Tag Archive for: Business Owners

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Inflation Reduction Act Law. State gets involved to help the population during the economic crisis
In August 2022, Senate Democrats passed the Inflation Reduction Act, which allocates nearly $80 billion to the International Revenue Service (IRS) and leaves business owners asking: What are the tax implications of this bill? Will there be more audits? How will audits change? In this article, we’ll break down what the Inflation Reduction Act is, where the money is going, the resulting tax implications, what businesses will be targeted, and how IRS audits will change. Let’s dive in.

What is the Inflation Reduction Act?

The Inflation Reduction Act is a climate, health, and tax package passed by Senate Democrats. 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, and
  • Taxes on corporations

Will the Inflation Reduction Act Increase IRS Audits?

The Inflation Reduction Act allocates $79.6 billion to the International Revenue Service over the next decade. These funds will increase IRS audits. Let’s take a look at where exactly the money is going. 

Enforcement: IRS is Hiring

According to the 2021 IRS Data Book, IRS in Fiscal Year 2021 had about 79,000 full-time equivalent (FTE) employees, and about 35,000 of them were dedicated to enforcement activity. In 2021, IRS closed about 739,000 tax examinations and processed more than 261 million tax returns and supplemental documents. This number of tax examinations in 2021 was less than half of the number of tax examinations in 2012. So, what does this mean for business owners? IRS is making an effort to conduct more audits than in the past few years and using the additional resources from the Inflation Reduction Act to do so. Let’s take a look at how. With the increased budget resulting from the Inflation Reduction Act, IRS will be expanding its staff. IRS will be hiring additional:
  • Revenue agents (to conduct audits)
  • Criminal Investigators (to carry out criminal investigations), and
  • Revenue officers (to collect taxes)

Operations and Developments

The remaining additional funding will be used for:
  • Technology
  • Development of a direct free E-file system 
  • Operations, and
  • Taxpayer services
According to recent estimates from the Congressional Budget Office, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031.

What Sizes of Businesses will be Impacted by the Inflation Reduction Act?

What businesses will be impacted by the Inflation Reduction Act? Let’s discuss.

Large Corporations and the 15% Minimum Corporate Tax

Large corporations with profits over $1 billion will be impacted by the Inflation Reduction Act. The bill imposes a 15% minimum tax on adjusted financial statement income for these corporations. Businesses owned by private equity would be exempt from this tax and the Joint Committee on Taxation projects that the tax would affect approximately 150 corporations. While the current statutory corporate tax rate is 21%, around 200 or more large corporations use tax loopholes to avoid paying that rate and pay below 15%. The bill will target these corporations. This provision would be effective for taxable years beginning after December 31, 2022.

Self-Employed Business Owners Are More Likely to be Audited

Self-employed business owners will be more likely to be audited as a result of this bill. Why? IRS is focused on self-employed people, whose financial situations can become tricky. For example, in these businesses, 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.

Why is IRS Making These Changes?

According to Forbes, “the two primary revenue-raising provisions of the bill are a 15% corporate minimum tax and IRS tax enforcement funding, together estimated to raise over $400 billion.” “In total, the bill will raise over $700 billion in revenue over 10 years, including the aforementioned tax changes, as well as taxes and savings from a prescription drug-pricing proposal.”

How Will Audits Change with a Better-funded IRS?

After the Inflation Reduction Act, audits will not only be more common, but also different. Why? The flux of new hires means the audits will be conducted by revenue agents with less experience. For example, according to IRS, a revenue agent “must be trained on the job for at least two to three years to have the experience and expertise to audit a complex return.”

How Can Businesses Prepare for and Navigate These Changes?

You can prepare for an IRS audit by ensuring that you have all of your documentation in order and that you can answer any questions IRS may have. If you are audited, it is important to cooperate with IRS and to provide them with any requested information. 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. For more, read our ultimate guide to IRS audits.

Hire an Experienced Tax Attorney

In the event of an IRS audit, business owners should consider enlisting the help of an experienced tax attorney. A tax attorney can help to guide you through the process of an IRS audit as well as navigate any issues brought on by a less experienced revenue agent.

