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An IRS Revenue Agent Report (RAR) is a document prepared by a revenue agent, which is a type of IRS employee who is trained to audit tax returns and determine the accuracy of the information provided.
If you are the subject of an IRS audit and receive an RAR, it is important to carefully analyze the report in order to understand the issues being raised and determine the best course of action.
In this article, we will provide an overview of the process for analyzing an RAR, including reviewing the findings and determining any potential implications for your tax liability. Understanding the content of the RAR and the audit process can help you to effectively respond to the audit and minimize any potential tax liability.
Let’s dive in.
What is an IRS Revenue Agent Report?
The Revenue Agent’s Report is a detailed document describing an IRS examiner’s audit findings. Additionally, the Revenue Agent Report states “the amount of deficiency or refund the agent finds the taxpayer to owe or be owed, respectively.”
Taxpayers have the right to disagree with a revenue agent’s report. If taxpayers disagree, they can challenge the agent’s findings through:
- A formal protest to the IRS Office of Appeals division by appealing to the U.S. Tax Court, or
- Paying the new assessment but then suing for a refund.
If the Revenue Agent Report is unchallenged or upheld, delinquent taxpayers may be subject to increased fines or jail time if they fail to reconcile their tax situation.
Every IRS audit concludes with a Revenue Agent Report which includes all the findings the IRS made based upon the documents and information collected, and the determination IRS has made.
An IRS audit starts with an initial audit letter sent to the taxpayer (in the case of our clients, the business owner). Then the IRS will send an IDR, also called an Information Document Request with a list of documents and information the IRS needs.In some cases a business owner might receive more than one IDR.
The next step is to provide documents and negotiate, communicate with your revenue agent and comply with additional requests for information. At the end of the audit, you will receive a Revenue Agent Report.
Sections of the Revenue Agent Report
Let’s review the sections of the Revenue Agent Report, so you understand where the information is and how to read it.
Adjustments to Income
The first section of the RAR is adjustments to income. This includes anything from income, additional income the IRS found, or even a reduction of income.
Usually, IRS finds additional income. Additionally, the section will include any other adjustments to expenses and potentially even net operating losses.
Corrected Tax Liability
The next section of the RAR is the corrected tax liability. shows the correct amount of tax that the IRS believes you owe, based on the audit findings. This may be different from the amount of tax that you originally reported on your tax return. The corrected tax liability is calculated by adding any additional tax that the revenue agent determined you owe, subtracting any overpayments that the agent found, and making any necessary adjustments to your tax return.
The balance at the bottom of the RAR reflects the total amount of tax that you owe, including any interest and penalties that may have been assessed. It is important to carefully review the corrected tax liability and balance sections of the RAR, as they will provide important information about the tax implications of the audit and any action you may need to take.
If you disagree with the corrected tax liability or the balance, you can contest the findings and seek to resolve the matter through the IRS appeals process.
Expenses
After the adjustments to income, you’ll find expenses. The expenses on your return are negative, they offset income. If IRS disagrees as to an item of an expense, it will be listed as a positive number to offset the negative number.
Balance
Below the corrected tax liability and credits, the Revenue Agent Report will list the balance at the bottom of the first page.
This balance does not include penalties and interest.
Penalties
The top of page two of the Revenue Agent Report lists the penalties that the IRS has assessed based on the audit findings. Penalties may be assessed for a variety of reasons, such as filing a tax return late, making payments late, or failing to keep adequate records.
One type of penalty that may be assessed is the negligence penalty, which occurs if the IRS determines that you kept poor records and did not have sufficient substantiation for your claims. This penalty may be assessed if the IRS determines that you made errors on your tax return due to a lack of attention or care, rather than an intentional effort to evade taxes.
The IRS may also assess a fraud penalty if they believe that you deliberately and willfully failed to file a tax return on time or deliberately understated your income or overstated your expenses in order to evade taxes. Fraud is considered a more serious offense than negligence and may result in more severe penalties.
It is important to carefully review any penalties listed in the RAR and understand the reasons for their assessment in order to respond appropriately and contest any penalties that you believe are incorrect.
