How the IRS Audit Works

There are 3 ways the IRS can perform an audit:

  • Automated Underreporter Program (missed informational returns)
  • Correspondence
  • Field Examination

If you are being audited by the IRS, you should always come prepared:

  • Prior tax returns have to be filed.
  • You also have to build a rapport with the examiner.
  • Be cooperative.
  • Prepare and label income and expenses transactions (include explanations).
  • Ask for written interview questions and go over them, then respond in writing (This protects you from self-incriminating). Don’t forget that you can’t win on every issue.

Why do you have come prepared? Potential penalties are 20% of underpayment, 75% of the underpayment. How to avoid it: show that you had a reasonable cause to underpay the tax and acted in good faith.

  • Never lie to the IRS agent.
  • Stay on track with the schedule of when you need to turn in your supporting documentation.

Don’t forget that you have 5th Amendment Right regarding the IRS audits. You can invoke this right to refuse to answer questions. (It usually doesn’t apply to producing documents). Although, invoking the 5th Amendment may be negatively viewed by the Court regarding assuming that you have something to hide. Although, it is your right.

  • Don’t forget to file the letter of appeal.
  • If you don’t respond to the 90-day letter, the tax liability then can be argued at Tax Court.

Potential Federal Criminal Charges:

  • Tax Evasion
  • Willful Failure to file
  • Corrupt Interference
  • Conspiracy to Defraud the U.S.
  • Making False Statements.

What are the red flags for the IRS to consider the criminal charges:

  • Inability to substantiate expenses
  • Admitting to not reporting
  • Participating in illegal tax shelters
  • History in efforts to evade collection
  • Not communicating

Reference to ASTPS.com

Also, it is important to remember the Tweel case, where the 5th Circut Court of Appeals held that civil examination can not be used to conduct a criminal investigation. That would constitute public deceit.

IRS Civil Enforcement

  • Levies,
  • Liens,
  • Seizures.

Employment Tax Compliance

IRS Revenue officers can show up unannounced at your place of business to conduct a field interview. The officers are expected to secure collection information and view assets in the field. If your business is a non-filing business, you may expect the IRS Revenue officer to visit your place of business at some point.

  • Your first step is to find what causes the problem in your tax matters and try to fix it.

According to the IRS, around 32% of overall America’s taxes come from Payroll. This is the primary reason why the IRS doesn’t take is slightly when an employer doesn’t withhold payroll taxes.

What are the actions that the IRS take? 

  • Trust Fund Penalty (up to 100% of responsible individuals’ and seize their assets)
  • Levy, DETL, Successors, Seizures (Account Receivables, Assets)
  • Collaborative Initiatives with DOJ and IRS CI (Court. If you are found in contempt of court it can lead to incarceration)
  • Suits for Injunctive Relief
  • Criminal Referrals

Treasure Department offers you to sign up at EFTPS free. If something is out of the ordinary the EFTPS will send an e-mail to the owner (FTD Alerts). That way the owner has time to address the issue.