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New Tax Laws Difficult To Navigate

January 23rd

The IRS audits little more than 1% of all personal tax returns annually. The agency doesn’t have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for review. But, with many new 2013 tax laws in effect and some still yet to be voted in Congress, the chances of making a filing mistake increases the chance of an audit.

Don’t Put Your Return At Risk

Facing pressure from a Congress dealing with a growing federal deficit, the IRS has made it clear it takes the enforcement of tax audit seriously. But the rich aren’t the only targets. Recent tax law changes, particularly when it comes to confusing tax breaks such as the first-time homebuyer credit, always prompt closer looks at returns. And if you’re a small-business person, either as a partnership or a Schedule C filer reporting self-employment income, you’ll want to take extra care with your deductions. And those with lower incomes eligible for the complicated earned income tax credit also face added scrutiny. Nearly 30 percent of audited returns had this claimed as a tax credit.

A few of the common mistakes made are failing to report all income or a mis-match of information from a W2. If your charitable deductions are disproportionately large compared with your income, it raises a red flag. Also, taking higher than average deductions or not having proper receipts may pull your return for review. And, if you sold stock you will need the exact dates of sale and prices. There’s no sure way to avoid an IRS audit, but by being aware of red flags, your chances of drawing unwanted attention from the IRS are decreased. In the event of an audit, a tax debt attorney will work on your behalf with the IRS towards a positive resolution.


Dealing With Tax Audits

July 18th

Are you concerned that you may be facing tax audits soon?  Perhaps the IRS has already started auditing you?  If so, you need to hire a tax debt lawyer immediately.  Though it’s possible to go through tax audits without legal counsel, the risk of doing it alone is too great to chance it.

Why Hire a Tax Debt Lawyer?

We’ve created a list of a few reasons why you should hire a tax debt lawyer to help you through your tax audits.  If you have a concern that this list doesn’t address, please don’t hesitate to contact us!

  1. A tax debt lawyer can put the technical legal jargon of tax audits into plain English that you can understand.  One of the biggest reasons that people who don’t hire a lawyer struggle during the process is that it’s sometimes impossibly difficult to understand what exactly the IRS is saying.  A tax debt lawyer can break it down for you.
  2. A tax debt lawyer can advise you on what information you should share, and what you should withhold (unless asked).  A good tax debt lawyer will never advise that you lie to the IRS.  But, you may have some information that the IRS doesn’t have a right to.  Without professional advice, you may accidentally offer up this information voluntarily.
  3. The most obvious reason, of course, is that a tax debt lawyer can represent you in court.  An intelligent, well-connected, and persuasive lawyer can be one of the most valuable assets at this time in your life for this reason alone!

If you are facing tax audits, do yourself a favor, and hire a tax debt lawyer.  The fees are reasonable, especially when you consider the long-term benefit of putting your audit to rest once and for all!


Tax Returns Likely to Face Audit: Know the Risks

September 16th

Every year the IRS flags certain taxpayers for audit. In some cases it is because the taxpayer has already been flagged for tax fraud, but in many instances they are simply chosen at random. For random audits the IRS uses the Discriminant Function, which is a highly secret method of determining who will face audit in a given year.

However, in other cases, the IRS chooses certain types of returns that will be a particular area of focus. Taxpayers with returns that fall into one of the following categories must accept the fact that they are more likely to face a tax audit. If you qualify in one of these areas, it is a good idea to consult with a qualified tax lawyer in order to ensure that you will have no unpaid taxes or unfiled returns.

1. Returns with Itemized Deductions. Taxpayers who file a Schedule A with their Form 1040 are more likely to face audit than other taxpayers. Additional calculations involved in the filing of an itemized deduction attract more taxpayer errors and fraud.

2. Self-Employed. Those taxpayers who are self-employed are also more likely to face audit than those in traditional employment. This is because more expenses may be claimed by self-employed individuals than by others, including home offices and travel. If you report a net loss for the year be prepared; you are especially vulnerable to examination by the IRS.

3. Small Businesses. All small businesses, even seemingly innocuous ones, are particularly vulnerable to IRS audit. This is because many small business owners do not understand how to properly file their tax returns and are thus more prone to making mistakes. If you own a small business, consider investing in the assistance of a qualified tax attorney to guide you through the process. In the long run, the investment could save you valuable dollars by avoiding penalties and interest on unpaid taxes.


Credit Card Purchases Open to Increasing IRS Scrutiny

August 29th

credit cardThe Internal Revenue Service have announced plans over the next few months to become more aggressive in their tracking of credit and debit card purchases. They intend to focus more heavily on spotting discrepancies between purchases and the income claimed on tax returns.  Offenders should therefore expect an increase in IRS audits, as well as the more liberal application of penalties and fines to those who commit this form of fraud.

In 2008 the Housing and Recovery Act was passed requiring all credit and debit card transactions be tracked by banks or third-party organizations, and subsequently reported to the IRS. The agency was then supposed to compare this information with income reported by business taxpayers on their annual tax returns, in an effort to maintain tax compliance. At the time, the Treasury Department estimated that such procedures could bring in an extra $10 billion a year in tax revenue.