Section 3: Interest and Total Balance
The section on page two of the Revenue Agent Report that lists interest and the total balance is an important part of understanding the tax implications of the audit. Interest is typically assessed from the date that the tax payment was due, which is usually April 15th for individuals and March for corporations.
The RAR may include a broad description of why the full expense was not allowed or why the tax payment was not satisfied. In some cases, the revenue agent may provide more detailed information about the audit findings in the work papers that were used to prepare the RAR. If you want more detail about the audit findings, you can request that the revenue agent provide the work papers to you. These papers may include a factual summary of the information that was exchanged between you and the IRS during the audit process. Having access to this information can be valuable in helping you to understand the audit findings and respond appropriately.
Recommendations
The final section of the Revenue Agent Report is called “Recommendations.” In this section, the revenue agent will list their recommendations for how to resolve the findings. These recommendations are non-binding, but they can be helpful in negotiating with IRS.
Final Thoughts
If you believe that the revenue agent overlooked some facts and you have some substantiation that’s not being considered by the revenue agent, you should consider communicating with the supervisor and try to get the supervisor involved. File a protest letter within the deadline.
Consider enlisting the help of an experienced tax attorney to navigate the complex situation and efficiently resolve any issues with IRS.
At Milikowsky Tax Law, we have over a decade of experience working with IRS audits and are experts in defending business owners in the face of IRS or other government agency audits.
Read on to learn how to respond to an IRS audit in 2022.
What happens if you miss a tax deadline? How long does it take before the IRS begins its collection action to collect your tax balance? How many fees will you have to pay?
Understanding and managing the nuances of tax law isn’t easy.
Understanding and managing the nuances of tax law isn’t easy. Whether you have failed to file your tax return on time, could not make a payment on time, or you are were assessed penalties by IRS, the best thing you can do is seek the assistance of skilled tax attorney.
The team at Milikowsky Tax Law has years of experience navigating complicated tax matters. If you have questions and need clear advice from tax attorneys who have business experience, and can provide value to resolve your matter, contact the team at Milikowsky Tax Law and access our expert resources for handling these situations.
What To Do After You Miss a Tax Deadline
When you’re running a business, it can be difficult to keep track of all the things you need to do — and when — to keep your company safe and in good legal standing. If you’ve missed the official deadline to file your taxes, you’ll need to speak to the IRS as quickly as possible. There will be a penalty for filing taxes late, but the sooner you address this issue, the better chance you have to minimize the amount of penalties you may owe and the collection action IRS can take (i.e. levies on bank accounts, liens, etc.).” The penalty for failing to file a timely return is generally higher than the penalty for failing to pay the full taxes owed. Thus, once you discover your tax returns have not been filed, you should act quickly to gather your records and work with your accountant or CPA to have the returns prepared and filed.
If you’ve missed a deadline, you probably have a lot of questions swirling in your head: How late can you file your taxes? What kind of consequences can you expect for being behind? Who should you contact first? Don’t panic.
Consequences of Missing a Tax Deadline
As soon as you realize that you’re late in paying your taxes, it’s important to seek help as quickly as possible. If you can pay the money owed quickly enough, you can reduce a lot of stress in dealing with the IRS. Even if you respond promptly, you should prepare to face a penalty for filing taxes late. This may include meeting with a trusted tax attorney and your own financial advisor to plan for the financial effects. Browse our resources below to help you understand what happens if you miss a tax deadline and how it will impact your finances.
- Check our article about the consequences of unpaid business taxes.
- Look at this insight into the result of unfiled tax returns.
- Remember that you’ll still need to pay taxes on time for a closed business.
What To Do If You Can’t Pay Your Tax Bill On Time
If you realize you cannot pay your taxes in full, you do have options, such as:
- Request an installment agreement with IRS or the California State tax agency;
- Contact IRS or the California state tax agency to request an extension to full pay the liability (not through a long-term installment agreement because you only need a couple extra months).
