IRS Audit

What is an IRS Audit and Should I be Worried?

We all dread the thought of an IRS audit or examination.If you have recently learned that you are facing an IRS Audit, you are likely stressed out and worried about the many possible reasons for the inquiry and possible outcomes: “What did I do?” “Am I in serious trouble here?” “Will they find out about that ‘little thing‘ I sort of overlooked 2 years ago?” Call us. The method of audit notification, the details in the notice, the location of the audit reveal what the reasons might be, and the potential severity of the inquiry.

An IRS audit is a review of a taxpayer’s supporting documentation that supports the tax return and accompanying schedules submitted for a given tax year and to verify if the taxpayer is correctly and accurately reporting his or her income, expenses, deductions, and other data that was used to compile the tax return in question. An IRS tax audit can be conducted by mail (a correspondence audit), at the local IRS office (a desk audit), or at the taxpayer’s home, business or the office of the taxpayer’s accountant or tax attorney (a field audit).

If a “Field Audit” is requested, make sure it is conducted in a tax lawyer’s office

Obviously, any level-headed taxpayer would prefer a correspondence audit, and if that is the case, the audit may just be a desk-bound IRS staffer who needs to verify some unanswered or confusing line items on your tax return —some missing, overlooked, or incorrectly transcribed data so that the IRS can close out that tax return and move on. If, however, the the IRS audit is set up as a field audit, it would be in your best interest to give the Tax Resolution Lawyers at Vincent W. Davis & Associates a call and have us contact the IRS on your behalf to inform them that their audit will be conducted at our offices and we will be your legal representatives.

Having the audit conducted in our offices will eliminate unnecessary and understandably-stressful interaction between you and the IRS field auditor, and to prevent the field auditor from making unneeded assumptions about you and your circumstances based upon their personal, subjective assessment of you, your home and your personal assets. It is always better to have the audit held in an ordinary, anonymous, neutral office environment, where the field agent will show up, have a conference, and then leave without the possibility of making your case into a “pet project.” Moreover, having the audit in our offices will significantly reduce the stress and anxiety that is bound to come about by a government revenue agent violating your private space and telegraph to the IRS that you are now being represented by professionals who will protect your rights while strongly advocating your position. There are always easier audit targets on the Agent’s schedule and we want to encourage the auditor to wrap up your audit, find mutual resolution and move on.

What might be the downside to an IRS Audit?

Most tax audits come down to the IRS representative asking you to clearly explain the nature of your income and for you to prove to them that you’ve accounted for all the income that must legally be reported. As you prepare for your audit you need to double check that the income you reported on the tax return STILL matches your current figures. Does it? Double check to see whether you overlooked some income. If so, you will need to voluntarily disclose the corrected information and expect that your tax liability will be adjusted upward. Interest is likely and penalties may also apply if it seems as if you purposefully attempted to withhold the reporting of some income.

Next, the IRS agent will want you to substantiate, with sufficient documentation, ALL expenses and deductions that you claimed on your tax return; that they are legitimate and not “sketchy” or invalid. Can you do that? If some of your expenses and deductions cannot be adequate documented to the standards required by the IRS, then those expenses and deductions will likely be disqualified and subtracted. That would result in a re-calculated tax liability that could be greater than what your tax return originally calculated. If this is the case you will owe additional taxes, interest, and any penalties. Unfortunately, should the IRS assess additional taxes they will share their findings with their counterparts at the state level and those upward adjustments will likely be matched by the State Tax Agency making an already stressful situation even more so.

What might be the upside to an IRS Audit?

On the other hand, many tax audits turn out to be a blessing for our clients. Especially those clients who might have calculated their own tax return or used a software program to assist them. When facing an upcoming tax audit, you will want to prepare so that you will have a defense for any and all possible challenges that may be presented to you or your legal representative at the audit.

The Process – We will meet, and have our expert tax professionals review your tax return and your supporting documentation in question. Surprisingly, we will often find that you, your tax preparer, or your software missed several legal and legitimate opportunities for more expenses and deductions that you could have taken advantage of. When this is the case, we will document and prepare a new and more aggressive tax return and keep it handy for the upcoming audit to use as a negotiating tool. After the IRS representative makes known the extent and true purpose of their inquiry, we can excuse ourselves and discuss your options with you if you attend or by phone if you do not. Many audits work out extremely well for the taxpayer who does their homework and prepares well.

All tax returns are scored by software and scored for risk assessment.

Some 80% of IRS audits are triggered by IRS Computer software that ranks tax returns and establishes a “risk score.” That score is affected by 100’s of various tests that all come-together to generate an aggravate score that determines the likelihood that your return will become part of the 1.11% of tax returns subject to IRS audit. Many of those line item “test scores” are affected by some IRS Red Flag Items that you can read about here on our website.

But WHY did the IRS target my tax return for audit?