Housing and Recovery Act Failures

A government report released last week found that the IRS had been somewhat negligent in the actual implementation of the 2008 law

In particular, the report conducted by the Treasury Inspector General for Tax Administration noted that the redesigned income tax forms for 2011 might not be conducive to facilitating the desired communication of information.

There are fears that the new income tax return forms may not match up clearly with the sales reported on Forms 1099-K, Merchant Card and Third Party Network Payments, thereby making it more difficult to notice reporting discrepancies.

Efficiency Improvements to be Implemented

Treasury Inspector General for Tax Administration (TIGTA), J. Russell George, commented that the report clearly demonstrates the need for improvements in the current system. Already the IRS has made adjustments to one tax form and is reviewing other affected forms in order to improve the efficacy of the inspection system as soon as possible.

The report also made a number of other recommendations, including better monitoring of amounts reported for merchant card and third-party payments, the inclusion of additional information such as financial reporting on risk assessments, and additional documentation. Thus far, the IRS has agreed with all the recommendations made and is planning to implement corrective actions.


IRS Pushes Time Limit on Audits

August 23rd

Most of the time, the IRS has only three years after the date you file a tax return in which to complete your tax audit. Specifically, this generally means that with tax returns usually due April 15, the statute of limitations should run for exactly three years from that date. If you file early, the period still runs from the actual date the return was due. However, for those returns filed late or have tax debt, the statute runs for three years from the actual late filing date.

This could all potentially change. The IRS has been pushing for six years to audit instead of the standard three.

A Substantial Understatement of Income

At present, despite the current three-year statute of limitations, the IRS can take up to six years to audit your tax returns. The IRS can get double time to audit if your return includes a “substantial understatement of income.”

While this generally means that the tax return has omitted 25 percent or more of the taxpayer’s gross income, the exact definition is the current subject of litigation.

The IRS, in fact, argues that anything that has “the effect of a 25 percent understatement” qualifies for an additional three years. The IRS has been pushing especially hard for this more flexible definition of what might qualify them to go over the statute.

There have been several court cases on this subject up to this point. While the IRS did just earn a major victory, they are continuing to lose their cases elsewhere. Recently four appellate courts have denied the request by the IRS to apply the six-year statute of limitations broadly to all omissions of more than 25 percent of gross income caused by an overstatement of basis. Until the cases reach the Supreme Court and receive a ruling, it seems that courts are unwilling to let the IRS overstep its boundaries.



Surviving the Audit #3: Appeal the Results

August 19th

Sometimes in the IRS audit process the appeal can be the most important step. An appeal can be a valuable tool if there has been any evidence of misconduct, or if the taxpayer simply disagrees with the audit’s findings.


tax appealIn those instances, meet with the agent’s supervisor to see if a compromise can be reached. Often in these cases representation can be a valuable asset. The representative must be designated to practice before the IRS. This group can include tax attorneys, accountants, or enrolled agents. They must also have received written power of attorney from the taxpayer being audited.

If this is still insufficient the taxpayer has the right to appeal the case within the IRS or bring it before the Tax Court. However, these are rarely used options. In most instances the case will be settled out of court./br>

Pay the Amount Owed Promptly

Perhaps the most important and least discussed aspect of the IRS audit process is payment. If the audit finds that you owe money, it is strongly advisable that you pay the amount as quickly as possible. Interest and penalties can escalate at a surprisingly rapid pace, so the sooner the money is paid to the IRS, the better your situation will be in the long term.

If you do not have the cash on hand to pay the amount all at once, there are plans available. The IRS has a number of different options, such as installment plans or even compromises on tax debts, for those who cannot afford to pay.

However, they are unlikely to make these options available to those who can afford to payment. They can also negatively affect your credit and are therefore not ideal options if there are other choices available.


Surviving the Audit #2: Keep Informed

August 18th

When entering the IRS audit process, one of the key mistakes many taxpayers make is not doing sufficient research beforehand. Being well-informed can be instrumental in the successful completion of an audit, as well as the prevention of paying any unnecessary taxes.

Research the Legal Issues

If you are preparing for an audit, one of the first steps is to perform some research on the relevant tax legal issues. Use free Internal Revenue Service legal publications as well as any available commercial tax guides.

If, after looking into these sources, you still feel unclear, it is advisable to speak with a tax lawyer. They will be able to inform you of the legal issues surrounding the audit, as well as how to appropriately present your documents to the IRS agent.

Know Your Rights

It is highly important that before entering an IRS audit, a taxpayer must be well-informed of their legal rights. The best document to read on this topic is the Taxpayer’s Bill of Rights. If unclear, again, it is recommended that you consult a tax professional for more clarification.

