Large Business, Small Business Tax Audit, Individual Tax Audits
The IRS has three main types of audits:
Large Business and International
The Large Business and International Section of the IRS (formerly the LMSB – Large Mid-Sized Business Section) is attacking businesses with assets of $10 million or more. Usually, the IRS comes in with a team of auditors. Your business should have its own team, led by the tax attorney, who will work with your CPA and in-house controller or financial manager. As soon as you receive the IRS audit notice, also called an “Information Document Request,” immediately call your Tax Lawyer.
The IRS plans to expend 18% fewer staff hours auditing large businesses with assets of more than $10 million in fiscal year 2013 (which ends Sept. 30) than it did in the financial year of 2011. These lower numbers do not take into account the effects of budget cuts that resulted from the sequester.
Small And Mid-Sized Business Audits
Just because your business is classified as a “small business” does not mean the IRS Audit cannot be a brutal attack on the very survival of your business and financial existence. One of the first things the auditor, called the “revenue agent,” will do is to try to convince you to talk and conduct the audit without a tax lawyer. That is a huge mistake! How the audit is conducted determines the outcome. Don’t expect the tax attorney to somehow magically correct the mistakes on Appeals or in Tax Court.
Note: The IRS has increased mail audits of small businesses. The auditors are not revenue agents. They have much less training than typical Revenue Agents and they make the audits much more difficult because they do not understand business. These minimally trained people are especially difficult to work with, and they rarely understand business.
Wealthy Individual Audits
The IRS has created a specialized audit group known as the global high wealth industry group. This audit group attacks wealthy taxpayers with complicated financial arrangements. These rigorous probes emphasize hedge-fund managers and other investors it suspects may be trying to evade taxes. Included in this group are individuals with asset protection trusts, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately held companies and partnerships. The IRS auditors are specially trained and highly experienced. They conduct the audits in the same fashion as a large business audit.
Have You Received A Notice From The IRS?
Did you receive a letter or IRS notice? Is it a certified letter? STOP!!!
Do not call or contact the IRS. Anything you say will be used to hurt you and your business. If you have not filed tax returns and the IRS asks, “Did you know you had to file tax returns?” If you answer “yes,” you have just admitted to a federal crime!
If you are asked:
- “Where do you bank?”
- “Where do you work?”
- “Do you have any credit cards?”
All of these questions are designed to get information so the IRS can wipe out your bank accounts, levy your wages and take your assets.
If you get a notice from the IRS, please call Ronald J. Cappuccio J.D., LL.M. (Tax), at 856-665-2121.
IRS Audit Notice
If you receive a letter from the IRS asking you to call for an audit, immediately call your tax attorney. Some audits are minor and based upon simple calculation errors or inadvertent exclusions of 1099s. Most audits, especially for business owners, can be big trouble. Before you respond, your tax attorney should review the notice and the entire situation. Nothing you say to the revenue agent or tax examiner (what the IRS calls “auditors”) can help.
IRS Letter 5043
The latest attack on small business owners is letter 5043. This letter states that you have received a disproportionately large amount on your 1099-K forms for credit card sales compared to total income. The IRS thinks you are hiding cash. The responses must be timely and carefully crafted to prevent a full IRS intrusive audit.
IRS Audits Can Be Successfully Fought!
The threat of an IRS audit or state tax audit can justifiably strike fear into the potential audit victim. Business owners, professionals, corporations, partnerships and LLCs have more complicated business transactions than most W-2 wage earners. Fear of tax increases, tax penalties such as negligence penalties, late filing penalties and late payment penalties as well as interest on the tax increase and penalties is real. Big increases in tax dollars owed and even claims of civil tax fraud are the potential result of a mishandled tax audit.
Do not let the audit start without legal representation.
- Engage a tax attorney, in addition to your accountant to represent you during the audit process.
- Defer all of the auditor’s questions to your tax attorney and accountant.
- Gather your accounting records and all tax returns for the years being audited.