If you are having a financial hardship, you may qualify for an Offer in Compromise (“OIC”), which is a request to IRS to settle your tax liability for a lesser amount based on a “Doubt as to Collectibility” or “Doubt as to Liability.” These issues involve intricate tax laws, legal issues, and a thorough analysis of a person’s finances (including preparing a bank account analysis and financial statement). If your business owes taxes, the company’s legal tax issues and financial analysis must also be thoroughly analyzed. The best thing you can do is speak to an experienced tax attorney and develop a custom strategy for resolving your outstanding balance with the IRS.
- See our guide on what to do if you can’t pay your taxes on time.
- Read our article on what to do if you can’t afford your tax burden.
What Are Back Taxes?
Back taxes arise when your personal or business taxes are not paid in full by the due date. For income tax, payroll tax, and sales tax, these can be quarterly and yearly. Over time, they accrue interest, and can also come with a host of other penalties to consider. If you’re wondering what the penalty for filing taxes late might be, back taxes are a common consequence.
- Read our overview of what back taxes are and how they affect your business.
- Check out our guide on back taxes and learn how our team can help you resolve them.
- Browse our expertise and insights on outstanding tax balances, what you need to know about them, and how you can seek professional guidance.
Resolving Your Tax Debt
No one wants an ongoing tax debt to worry about when they are trying to run a successful business. There are several ways to resolve your tax debt, from agreeing to pay back a portion of the money owed each month (i.e. an offer in compromise), to requesting an extension of time to pay. Even if you owe the IRS more than you can afford to pay, there are solutions available — such as an offer in compromise. The best decision you can make is to start with an experienced tax attorney who understands your business and can offer clear solutions to resolve your tax issue.
- Explore your options for settling tax debt.
- Read through our blog about offers in compromise.
There are a lot of different types of penalties IRS can assess. Let’s start with the failure to file.
Typically, it’s a firm deadline and when you have to file a return. If you don’t file an extension and your return is late, or you do file the extension and your return is late, you’ll get a notice from the IRS that you have a late return. Even if you have a good excuse you will have to substantiate it with documents and evidence of reasonable cause.Some examples of excuses that don’t work on the IRS:
Saying your CPA promised to file the return on time and they missed the deadline. Simply indicating to the IRS that you had a CPA that missed a deadline is not enough, because IRS feels that it is your responsibility, not the CPA’s to know when to file the return. If it’s something more of a technical nature and you file the return with an error on it, and it’s really more of a legal question or super technical tax question, if you get a penalty for that for misreporting something, you might be able to argue reasonable cause because you relied upon a tax professional. Get a letter from your CPA, tax attorney, or whoever gave you the advice in question, and IRS will then consider that and potentially, abate the penalty.What does it mean to abate a penalty?
Removing the penalty in the terminology of the IRS is abating the penalty. When requesting penalty relief, that is what you want to ask for, “penalty abatement”. Missing a filing deadline is very difficult. We had a client for whom we were able to get an abatement fro for a missed deadline, but you really have to show that even though you took all reasonable measures and acted like a prudent person, you still couldn’t meet the deadline. There have been cases of people that have been incarcerated, out of the country, and a number of other excuses that do not qualify. Because you can always file a tax return with the US Embassy in a foreign country.Carefully consider what the facts are and respond to the notice even if you don’t have a good reason for your missed deadline.
Always be truthful, gather your evidence, provide your documents. Third-party records are better if somebody can substantiate,your evidence with a declaration or a note from that person. Be sure to respond within the correct timeframe. In the notice, it’ll indicate how much time you have to respond. It’s typically 30 days, but it could be as short as 15 days or even less. Different penalty notices have different deadlines. Make sure you don’t miss that deadline on top of the missed deadline for which you have been assessed a penalty.Asking for more time from IRS
If you got the letter or notice late, or you just are unable to gather the evidence in time but you really do want to respond, you can write a letter to the IRS requesting an extension to respond to the penalty notice. The extension is not guaranteed, IRS can still deny your request and assess the penalty. But if you are in a bind, and you want more time, it can’t hurt to request additional time. Typically they will grant you an extension.Keep supporting evidence of correspondence
Post-COVID, IRS is so far behind on mail that they might actually generate a notice indicating you didn’t respond to the penalty letter and assess it to you, even though you did send a letter before the deadline. So be cognizant of that and register the mail you send, take a time-stamped picture of the correspondence or find a fax number. Faxing to the IRS is the quickest way for them to get the notice (don’t forget to keep your fax confirmation). Whether you respond to the penalty notice or you ask for additional time, send a certified US mail with a return receipt as well as a fax. And if you don’t have a fax number on the notice, you can contact IRS directly and ask them if there’s a fax number for the department that generated the notice.
