As an attorney who assists clients with tax audits, I have observed the serious repercussions that even minor mistakes can create. It is crucial that small business owners adhere to record keeping rules, not only to avoid audits, but also to save on attorney fees. Audits can be a daunting experience for anyone, especially for wealthy individuals, and business owners who are successful often end up having issues due to poor bookkeeping. The COVID-19 pandemic has led to a rise in tax audits, as the IRS has announced several times.
The IRS selects tax returns for examination through several methods, including computer programs that compare tax returns to industry statistical “standards,” bank notifications of transactions over $10,000, and a “Dirty Dozen List” of known fraudulent transactions. The latter is a list published annually by the IRS, and the IRS pays close attention to tax returns for items listed there. Additionally, the IRS audits most companies that have applied to receive an Employee Retention Credit (“ERC”), as there are promoters all over the country who trick unqualified people into claiming credits. The IRS also targets nonpayment of federal income taxes, conservation easements, fuel tax credit violations, cryptocurrency reporting, and gambling earnings.
The general process of an audit begins with the IRS sending a notice and referring the taxpayer to a tax agent. The IRS then sends an Information Document Request (IDR) to request a list of documents, followed by an interview with the taxpayer. Preparing for the interview is essential, including reviewing previous responses to the IDR and previously provided documentation. After the interview, the tax office may conduct an on-site visit to confirm that the company is engaging in the activities described in the interview. Once the investigation process is completed, the IRS issues a report and holds a final meeting.
It is advisable to consult an attorney as soon as you receive notice from the IRS. Lawyers provide crucial insight into the tax office’s motives and questions, and their presence can help alleviate tension. It is pertinent to maintain clear and accurate bookkeeping records, as the IRS has the power to contact a third party if it suspects fraudulent activity. In addition, keeping accurate records can simplify the audit process and prevent incurring more legal fees than necessary.
In conclusion, as a tax accountant and attorney, my goal is to simplify the internal revenue law. I aim to reduce client stress by providing legal strategies that reduce the tax burden, assist in the audit process, and help individuals and businesses repay taxes. I enjoy spending my free time with my family, and I believe that maintaining accurate and clear records is critical in preventing audits and legal fees. Follow our LinkedIn page for more tax law insights.