Hanover IRS Tax Audit Lawyer
An audit by the Internal Revenue Service, sometimes call an examination, can occur for many different reasons. Frequently, an audit is triggered by a seemingly random application of a little-known algorithm: the Discriminant Inventory Function System (DIF). While the DIF typically focuses on anomalies or inconsistencies reported on a tax return, it can also be triggered by a certain level of income, a focus on new reporting procedures, or, for the unfortunate, bad luck. The DIF is a systemic means for the Internal Revenue Service to increase the results of its limited compliance resources. In addition to this mechanism, the Internal Revenue Service frequently audits potentially problematic returns reported through its Whistleblower Program, from information-sharing initiatives with other federal and state agencies, from information mismatches identified in third-party reports, from identification of abusive schemes, and through a host of other means. Over time and with advances in technology, the Internal Revenue Service has become increasingly adept at selecting potentially erroneous returns with specifically identified problems. Call our IRS tax audit lawyer in Hanover, MD today!
Once a tax return or group of returns has been selected for audit, the Internal Revenue Service will generally engage in one of three types of audits: (1) a correspondence audit, (2) a desk audit, and (3) a field audit. These classifications generally correspond to the manner in which the audit was generated and/or the level of sophistication of the issues involved.
Correspondence Audits
Generally, the most basic and least concerning the category of examination is a correspondence audit. These exams are usually triggered by a mismatch in the information reported by third parties to the Internal Revenue Service. For example, a third-party investment brokerage might report information to the Internal Revenue Service regarding investments sold in a year. If a taxpayer does not completely and consistently report the sale of the investment on its tax return – e.g., by not reporting the sale at all or by failing to include the same basis or holding information – it will likely trigger an audit notice, such as a Notice CP2000.
To rectify this potential error, taxpayers must provide correct information or otherwise substantiate the accuracy of the information already reported. Most correspondence audits do not involve technical issues or items involving an intensive review of individualized facts. With proper guidance and an understanding of the process, many correspondence audits can be resolved with relatively minor adjustments. In others, an adjustment may be warranted but can be easily and objectively accepted with a proper explanation of the law. In many cases, Crepeau Mourges can quickly and cost-effectively represent taxpayers faced with a correspondence audit.
Desk Audits
The second type of exam conducted by the Internal Revenue Service is a “desk audit,” sometimes called an “office audit.” Many self-employed taxpayers filing a tax return with a Schedule C are selected for this type of audit. In these audits, a taxpayer will receive a letter with a pre-determined date requesting the taxpayer to appear in an office of the Internal Revenue Service with specific substantiating documents and information to support their tax return. A tax examiner will interview the taxpayer and review the substantiation. These meetings can last anywhere from one hour to an entire day.
At a minimum, if you are selected for a desk audit, it is recommended that you consult a tax professional before appearing before the Internal Revenue Service. In these consultations, you can discuss the potential issues involved in the audit, the documentation that will likely be needed to support the tax return, and what to expect during the process. In the alternative, a taxpayer may retain tax counsel to handle the exam on their behalf. While more expensive, the latter option is typically warranted for those tax returns with limited substantiation, incorrect positions, and/or where a nervous taxpayer is involved. Crepeau Mourges frequently handles and advises taxpayer or their tax preparers with respect to desk audits.
Field Audits
The final category of the examination conducted by the Internal Revenue Service is the “field audit.” Unlike the prior types of audits, these engagements are very involved, can take months or years, and can require taxpayers to produce large volumes of personal and financial information. These examinations are serious matters typically involving complex issues and substantial potential taxes and penalties.
These in-depth audits are conducted by some of the most sophisticated revenue agents employed by the Internal Revenue Service. Many agents have advanced degrees in accounting or finance, and some have designations as Certified Public Accountants and lawyers. It is not uncommon for multiple revenue agents to be involved in these matters and, in some cases, for government attorneys to be involved.
Aside from the experience of the personnel involved, these examinations involve a much greater level of information-gathering. In most, the Internal Revenue Service requires an interview with either the individual or key personnel of the business. Most examinations also involve a tour of a taxpayer’s home and/or business. To make matters worse for taxpayers, revenue agents are well-versed in the law and common problem areas on tax returns. When taxpayers are evasive or are otherwise unable to provide a legally substantiated response to all issues, revenue agents will resolve doubt in favor of the Internal Revenue Service.
