that you owe less or another amount, but you have to say something.
Now when the IRS audits you, they send you a large file with very single amount that’s reported on your tax return and what the IRS has computed and why is there a difference there and they are asking you to accept or sign but is never advisable to sign without consulting first with a qualified attorney, CPA or enrolled agent specialized in the IRS and debts resolutions because once you sign that document there is nothing else you can do, you can’t go back.
What Causes You To Get Audited By The IRS?
The IRS uses microchips to started integrating their systems and they have developed the data from previous decades and whenever there is a discrepancy between your tax return and the average number in the industry that the IRS has created through the years, whenever there is a mismatch between your income and expenses and the statistical tables and the average the IRS has developed a letter is created. That letter can become an audit or just a simple solution of sending the documentation and releasing then the charges from the IRS.
That’s the difference is how you deal with your numbers from the beginning, the cause of the audit is not the IRS not being fair, is what information you feed your return with, this is going to create a very pleasant year, or the IRS is going to send one or multiple letters claiming that you have not paid taxes.
This always happens when people want to cut corners and they want to maximize their returns and hire attorney and they end up with an audit. The real cost before going through all this is the information that you feed your tax return with. Ask for references and licenses and test if there is any complaint against that professional and make sure you are providing your information to someone that is reputable and has not led you down. The real cause is the information you’re putting in your tax return, get a licensed person to help you with this for your protection.
What Happens If IRS Audits You?
If the IRS audits you, they are going to give you a plan of action. When there is an audit the first step is giving you the justification for the audit, it’s usually a document depending of the returns, if there are 2 returns of the company and the individual, and also depending of the years, if there are multiple years. There is what is called the statute of limitations, meaning that you can only be audited 3 years back, except for misreporting of income and every single year is open to an audit. If there is no misreporting of income on the tax return, then the IRS can only audit you 3 years back including the year you are filing.
If in those 3 years you have provided the information to the IRS and the numbers of the IRS are different, they are going to send you a letter for each year that the records are different. Every letter will be between 5 to 10 pages will tell you what you reported in the personal return and in the company return, the second column will be the numbers that the IRS is recognizing and at the end will say your numbers and tax owed and our numbers and taxes owed and that’s the amount that you owe. That will be per year. If you have an LLC or S Corp you will receive one letter for the business and the individual, remember that the business is passed through entity and the letter will include the personal and the individual return.
Once you get that the IRS is serious and they want that money, at that point you have two options, agree with them, and sign the document and write a check or set up a payment plan and satisfy the IRS. But remember whenever that happens, they are going to include penalties and interest and if you receive any refund, you will add to it. In addition to that, because of the misreporting of income or over reporting of expenses now you must pay taxes, so on top of the refund you have to give back there is a portion of tax that you have to pay and because you didn’t pay them on time now you have to pay interest and penalties.
Can You Go To Jail For IRS Audit?
No you can’t go to jail for an IRS debt If you owe money for yourself, it means that if you are in audit or the IRS sends you a letter and this is because of your individual tax return, this is exclusively because you are not able to pay the taxes that are reported on your income personal tax return and this is exclusively yours and no one else, there is no third party involved there is no money of anyone but yourself and only your debt then no you can’t go to jail for any reason.
But the IRS will collect the debt in any way or another, the IRS will garnish your salary meaning that it will withhold, it will force you employer to withheld 10% of your salary, the IRS will kidnap your bank account up to the amount that you owe and or the IRS will place a lien on your property and neither of this 3 the lien, the garnishment or the kidnap of your account will be removed unless you pay your debt.
That’s why is very important that if you’re not able to pay your debt with the IRS do a payment plan. Is very easy to do a payment plan if you owe less than $25,000 you don’t even need automatic debits if you owe more than $25,000 up to $$50,000 you need automatic debits, but they are not going to ask for any financial information at all.