Many people don’t know the options that are available to them when dealing with back taxes and the IRS.
Back taxes are a nightmare for anyone that owes the IRS money without the means of paying it. If you are already in debt, the IRS banging on your door doesn’t help your situation—it just makes it more stressful. If you owe a lot of back taxes, you don’t have to panic; you have options. Let’s discuss.
First, What Are Back Taxes?
Back taxes are “taxes that have been partially or fully unpaid in the year that they were due. Taxpayers can have unpaid back taxes at the federal, state and/or local levels. Back taxes accumulate interest and penalties on a regular basis.”Understanding Back Taxes
Back taxes refer to taxes owed from a prior year. A taxpayer may be behind in paying taxes for intentional or unintentional reasons. Some of these reasons include:- Filing a return and failing to pay the tax liability
- Failing to report all income earned during the tax year
- Neglecting to file a tax return
What Happens if a Taxpayer Doesn’t Pay Back Taxes?
Unpaid back taxes can be a serious issue for many taxpayers who don’t have the means to pay them. If a taxpayer does not pay back taxes they owe, they can face a range of consequences from the government. Some strategies the government may use to get a taxpayer to pay back taxes include:- Pressing charges
- Demanding the taxpayer pay immediately
- Offer a voluntary disclosure program (to help avoid criminal charges)
- Offer payment options
- Seizing property
- Seizing assets
- Placing liens on the property
- Placing a federal tax lien to inform other creditors of the taxing authority’s legal right to a taxpayer’s assets and property.
- Garnishing a taxpayer’s wages and to levy their financial accounts, seizing up to the total amount of taxes owed.
What Are Your Options For Handling Back Taxes?
Some solutions our San Diego back tax attorneys can provide include:A Payment Plan
Agreeing on a monthly payment amount that is feasible and not strenuous can make all the difference. Our tax lawyer can help facilitate an agreed amount that works for both you and the IRS.An Offer in Compromise
An offer in compromise allows you to settle your debt with the IRS for much less than what you owe.Declaring Non-Collectible
When you declare non-collectible, the IRS immediately stops trying to collect from you for approximately one to two years.Abatement of Penalties
Through this method, you can seriously reduce the amount you owe the IRS, by reducing the costs of the penalties and interest against you.Contact Milikowsky Tax Law
If the IRS is telling you to pay your back taxes in a payment plan you can’t afford, contact our San Diego back tax lawyer today. Our legal team at Milikowsky Tax Law is well-versed in tax law procedures and options; we are ready to assist you through this difficult time. Our committed tax law firm can answer your questions, explain your options, and guide you towards the best game plan for you. At Milikowsky Tax Law we are experts in providing legal counsel for dealing with unpaid taxes.
On Sunday, August 7th of 2022, the Senate passed the Budget Reconciliation Bill, or the Inflation Reduction Act, which includes nearly $80 billion in funding for IRS. More than half of the funding is set for enforcement. IRS aims to collect more from corporate and high-net-worth tax dodgers.
What will all this mean for taxpayers?
The founder of Milikowsky Tax Law, John Milikowsky, explains the impact from the Budget Reconciliation Bill in detail. Check out the video below for more information:
Read on for an in-depth discussion of the Inflation Reduction Act and its effects.
In this article, we will discuss:
- The Inflation Reduction Act: what it is and what the money will be used for
- How these changes will affect audits
- Red flags IRS will look for to initiate audits
- How business owners can prepare for the increased IRS scrutiny of their tax returns
- Any additional taxes the bill will impose
What is the Budget Reconciliation Bill?