In almost all circumstances, a taxpayer should retain a competent tax attorney to handle a field audit conducted by the Internal Revenue Service. Revenue agents have been known to push, and perhaps overstep, the boundaries of taxpayer rights when dealing with unrepresented businesses and individuals. Experienced and competent tax counsel should understand these boundaries and vigorously defend those rights for a taxpayer. These actions are needed as, if left unchecked, revenue agents can, and will, turn a field audit into a tedious and invasive fishing expedition. And, as more time passes and examinations are permitted to be unnecessarily expanded, it provides additional ammunition for revenue agents to make criminal referrals, expand the audit into other years, and find inventive ways to increase proposed assessments of additional taxes and penalties. For these reasons and more, it is strongly recommended that those selected for a field examination engage an experienced and competent advocate. Crepeau Mourges routinely represents individuals and businesses in field audits and will work to achieve the best result possible in light of the gravity of the situation.
How to Protect Yourself from a Tax Audit
Tax audits can be intimidating and stressful, and it’s important to know the best ways to protect yourself from the possibility of an audit with the help of a Hanover, MD IRS tax audit lawyer on your case. A lawyer can provide valuable insight into the best steps you can take to minimize the chances of a tax audit — fortunately, there are steps you can take to protect yourself from the possibility of an audit, but if you still find yourself facing one, contact an attorney immediately at Crepeau Mourges today.
- Keep Good Records
Having good records is the most important way to protect yourself from a tax audit. When it comes to taxes, you should never underestimate the importance of documentation and accuracy. Make sure you are keeping accurate and detailed records of all your income and expenses, including receipts for all business transactions. This will give you the evidence you need to back up any deductions or credits you may claim on your tax return. In addition to income and expense records, you should also keep copies of all forms, including your W-2s, 1099s, and other forms related to filing your tax return. Keeping all of your paperwork organized in one place can help ensure that all of your information is readily available if you are ever asked to provide proof or backup documentation.
- Know What You Can Deduct
When it comes to protecting yourself from a tax audit, it’s important to understand what you can and cannot deduct. A Hanover IRS tax audit lawyer recommends that you familiarize yourself with the various deductions that are allowed by the IRS. Keeping track of all the expenses you incur throughout the year and understanding which ones you can deduct can help you avoid an audit.
Some of the common deductions available include:
- Mortgage interest and real estate taxes
- Medical and dental expenses
- Job related expenses
- Home improvement costs
- State and local taxes
While it is possible to complete your taxes on your own, it’s highly recommended that you seek the advice of a professional tax preparer or lawyer if you have any questions or concerns. They can help ensure that you’re following all the rules and regulations while also helping you maximize your deductions.
- Understand the Difference Between Personal and Business Expenses
Personal expenses are those related to living, such as rent or mortgage payments, food, entertainment, transportation, and clothing. Business expenses, on the other hand, are related to running your business, such as office supplies, wages paid to employees, advertising, equipment, travel expenses, and more. It is important to differentiate between the two as you can only deduct business expenses from your taxes. Any personal expenses that you use for your business must be separated and only the portion used for business purposes can be deducted.
- Don’t Ignore the Letters
One of the biggest mistakes people make when dealing with a potential tax audit is ignoring letters from the IRS. It’s important to take any correspondence from the IRS seriously and respond to them in a timely manner. Failure to do so can lead to penalties and even criminal prosecution. When you receive a letter from the IRS, it’s important to read it thoroughly. You may have received it because of an issue with your taxes, such as an error or discrepancy. If this is the case, you should act promptly and work with a tax lawyer or accountant to address any issues.
- Seek Professional Help
When it comes to navigating the tax system, it’s important to have professional help. A tax lawyer or accountant can provide invaluable advice when it comes to protecting yourself from a tax audit. They understand the ins and outs of the law and can provide guidance on what you should and shouldn’t be claiming on your tax return. A tax lawyer can provide tailored advice on how to minimize your risk of a tax audit and offer support in the event that you do receive an audit notice. They can review your documents and ensure that everything is accurate, compliant and up to date. Professional help can save you time and energy and give you peace of mind knowing that your taxes are taken care of correctly. Contact a Hanover IRS tax audit lawyer today at Crepeau Mourges!