During the audit, there are a few rights that are especially valuable. If the audit is not going well, as the taxpayer you may request a recess to consult with a tax professional. You may also speak with the IRS agent’s supervisor if you think you are receiving any kind of unfair treatment, or document the treatment for future reference. Most importantly, if the issue of tax fraud arises, never try to handle it yourself. The taxpayer is always entitled to consult with a professional in those instances.


IRS Abandons Plan to Audit Major Political Donors

August 17th

tax auditThe Internal Revenue Service has abandoned its plans of auditing all major political donors just in time for the 2012 election season to begin in earnest, chiefly as a result of significant public backlash.

In May,  large-scale political donors were scrutinized through a tax audit. They sent letters to five major political donors informing them that their donations to nonprofit groups registered under section 501(c)(4) of the tax code were subject to gift taxes, and could be owed retroactively. These letters were aimed specifically at conservative political action groups which, for the first time since 1994, managed to outspend liberal groups.

Though the backtracking has been good news for many large-scale political donors, the IRS has not promised that they won’t pursue similar action in the future. The mailings have also resulted in many donors having since paid gift taxes on their contributions to ensure they were in line with the law. There is no clear word on whether or not these individuals can expect refunds.

Democrats Push to Control Independent Political Donations

Since the Supreme Court’s 2010 decision in Citizens United restored the right of businesses and unions to donate to independent political groups, Democrats have been desperate to find a means of containing all the biased speech entering the political arena. This most recent movement by the IRS is only the latest in a continued campaign against biased political speech.

Democrats tried to pass the Disclosure Act to impose new disclosure requirements on political donors as well as encouraged the Federal Communications Commission to demand disclosure from those that run the political ads.

It was in this same tradition that Senator Max Baucus pushed the IRS to crack down on political donors. However, the IRS has maintained that the decision to pursue audits of large-scale political donors was made by “career civil servants” and had no connection at all to the administration or any other kind of outside influence.

Whatever the cause, the investigation was designed to make an example of large-scale donors and discourage biased political speech. Despite the abandonment of the current plan, by leaving the possibility open of a future audit, the IRS has managed to leave the threat and uncertainty lingering over the heads of all political donors.


Surviving the Audit #1: Ask Questions

August 17th

For many Americans, the tax audit is a terrifying proposition. Taxpayers imagine the revenue agents as terrifying figures out to victimize innocent citizens. Feel reassured, this is not usually the case. In most instances, those who staff the Internal Revenue Service are usually trying their best to sort out mistakes and inconsistencies and are only aiming to charge you that tax which you owe.

However, by staying alert and adhering to a few simple practices, the audit can seem significantly less painful and a lot more manageable.

Do Not Assume the Tax Authorities Are Correct

Every year federal and state tax offices send out enormous numbers of letters to individuals and businesses informing taxpayers that they owe money. This does not necessarily mean that everyone who receives a letter will always in reality need to pay.

If you carefully gathered your tax information and had a qualified individual review your materials, it is likely that this letter will be incorrect. However, be sure to double-check your materials. Gather your tax information and review everything. It is also a good idea to have your tax preparer have another look at the materials to be certain.

When reviewing your materials, check to ensure you have possession of all relevant data. You are permitted to reconstruct anything that may be missing, and it is highly recommended that you do so.

Do Not Be Intimidated

Most agents of the IRS will not yell at, threaten, or otherwise mistreat a taxpayer. However, on occasion it does happen. If this does occur, be sure to react calmly. You may hire a tax lawyer to represent you if you feel like you aren’t making headway.

Simply speak with the agent’s supervisor, or document the behavior to be shown to the supervisor at a later date. It is also useful to have documentation of such conduct if it becomes necessary during an appeals process.



IRS Audits for the Most Wealthy

August 9th

Many of us tend to believe that the wealthiest among us are made exempt from many of the rules that govern the rest of society. But in recent months the Internal Revenue Service has proven that this is not the case by increasing the number of tax audits of those who make over $10 million by 73 percent.

This staggering increase in the number of audits in the highest income bracket means that, last year, the IRS managed to audit over 18 percent of taxpayers that met this criteria.

While historically it has always been true that those in the lower income brackets have traditionally been under greater scrutiny than higher income earners, the tables have certainly turned in recent months.

Last year, taxpayers earning between $5 million and $10 million were also among one of the most highly audited groups. Of these individuals the IRS managed to audit nearly 12 percent, representing a 54 percent increase from the year before.

Why the Increased Scrutiny?

The increased scrutiny on higher earners comes as, in the current economic climate; the Internal Revenue Service makes a concerted effort to boost its revue. Additionally, the current audits accompany an IRS move to combat concerns from a majority of the population that it favors the wealthy

To a certain extent, the IRS has already been successful in its efforts to draw out additional income through audits on the wealthy. Last year alone funds from audits jumped 18 percent to approximately $57.6 billion

The IRS has even created a special unit, the Global High Wealth Industry Unit, to specifically monitor this influx of activity. However, since many audits take a number of years to resolve, the IRS will need to gauge their progress and potential for profit over time.


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