In August of 2022, Senate Democrats passed the Inflation Reduction Act, a climate, health and tax package. The bill passed with all 50 Democratic votes in the Senate. The final version of the act proposes policy changes such as:- Climate and energy provisions
- Prescription drug price reforms
- Taxes on corporations
The Budget Reconciliation Bill and IRS
Perhaps one of the most controversial pieces of the act is the expansion of the International Revenue Service. This expansion passed on the claim that strengthening enforcement of existing taxes will raise revenue without having to create new laws. The Inflation Reduction Act allocates $79.6 billion to IRS over the next decade. Where is this money going?Enforcement
More than half of the nearly $80 billion is meant for enforcement. IRS aims to collect more from corporate and high-net-worth individuals who have been successful dodging taxes in the past. Why the focus on these taxpayers? IRS’s audit rates have dropped. In fact, in 2010, it was 16% for high earners but has declined to only 2%. To combat this drop, IRS will be hiring more revenue agents to do audits, more criminal investigators to do criminal investigation of crimes, and more revenue officers to collect the tax.Operations and Developments
The remainder of the funding is set aside for:- Operations
- Taxpayer services
- Technology
- Development of a direct free e-file system
- And more
What Do These Changes Mean for Taxpayers?
This bill will lead to an increase in the number of audits conducted each year by IRS, therefore increasing the chance that your business will be audited. However, there are steps you can take to prepare. First, let’s discuss which taxpayers are at the highest risk of being audited:- High-earners or high-income taxpayers
- Non-filers
- Self-employed business owners
High-Earners or High Income Taxpayers
A high-income taxpayer, or high-earner, is defined by IRS as someone who generally receives income in excess of $100,000 during a tax year. However, we typically see audits for high-earners of $200,000, $250,000, or higher. According to Paul Mamo, Director of Collection Operations, Small Business/Self Employed Division at IRS, “The IRS is committed to fairness in the tax system, and we want to remind people across all income categories that they need to file their taxes…These visits focusing on high-income taxpayers will be taking place across the country.”Non-filers
While non-filers can be considered someone who did not file taxes for a single year, usually we are looking at a taxpayer who has skipped at least a couple years or more. At Milikowsky Tax Law, we have some clients who haven’t filed tax returns for five, six, seven years, a significant amount of time.Self-Employed Business Owners
IRS is focused on self-employed people, whose financial situations can become tricky. For example, there are no W-2 jobs with a paycheck; there is just money coming in and going out. This increase in audits means that self-employed people will have to be even more careful in filing the proper forms and providing the correct taxable income (but more on this later).How Business Owners Can Prepare for an IRS Audit
IRS is primarily focused on high earners who do not file tax returns or have not filed for a number of years. If you are a high-earner or you have not been filing your taxes, you are at a higher risk for an audit. You can prepare for an IRS audit by ensuring that you have all of your documentation in order and that you are able to answer any questions the IRS may have. If you are audited, it is important to cooperate with the IRS and to provide them with any information they request. If you are self-employed, we encourage you to keep track of income and expenses so you can file a tax return. Consider taking a look at bank and credit card statements for an idea of business expenses. Read our ultimate guide to IRS audits, here.Additional Taxes the Budget Reconciliation Bill will Impose
15% Minimum Corporate Tax
While the 15% minimum corporate tax mostly applies to corporations that have over $1 billion of income, it can still complicate things for other business owners; The AICPA has sent letters to Congress indicating this could result in some confusion and inconsistent results. Why? Because the 15% corporate minimum tax applies on book income, not tax return income, which are two different things. Book income is based on your books and records, such as the figures on your profit and loss statement. This can differ significantly from what is reported on your tax return. The two different figures could produce inconsistent results.One Percent Excise Tax on Stock Redemption
This bill potentially could assess a one percent excise tax on the stock redemption. This tax on stock redemption may also apply if a corporation buys back its own stock. Find a one-page summary of the Inflation Reduction Act of 2022, here.Still Have Questions?
Business owners should contact Milikowsky Tax Law if they have any additional questions about how this bill will impact them. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits. Read on to learn how to respond to an IRS audit in 2022, here.
Business owners may not be sure where to start if IRS audits their company. However, an IRS audit doesn’t have to feel stressful or disorganized. In this article, we’ll discuss a set of steps business owners can take if they find out they are being audited by IRS.