There are numerous reasons why the IRS (or the state) will select you for an audit. The IRS computers select taxpayers (1) randomly, (2) by “document matching,” and (3) by computer screening all returns for so-called “red flags” and then assigning each return a risk score. Depending upon the agencies’ budget that year and the score that your return is assigned, can make the difference of being selected or passed over. Some of the “red flags” that can trigger an IRS audit including, but not limited to:

  • Making too much money
  • Making too little money
  • Sketchy Tax Preparer
  • You own a business
  • You run a cash business
  • Disagreements between state and Federal returns
  • Big changes in income from year to year
  • Large charitable deductions
  • Submit a handwritten tax return

30 IRS Red Flags that can Trigger an Audit   READ HERE

You can be randomly selected for IRS Audit

If it turns out that you were one of the very few taxpayers randomly selected for audit, it might be time to start playing the Loto! You are unique. Only a small percentage of the 1.11% of all audits are randomly generated. While it was the “luck of the draw” that selected your return, you will still experience the same stress, worries, and investment of time to prepare for your audit. You might want to call a tax attorney and quickly run your financial thumbnail past them for a quick review to see if there is reason to be concerned.

‘Document Matching’ can trigger an IRS Audit

A tax return can be selected for audit because it came up short on the “document matching” process conducted by IRS computers which attempt to match what you report on your tax return against the forms filed by people with whom you do business with, work for in some capacity, or have an account with (bank, stock brokerage, etc.). Those people and entities will have filed Forms 1098, 1099, W-2, and others. Generally you will get a copy of those forms and should account for them in your tax calculations and voluntarily attach them to your tax return. Should the amounts reported to the IRS on those 3rd party forms not match what you report on your tax returns, the computer will generally note the return for additional followup that might result in an IRS audit by mail, at an audit at an agent’s desk at the nearest IRS offices, or a field audit at your home, your business, or your legal representative’s office.

Tips from informants and snitches can result in an IRS Audit.

Tips from informants can also trigger IRS audits. The IRS has a reward program to pay tipsters for information that results in significant money collected because of the tip. In fact, the IRS has a special for just for tipsters: IRS Form 211. Most “tips” are made by employees who have a beef with their employer, someone you have shared that you are not reporting income and is jealous, vindictive or just wants to stir the pot, or perhaps a customer who suspects you are pocketing money and not reporting it and so forth.

Unfiled Tax Returns can result in an IRS Audit

An IRS audit triggered by the failure to file one or more tax returns can also lead to trouble for the taxpayer. In such cases, the IRS might have a tax return created for the taxpayer based on past returns and tables of average income for like work or profession. This is know as a “substitute for return” and will often generate a tax liability which is utterly arbitrary and may not be anywhere close to the tax you might owe had you filed. A “substitute for return” might even be generated when you legally fell short of the minimum necessary income level to even be required to file a tax return that year – as happened to one of this law firm’s outside IT vendors who took a year off from employment and a tax return was generated and enforced (collected) though he clearly was not required to file that year. (Read his story HERE) Be vigilant and file a tax return stating that you are exempt – even in not “technically necessary.” Finally, if you should have filed one or more back tax returns and did not, we strongly suggest that you contact the Tax Resolution Lawyers at Vincent W. Davis & Associates for assistance in preparing and filing your tax returns as soon as possible.

If you or your business is facing an upcoming tax audit, it is time to consider getting a professional Tax Resolution Lawyer on your side.

Get some help —Make that call!

The Tax Resolution Lawyers at Vincent W. Davis & Associates, provide a no-obligation, confidential consultation and have appointments available for evenings and weekends. Moreover, we accept all major credit cards and can make other payment arrangements so that we can help you get your tax problems straightened out without adding additional layers of financial burden on you and your family. We have seven convenient offices throughout Southern California, including Los Angeles County, Orange County, Riverside County and San Bernardino County. To schedule a confidential consultation with one of our Tax Resolution Lawyers, call 626-446-6442.

Arcadia Office
150 N. Santa Anita Ave,
Suite 200
Arcadia, CA 91006
Phone: (626) 446-6442
Fax: (626)-446-6454

Beverly Hills Office
9465 Wilshire Blvd.
Suite 300
Beverly Hills, CA 90212
Phone: (310)-880-5733

La Mirada Office
Cerritos Towne Center
17777 Center Court Drive ,
Suite 600
Cerritos, California, 90703
Phone: 888-888-6542

Los Angeles Office
Gas Company Tower
555 West Fifth Street,
31st Floor
Los Angeles, California, 90013
Phone: (213)-400-4132

Long Beach Office
Landmark Square
111 West Ocean Blvd.,
Suite 400
Long beach, California, 90802

Irvine Office
Oracle Tower
17901 Von Karman Avenue,
Suite 600
Irvine, California, 92614
Phone: (949)-203-3971
Fax: (949)-203-3972

Ontario Office
Lakeshore Center
3281 E. Guasti Road,
7th Floor
City of Ontario, California, 91761

Riverside Office
Turner Riverwalk
11801 Pierce Street,
Suite 200
Riverside, California, 92505
Phone: (909)-996-5644

San Diego
Emerald Plaza
402 West Broadway,
Suite #400
San Diego, California, 92101
Phone: (619)-885-2070

Aliso Viejo
Ladera Corporate Terrace
999 Corporate Drive,
Suite 100
Ladera Ranch, California, 92694
Phone: (714) 721-3822