Let’s say that you have a company and whenever you have a company you have employees and you have to pay payroll and within payroll you have payroll taxes and they must be paid to the IRS but if the owner of the company doesn’t do the payments that they are withholding from the payroll tax of the employee plus the amount the employer needs to contribute that are 7.65% from the employee and 7.65% for the employer that is Social Security and Medicare so they combine 15.2% of all the salaries paid to the employee. So, 15.2% of your gross salary needs to pay to the IRS. If that 15.2% is not given to the IRS in a monthly basis and you can’t keep doing that through the years that is a felony because you are withholding and using money from somebody else. And this happens many times for companies, small businesses are not able to pay to the IRS the payroll tax that is Social Security and Medicare withheld from the employees because there is not enough cash and if they do that through the years the IRS is going to come after them criminally. And then the business owner is going to go to jail.
The payroll taxes belong to the IRS, the US Treasury to Medicare and the Social Security, but remember this payroll taxes is not yours, the misappropriation of funds is a crime and because is a crime is punishable with jail and at that point you do go to jail because you have committed a crime so be careful, if you are the owner and you cannot sustain a business because you can’t pay payroll taxes better fire everybody and work 24 hours a day and 7 days a week until you can get your employees back, or move the office to your home and minimize your expenses and start from scratch, many small business started from home instead of not complying with your obligations with the IRS because they are going to go after you and the person who is not reporting the payroll tax timely and this is sustained through the years the IRS will come after you and the person is going to jail.
What Happens If You Get Audited And Fail?
There is a case where you report as an individual and you have a business and the business is claiming expenses but the business doesn’t have the invoices for the expenses so if you don’t the invoices for the expenses you cannot prove your deductions and because you cannot prove your deductions you are not able to claim your deductions and they now the profits of the income are larger than before, you have more profit now because you have less expenses therefore your taxes are going to be larger because you are not able to prove the expenses the IRS is going to disallow the expenses at that moment you fail because you fail to prove the expenses that you claim in your tax return in the company tax return or even in the individual tax return if this an individual tax return and you are claiming credits and you are not able to support those credits with evidence the IRS is going to disallow those credits, is going to ask to return the refund and you’re going to have to pay taxes on top of that return because you owe them because those credits created a fictitious refund and you’re not entitled to that.
So, at that point is when you fail the audit you failed to prove that the deductions that you were claiming were true, were real and because of that failure you are going to pay more taxes. Many times, the reason of the credits, the reason of the expenses is the refund. Whoever did the refund created all this expenses and provided all the information with the objective of getting a larger refund and now all those expenses and all those credits are disallowed now you have no refund. But in addition, that you have no refund now you must pay taxes because you have income now, income that needs to be taxed and the taxes need to be paid. So, the consequences of failing in that return is the return, you have to give back the refund, you have to pay taxes because now you have more income and in addition to that you also have to pay interest and penalties.
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How To Avoid And IRS Audit?
The provision of the information, there are two sides, your side and the side of the preparer. Your side is responsible for providing the exact information, that is true and verifiable meaning that you have support for every single deduction that you’re claiming and if you have a business that you have an invoice and you have a bill for every single expense that you have and for income you have the records in your bank statements and your merchant accounts if you have a restaurant or retail you have the proof for the merchant accounts of all the money you have received, that’s the ultimate proof. Third party statements are good for income because no one is going to inflate your income although we have had request from people who want to buy properties so they can qualify for this house. Even if the client asks to inflate that would not be ethical.
Whenever there is proof for your income and for your expenses you’re safe, meaning that every single amount that you claim as a credit in your tax return this is for example if you have low income and you claim the earning income credit and this is for people who work and this approximately 3500 per kid meaning that your kids need to live with you and you have to provide at least 6 months of support and they need to live with you in the same property. If you’re claiming student credits you need to have proof that you are in the university or college and the college will give you a form and the college will give that information to the IRS that’s why it’s matching.
Let’s say that you have given money to charity it Is not enough that you have the check, you must have a letter of proof that the charity has received the funds and the amount. Let’s say you have medical expenses you must have to actual bill not even the statements that you pay to x and y doctor, the actual bill. If you’re claiming expenses because you have a business, individual business you work by yourself and you’re saying that your activity created losses first they are not gonna believe you because no one works to make losses. Everyone works to make money and to have income and to have a surplus, the IRS is going to audit you for sure. It’s a good sign that you’re dealing with an experienced tax preparer.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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