Familiarize Yourself With Common Audit Triggers
The first question many business owners may have when being audited is simply: why is IRS choosing to audit my business? By knowing and understanding common audit triggers, taxpayers can understand how to prevent future audits as well as gain more insight into what caused this audit to occur.
Businesses are more susceptible to an audit if they:
- Have foreign assets
- Have a cash business
- Are self-employed
- Have a home-based business
- Claim a disproportionate number of deductions
- File incorrect or incomplete returns
- Have a large number of cash transactions
- Earn less than $25,000 or more than $500,00
- File a Schedule C
- Claim a vehicle as 100% business expense
- File taxes late
Review the Audit Letter Carefully
Take time to fully read the audit letter and consider hiring a professional, such as a tax attorney, to help walk you through it. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is.
*Taxpayers should note that IRS does not send emails or phone messages to notify taxpayers of an audit. These types of communication may be a scammer attempting to retrieve personal information or data.
Understand the Type of Audit IRS is Conducting
IRS defines an audit as “as a review and examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
IRS has several different ways of auditing businesses. There are two primary forms of audits: correspondence and field audits.
Correspondence Audits
Correspondence audits are the most common type of audit. This form of audit is generally considered to be easier to navigate than a field audit. Why? A correspondence audit occurs when there are errors on the business owner’s tax returns and IRS identifies these errors.
As a response, IRS sends a letter that describes each of these mistakes in detail. The business owner can respond and correct or explain the error through sending additional information to IRS.
Field Audits
A field audit is more thorough than a correspondence audit. Auditors will visit a business site in person. In this case, the auditor will examine financial records and compare them to the business owner’s return.
Prepare the Paperwork
IRS should list the information it requires in your audit letter. Once you know what information IRS needs, you can collect all of the records and supporting documentation requested (but nothing additional). For example, you may need to submit records such as:
- Bank statements
- Receipts from vendors, and businesses you have worked with
- Invoices
- Pay stubs
- Payroll records
- And other information
You can view a list of records IRS may request here.
Answer the Auditor’s Questions
In the case of a correspondence audit, send in the requested documents to correct the error on your tax return or to provide the necessary information to complete it. In the event of a field audit, you will have an interview with an auditor as they visit your business in-person.
In this interview, the auditor will ask questions about your tax return. We suggest being as straightforward and clear as you can. We also advise against volunteering any information or accounting records you are not required to give, including previous years’ tax returns, just to keep the process as simple as possible.
Consider Contacting an Experienced Tax Attorney
The combination of a tight deadline, little to no room for mistakes and potentially severe consequences can be a lot for a taxpayer to handle alone and lead to a poor interaction with IRS. This is why we suggest letting your tax professional do the talking for you.
An experienced tax attorney can help guide you through the process and ensure you are timely, responsive, and compliant.
Additionally, tax lawyers offer attorney-client privilege, whereas other tax professionals, such as CPAs, do not. Therefore, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
Facing an IRS Audit?
If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS, tax audits and tax issues. are experts in defending business owners in the face of IRS or other government agency audits.
Is your small business ready for an audit? We dive into five signs your small business is ready for an IRS audit, here.
IRS audits can be a business owners’ worst nightmare: the hassle, the heaps of paperwork, the potentially hefty bill. However, with the right preparation and resources, an IRS audit doesn’t have to be a stressful event.
Read on for our ultimate guide to IRS audits. We answer all the most common questions to help you navigate an audit as smoothly as possible. Let’s get started.
What is an IRS Tax Audit?
IRS defines an audit as “as a review and examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
How Will You Be Notified of an Audit?
You will know if you are selected for an audit if you receive a verified letter in the mail from IRS. They do not call to notify you about your audit.
Why Was Your Business Selected For an Audit?
There are several different reasons your business may be flagged for IRS audits.
Random Checks
Some businesses are audited in random checks. However, the chances of a random audit are low. Most taxpayers have less than a 1% chance of receiving a random audit check.
Incorrect Tax Filing Information
IRS runs tax returns through their Discriminant Information Function (DIF) system to track industry benchmarks for each industry and tax bracket. The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, or if the form isn’t complete, may trigger an IRS audit.