Still Have Questions?

Business owners should contact Milikowsky Tax Law if they have any additional questions about how the Inflation Reduction Act will impact them. At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits. Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.
SBA PPP Loan Paperwork

The Small Business Administration (SBA) has forgiven over 98% of the total Paycheck Protection Program (PPP) loan value that borrowers requested them to forgive; recently, however, SBA has begun to issue more forgiveness PPP loan forgiveness denials.

Many of these recent denials issued by the SBA are not consistent with their own guidelines. Borrowers have received denial letters based on:

  •  Insufficient communication between SBA and lenders
  •  Misapplication of SBA’s Interim Final Rules (IFRs) or affiliation rules
  •  Mistakes by SBA surrounding the loss or misuse of borrower information

Borrowers should be aware that such denials are appealable. Consider challenging forgiveness denials if you believe SBA’s decision is in error.

Read our full guide to SBA’s PPP loan forgiveness denial below to learn more about how to appeal a denial, the criteria required for an appeal, and who can represent your company in the process. 

How Do I Know if My Business’ PPP Loan Forgiveness was Denied?

If SBA denied your application, you will receive an SBA Final Decision Letter in the mail. 

Learn more about what to do if your PPP loan is not forgiven, here.

How Do I Know Why My Business’ Forgiveness Application was Denied?

The first page of the Final Decision letter contains a section indented and in bold that provides the reasons SBA denied your request for forgiveness. It’s important to understand why SBA is rejecting the forgiveness application before taking action- such as appealing the denial.

Who Makes the Decision on PPP Forgiveness?

The decision to deny your PPP loan forgiveness can be made by:

  • Your lender (i.e. bank, credit union)
  • The Small Business Administration (SBA)

How Much Time Do I Have to Appeal a PPP Loan Forgiveness Denial?

You must respond to SBA and submit your appeal within 30 days of the date listed on your SBA Final Decision Letter.  The timeline for SBA forgiveness appeals is inflexible. Once your initial 30-day period expires, you will lose your right to appeal SBA’s denial to forgive your PPP loan.

How Do I Appeal a PPP Loan Forgiveness Denial?

You must appeal denials of forgiveness to the SBA’s Office of Hearings and Appeals (OHA) within the 30-day period. 

File appeals through OHA’s case portal. Filings for PPP appeals received in any other manner may be rejected and not docketed for processing.

SBA states that OHA has jurisdiction over appeals where SBA has provided the borrower with a PPP final loan review decision finding the borrower:

  • Is ineligible for a PPP loan
  • Is ineligible for the PPP loan amount received
  • Used the loan proceeds for unauthorized uses
  • Is ineligible for the PPP loan forgiveness amount determined by the lender in its full or partial approval decision issued to SBA, or
  • Is ineligible for PPP loan forgiveness when the lender has issued a full denial decision to SBA.

Learn more about how to appeal an SBA PPP forgiveness denial, here. 

What Information Do I Need to Provide in the Appeal?

The criteria for an appeal filed with the SBA are strict. According to SBA, appeals must contain:

  • A complete, detailed statement as to why the SBA loan review decision is erroneous, with accurate information and legal arguments supporting the statement;
  • No more than 20 pages (not including attachments)
  • Clearly labeled exhibits and attachments

Due to the strict criteria of the appeal, we recommend hiring a qualified attorney to represent your business and help you to create a strong, successful appeal. 

Who Can Represent My Business in the Appeal Process?

An identified legal representative of the business or a qualified attorney must represent the appeal since the SBA PPP loan is a business loan and not a personal loan. To represent your business, one must be:

  • A shareholder owner 
  • An officer, or
  • An attorney

Who Can’t Represent My Business in the SBA Appeal Process?

The following positions are not legally entitled or allowed to represent businesses in the SBA appeal process:

  • Certified Public Accountants (CPAs)
  • Lenders 
  • General Employees

What if I Lose My Appeal?