IRS auditors, known as Internal Revenue Agents, and their criminal counterpart, CID (Criminal Investigation Division) agents, have extensive training and education. Without the assistance of a qualified tax lawyer before the audit even starts, a taxpayer is starting behind the IRS professionals. The first step is preparation and acquisition of tax law information.
General Information Concerning Audits
You are not going to jail!!!!!
Almost all tax audits are simply about the various levels of government trying to get more money. Every year, usually around the April 15 filing date, the IRS announces a vicious prosecution against nationally (or locally) known high-profile individuals. This is part of the IRS enforcement technique to scare taxpayers into “following the rules” imposed by the Treasury. But the fact does not change that few taxpayers are indicted solely for tax matters. An IRS Audit notice is for money not jail!
Do not wait to see how the audit “turns-out” to consult a tax lawyer!
Winning the audit requires the taxpayer to prepare for the audit. Good preparation is more than simply gathering the documents demanded. Identification of the tax law issues and factual areas of contention require the experience and knowledge of a tax attorney. Even if the return was prepared by a CPA or professional accountant, the approach of the tax attorney is to advocate for the taxpayer. Immediately, arrange for an initial consultation to prepare for the audit.
Types Of Audits
There are three general types of IRS Audits:
- Mail audit
- Office audit
- Field audit
The mail audit is typically if there is a discrepancy within the return (such as a calculation error) or with third-party information such as 1099s. Usually, these audits merely require submitting backup information, documents and an explanation. Typically, this type of audit requires minimal assistance.
An office audit normally is for W-2 wage earners and some small-business owners. The taxpayer is required to bring substantiating documentation for the return to the local IRS Office for analysis. The office audit typically lasts one day or less. Frequently, taxpayers are lulled into believing that the audit is “simple” and “straightforward” and try to not have legal representation. This is how an unwary taxpayer can fall into the traps of the IRS Revenue Agent. Immediately upon receipt of an office audit notice, the taxpayer should consult a tax lawyer.
Field audits, where one or more IRS Revenue Agents come to a taxpayer’s office are usually reserved for corporations, partnerships and limited liability companies (LLC), although complex sole proprietorship are also subject to field audits. The auditor has to go to the office of the taxpayer because the documentation and legal issues are voluminous and complex. The taxpayer should expect to obtain legal representation as well as further accounting assistance to prepare for the audit.
Get Sales Tax Audits Advice And Representation
Sales and use taxes are collected by many state and local taxing jurisdictions. Each state, and sometimes the local municipalities and counties have conflicting laws determining whether a particular sale is subject to sales tax. Slight factual differences may result in dramatic tax effects.
Sales Taxes In An Audit
Sales tax auditors start with the approach that every sale is taxable. You, the taxpayer, must prove the sale is not subject to taxation. Typical issues are whether the sale:
- Is of a type that is not taxable (ex., certain services)
- Is to an exempt entity (reseller or non-profit)
- Does not have a connection (“nexus“) to the state
- Is the correct amount
- This requires planning and negotiation by your tax attorney in cooperation with your accountant or CFO.
Income Taxes Are Also Audited
Business and corporate income returns are also audited with most sales tax reviews to verify income and expenses. The technique used by the government is to “sample” a given year, determine the ratio of underreporting and multiply this for all open tax years. This can result in whopping tax liabilities, plus interest in penalties.
Tax Recovery And Minimization
State sales and use tax laws are growing increasingly complex and counterintuitive. It is important for your tax lawyer to act as your advocate in the negotiations with states and local taxing authorities. As part of the audit support and defense, your tax attorney will perform the detailed tax research and investigation to determine whether a particular activity is subject to tax.
To learn more, contact my firm, Ronald J. Cappuccio J.D., LL.M. (Tax), by calling 856-665-2121. You can also reach me by sending an email.
Don’t Face The IRS Alone
Please seek legal advice if facing an IRS audit. You can contact Ronald J. Cappuccio J.D., LL.M. (Tax), by calling 856-665-2121 or by sending an email.