Other Reasons Businesses May be Audited by IRS
People are more susceptible to an audit if they:
- Have a home-based business
- Have a cash business
- Have foreign assets
- Have large numbers of cash transactions
- Claim a disproportionate number of deductions
- Are self-employed
- Issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit
Learn how to avoid IRS red flags from cash transactions, here.
How Long Do You Have to Respond to an IRS Audit?
You have 30 days to reply to the initial audit letter.
What if You Need More Time to Respond to an IRS Audit?
Your attorney can help by advocating for more time with the IRS agent. We don’t recommend hesitating on responding to an IRS letter on your own, IRS is likely to offer extensions without assistance from an experienced tax attorney who can help present your case.
What Do You Need to Provide in an Audit?
According to IRS, they may ask for copies of:
Receipts
We recommend presenting receipts by date with notes of how they were used by or relate to your business.
Bills
Business owners can include dated bills with information such as the name of the organization that received the payment as well as the type of service it provides.
Canceled checks
Business owners can organize canceled checks with copies of the bills they paid and any applicable employer reimbursement.
Legal papers
Include a description of what the case was about, when it happened and how it relates to your business, credit or deduction. Examples include:
- Divorce settlements including custody agreements
- Criminal or civil defense papers
- Property acquisition
- Tax preparation or advice
- Loan agreements – Include a copy of the original loan with the following:
- Names of the borrowers
- Location of the property
- Financial institution making the loan
- Amount borrowed
- Terms (the number of months to pay)
- Settlement sheet
- If the loan was from an institution, include an end of tax year statement indicating interest paid
- If the loan was not from an institution, provide a statement from the payee indicating the interest paid that year as well as the payee’s address and Social Security number
- Provide a break-down of how you used the money
- Logs or diaries
- Tickets
- Medical and Dental records
- Medical savings account statements
- A copy of a handbook or other statements showing benefit and reimbursement policies
- Physician statements
- Capital improvement records for medical purposes including appraisals of the property before and after the improvements
- Contract for attendant care
- Theft or loss documents
- Insurance reports detailing the nature of the loss or damage
- If not insured, copies of fire department or police reports on the loss, theft or accident
- Photos or video showing the extent of the damage (if available)
- Appraisal from a qualified adjustor showing fair market value of the property before and after as well as an estimate of the damage
- Brief explanation of the loss
- Employment documents
- Schedule K-1
You can view a list of records IRS may request here.
How Long Do Audits Take?
The time it takes to conduct an audit depends on the case. It fluctuates depending on:
- The tax reporting error
- Communication between the person being audited and IRS officer
- When and whether the right information is provided to IRS
How Far Back Can IRS Audit Your Return?
IRS audits tax returns from the past three years. However, audits are typically from the past two years.
IRS will not look for information older than three years unless they find discrepancies within the audit they are conducting. Most audits do not look for information past six years. In criminal cases, IRS can look back more than nine years.
Facing an IRS Audit?
If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.
Read on to learn how to respond to an IRS audit in 2022, here.
INTERNATIONAL TAX ATTORNEY IN SAN DIEGO
EFFECTIVE TAX LAW GUIDANCE IN CALIFORNIA & TEL AVIV, ISRAEL
At Milikowsky Tax Law, we routinely assist businesses that have locations overseas and in the U.S. Our own legal practice spans from Southern California to an office in Tel Aviv. We are well versed in international tax law, uniquely equipped to provide counsel. Our skilled team of San Diego international tax lawyers can help you navigate this complex legal field, avoid criminal and civil penalties, and stay in business.
If you have overseas accounts, we can inform you of the financial disclosure laws that apply to you. We can help you report your financial information, or undertake voluntary disclosure if you have failed to include foreign assets in past tax returns. If you are a visa or Green Card holder, we can explain what tax obligations you may have. Whatever complications or uncertainties you face with international tax law,our San Diego tax lawyers can provide the guidance you need.
Our first priority is to exceed your expectations in the service and value we provide. Start receiving the legal answers you need in a free case consultation!