Any appeal denied in the Office of Hearings and Appeals will have to go to a higher court. Why? Because SBA is a federal agency. The process of going to federal court can be extremely tedious and expensive due to the strict regulations. 

To avoid the costly and time-consuming process of going to the federal district court, we recommend hiring a qualified attorney to make sure you’re building a strong appeal for your business.

While each case is unique and this is not an indication of success in other cases nor a promise of results, our team at Milikowsky Tax Law has extensive experience in government audits and cases involving government entities from IRS to SBA and CSLB.  

Contact Milikowsky Tax Law and learn how we can help.

How to Abate an IRS penalty

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.   
Attorney reviews options for handling back taxes
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
If back taxes are not paid, some consequences may include IRS:
  • 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. 
Failure to pay taxes can also involve imprisonment. However, if you owe back taxes, you don’t need to panic. Let’s take a look at some of your options. 

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.
Before responding to an IRS audit letter, first identify the following five things: the taxpayer, revenue agent, tax years audited, triggering issue(s), and the deadline.
As a small business owner, you may be wondering what the process is for an IRS audit. An IRS audit is when IRS reviews your tax return to ensure that you have reported your income and expenses correctly. The founder of Milikowsky Tax Law, John Milikowsky, breaks down the process of an IRS audit for small business owners. Check out the video below for more information:
In this article, we will review the various stages of an audit as well as information you can obtain from IRS during an audit to ensure that your tax return is correct. 

The IRS Audit Process

The process of an IRS audit can feel overwhelming for a small business owner. However, it doesn’t have to be. Let’s take a look at each step of the process.

The Audit Letter

An IRS audit starts with an audit letter that is generally sent to the business owner or taxpayer. This letter will include:
  • The name of the assigned revenue agent
  • The telephone number and fax number of the revenue agent
  • The number of days you have to respond to the revenue agent
Business owners should pay careful attention to the number of days they have to respond to the revenue agent. This is important in continuing the audit process efficiently and cooperating with IRS. 

What If You Need More Time to Provide Information to IRS?

It is important to respond to the audit letter, even if just to request more time. If you do need more time, you can request an additional 30 or 60 days. Typically, they’ll give you 30 days to respond, have an interview, and meet.  During this time, you will want to consider hiring a professional to help guide you through the audit process.

Consider Hiring a Tax Attorney or CPA

As you collect information for IRS, you can choose to enlist the help of an experienced tax attorney or a CPA. We’d recommend a tax attorney because any communication you have between your attorney is protected under attorney-client privilege, whereas it’s not protected by any other tax professional or CPA. 

Initial Document Request

If you’re being audited by IRS, one of the first things they’ll do is send you an Initial Document Request (IDR). This request will list all of the documents and information that the revenue agent needs in order to complete the audit.  If you don’t provide this information, IRS can summon the information. For instance, if you don’t provide your bank statements, IRS can go directly to your bank to obtain them. If this occurs, within 30 days, IRS can obtain your bank statements, canceled checks, and deposited items. 

Second Initial Document Request

After you respond to the IDR, IRS will have another discussion. If IRS does not feel that they have all the information they need or if you failed to provide all requested information, they can issue an additional Initial Document Request. This process can continue with as many document requests as they need based upon the number of alleged issues on your tax return. And if they don’t feel that you provided all the information, they’ll issue another IDR, typically IDR Number Two, and it could go up to as many IDRs as they need based upon the number of issues that they’re looking at on your tax return. 

Interviews With the Taxpayer

After you provide all necessary information to IRS, they will typically conduct an interview. At Milikowsky Tax Law, we attempt to schedule the interview at the end of the audit or not have one at all. That being said, sometimes it is an unavoidable step in the process. 

An Interview May Come With a Summons

If IRS wants to interview you and it is an important part of their audit, they can submit a summons. If you disregard this summons, IRS can file an action in the federal court to require you to appear and provide the documents or any other testimonial information. This step depends upon how important an interview is to resolve the audit.