THE FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)
This crucial law was passed in March of 2010, and it mandates that taxpayers in the United States who have certain offshore accounts must report them. If taxpayers have financial accounts and assets overseas that exceed a certain specified amount, they must report this in their annual tax returns by completing Form 8938 and / or a Report of Foreign Bank and Financial Accounts (FBAR). We can help you understand which of these forms you need to submit, as well as provide guidance on how to complete them in a thorough and timely manner.
What happens if you do not complete the required disclosure? You could be hit with a tax evasion charge and the civil and criminal penalties that come along with it.
The criminal penalties could include:
- Up to a $250,000 fine
- 5 years in prison
Civil FBAR penalties alone could also include:
- Up to a $100,000 fine, OR
- 50% of your account balance, whichever is greater
It is imperative that you understand what tax laws entail for you, lest a mistake or some mismanagement lead to severe penalties. And if you have already failed to follow proper disclosure practices in the past, you need to be aware of what your options are, such as the offshore volunteer disclosure program (OVDP).
THE OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP)
If you have not disclosed foreign assets in accordance with international tax law, then you might still be able to avoid the above penalties. You can do this through voluntary disclosure that occurs prior to discovery by the IRS. If you do this, you can head off a charge of tax fraud or tax evasion before it ever forms, saving yourself the stress and financial losses of an audit and criminal prosecution.
CALL OUR SAN DIEGO TAX ATTORNEY FOR A FREE CONSULTATION!
Our tax law firm’s founding attorney, John D. Milikowsky has more than a decade of experience in tax law, and he is recognized in the legal and business communities for his consistent ability to provide real results and value to our clients. Our goal is to exceed your expectations in efficient and timely service. If you need to meet a deadline or resolve an emergency, we are prepared to work with you outside of business hours, which can include weekends.
Our San Diego international tax lawyers are prepared to help you or your business resolve the international tax issues you face, whether they are civil or criminal matters. Beyond that, we can consult on the underlying business issue that gave rise to your tax dilemma. When you retain a member of our skilled legal team, you can rest assured that you will receive the strong legal support you need to face the future with confidence.
SAN DIEGO CALIFORNIA INCOME TAX LAWYER
GET EXPERIENCED LEGAL ADVICE FROM OUR BUSINESS TAX ATTORNEYS
Under California law, the definition of a “resident” is unclear. The distinction between a resident and non-resident determines whether California can assess you taxes on income earned in California and in other states. Under Revenue & Tax Code Section 17014, a “resident” is defined as “every individual who is in this state for other than a temporary or transitory purpose.” The definition also includes individuals who are “domiciled in this state” who is outside of California only for a temporary or transitory purpose. Whether an individual is a resident of California (and is only outside of California temporarily) essentially relies on many facts and legal presumptions.
While residents of California are taxed upon their entire net income, non-residents are only taxed on income from California sources. Individuals who have California source income typically do not get out of paying income taxes simply by changing their residence. Franchise Tax Board will scrutinize a change in residence to determine its legitimacy and whether an individual has truly severed his or her connections with the State.
If you are receiving income from any of the following sources, they may be considered sources within California:
- Tangible and real personal property within the state
- A profession, trade, or business used within the state
- Profit from stocks, bank deposits, bonds, notes, or other intangible property that carries taxable situs
- Copyrights, patents, brands, trademarks, and other similar property with taxable situs
- Compensation for personal services performed in state
- Royalties or rentals for the use or privilege within the state
The taxes assessed on part-year residents and non-residents are determined by calculating the tax on all income-regardless of source-as if the taxpayer was a full-year resident. The tax liability is then factored out by applying the ratio of CA AGI to total AGI from all sources. This applies the graduated tax rates to all persons, not just those who have lived in the state for the full year. This method doesn’t tax out-of-state sources of income, but takes it into consideration while determining the tax rate that should apply to California-source income.
SAN DIEGO TAX LAWYERS PROVIDING VALUE TO OUR CLIENTS
If you are seeking a San Diego income tax lawyer who can help you minimize your tax exposure, look no further than Milikowsky Tax Law. Our team of skilled tax attorneys have extensive experience and knowledge in the field. We are devoted to providing value to our clients.
Contact our firm today to find out how we can minimize your audit risk and tax exposure!