Revenue Agent Report

After the business owner and IRS have exchanged information through the audit letter, IDR(s), and an interview, taxpayers will typically receive a Revenue Agent Report (RAR). The Revenue Agent’s Report is a detailed document describing an IRS examiner’s audit findings.  Additionally, the Revenue Agent’s Report states “the amount of deficiency or refund the agent finds the taxpayer to owe or be owed, respectively.” Learn more about how to read a Revenue Agent Report, here.

Audit Conclusion: Respond to the Revenue Agent Report

Typically, a business owner will have 30 days to respond to the Revenue Agent Report. It might be less time, especially if there have been multiple Revenue Agent Reports. 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 and then suing for a refund.
If the Revenue Agent’s Report is unchallenged or upheld, delinquent taxpayers may be subject to increased fines or jail time if they fail to reconcile their tax situation.

Facing an IRS Audit?

If you or someone you know received an audit letter from IRS, reach out to our team of experts 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. Have more questions about IRS audits? Check out our full guide, here.

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
Let’s dive in.

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
However, despite its name, studies show the bill will have little to no impact on inflation.  Forbes deems this act a “slimmed down version of the Build Back Better Bill.” Find a detailed explanation of the Build Back Better bill, here.  Taxpayers should note that this bill has not yet passed in the House of Representatives.

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
According to recent estimates from the Congressional Budget Office, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031.

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
Let’s take a closer look at each of these.

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.
Revenue Agent Report - IRS


If you’ve been through an IRS audit, you know that one of the most important documents you receive at the end is the Revenue Agent Report (RAR). 

Many taxpayers may not know where to start when it comes to reading their Revenue Agent Report. 

John Milikowsky, the founder of Milikowsky Tax Law, explains how to read your Revenue Agent Report in detail. 
Check out the video below for more information:



In this article, we walk you through the elements that make up an IRS Revenue Agent Report. 

First, 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. Now that we have covered what a Revenue Agent Report is, let’s break down how to read it, section by section. 

How to Read a Revenue Agent Report

Audit Information

The first section of the Revenue Agent Report is called the “Audit Information.” This includes basic information about the audit, such as the type of audit (field or correspondence), the date the audit began, and the taxpayer’s name and address. Learn more about the four types of IRS audits and how to navigate them.

Audit Results

In this section, the revenue agent lists their findings.  Each finding will include:
  • A description of the issue
  • The amount of money in question
  • The proposed changes to the tax return

Adjustments to Income

At the top of page one, you’ll find the adjustments to income. Adjustments typically start with income, whether income has increased or decreased, which could go either way. Typically, IRS will increase your income if they identify additional income that was not reported on your tax return. 

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. 

Corrected Tax Liability

Beneath these figures, the Revenue Agent Report will list the corrected tax liability and any credits, such as prepayments you have made or withholdings of income tax. 

Balance

Below the corrected tax liability and credits, the Revenue Agent Report will list the balance at the bottom of the first page. 

Penalties

The top of page two of the Revenue Agent Report will list the penalties. For example,  if you filed a late return or made payments late, typically IRS will also include a negligence penalty. Negligence occurs if you kept poor records and you didn’t have any substantiation, or you didn’t have enough substantiation where IRS could tell you made some typical errors. In this event, they may file a negligence penalty.  IRS can also assess a fraud penalty if they can establish willfulness and there is fraud for failure to file a return on time. Additionally, IRS may determine fraud in overestimating or overstating expenses or understating income where they believed it was more willful rather than negligent. 

Interest Due

In addition, on page two,  IRS will assess interest from the date the return payment was due.  If the Revenue Agent Report is reviewing an individual, this date is typically April 15th. If the agent is reviewing a corporation, the return payment due date is usually in March.

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.

What to Do After Reading Your IRS Revenue Agent Report

At the end of this process, IRS can give you a set period of time in which to dispute these findings. This is typically 30 days but can occasionally be only 10 days.  You have 30 days to provide a protest letter. If you do not, IRS will conclude the audit with a notice of deficiency. At this point, you’re required to file a tax court petition going to the United States tax court in order to dispute the findings. 

What We Recommend 

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.
Image of a calculator IRS in an audit

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.