From the Tax Law Offices of David W. Klasing - How To Survive a Tax Audit When You Have a History of Blatantly Cheating
IRVINE, Calif., Feb. 10, 2022 /PRNewswire/ -- Receiving a notice that you're being audited by the IRS, or another state tax agency is daunting under any circumstances. However, the worry and concern can be overwhelming when you have a history of knowingly making misrepresentations or intentionally under reporting your taxable income on your federal or state income tax returns. If you find yourself in the circumstance, and your tax return(s) is/are now under audit, your top concern should be avoiding the inherent criminal tax exposure associated with an Egg Shell or Reverse Egg Shell Audit. Taxes are complicated, and your situation may not be black and white.
An experienced dually licensed Criminal Tax Defense Attorney & CPA will be invaluable to you during this emotionally challenging time and relieve the overwhelming stress and sleepless nights these high-risk audits can cause. To schedule a consultation with an experienced dual licensed Tax Attorney & CPA to discuss a potential audit, contact David Klasing.
Small and Midsize Businesses Tax Returns
Generally larger, public companies receive less scrutiny by the IRS, due in part to the already-strict reporting regulations imposed on them by the Securities and Exchange Commission (SEC). The SEC requires that a third-party auditor review a public company's tax statements. Because there is less oversight when it comes to middle market to small businesses, their tax returns are more likely to be audited by the IRS or state tax authorities when they suspect the numbers aren't right.
Businesses that are primarily conducted using cash and rely heavily on cash receipt ledgers are more likely to be audited than other businesses. This typically applies to most businesses in the service industry (i.e., hair and nail salons, spas, etc.). Should your business's tax return raise suspicion, it will likely be due to concerns about the business hiding cash sales or inventing or exaggerating expenses. Even more concerning to the IRS will be a pattern of tax returns claiming losses.
Claiming large unsubstantiated expenses will draw negative attention to your business by the IRS, making it more likely that you and your business will be audited. A business that does not appear to make rational amounts of income over time will also raise suspicion. Logically, a business consistently reporting little to no income, or low income, cannot continue to operate because it wouldn't be reasonable to do so and may run afoul of the hobby loss rules.
The IRS is more likely to conduct an audit when the numbers appear to have been rounded, contain to many even numbers, or too many zeros, under suspicion that they have been intentionally manipulated, or are estimates, rather than actual numbers.
Personal Tax Returns
Amongst average taxpayers, the more common misrepresentations the IRS is known to audit or criminally investigate concern how many dependents they claim, the legitimacy of the itemized deductions or tax credits claimed and failing to report gambling earnings. It is also very common for high income wage earners to claim a fake offsetting Schedule C business loss to illegally lower their tax liability.
Many taxpayers who own businesses will have to file both a personal and business tax returns. It is not uncommon that a taxpayer filing a personal return and business return will attempt to underreport their business's income by trying to claim nondeductible personal expenses as business expenses. Your tax position as a businessowner is more likely to garner attention when the numbers don't make statistical sense in comparison to your competitors for the business that you are in.
Your financial involvement and transactions with other taxpayers and or business entities who are being audited or criminally investigated can lead to you facing an audit or criminal investigation as well. You should immediately contact an experienced dual licensed Criminal Tax Defense Attorney and CPA once you receive notice that your being audited, interviewed, or criminally investigated based on your involvement with another person or entity that is under audit or criminal tax investigation.
Even when it is discovered that these other taxpayers, business entities or tax preparers are primarily culpable, The IRS can still become aware of any intentional understatements / tax crimes that you may have potentially been engaged in. Loyalty does not exist when it comes to audits or investigations when there are heavy civil and criminal penalties and potential prison time, at stake. Your esteemed and trusted business partners will gladly throw you under the bus to mitigate their own civil and criminal liability especially while attempting to avoid any perceived risk of serving time in prison.
Counterintuitively, you are required to report income that is gained through illegal means such as through the sale of illegal drugs, prostitution services, fraud, embezzlement, and other illegal activity you might have been engaged in. However, you shouldn't take a decision to report illegal income lightly, and you should seek an experienced dual licensed Tax Attorney and CPA's assistance to determine what can be done to limit your culpability and exposure.
In addition, you should be aware that your original tax returns can still come under attack even when amended tax returns have been submitted. Suppose you made intentional misrepresentations on the initial tax return, and on your own accord, decided to make things right. While this is commendable, it will not absolve you of any civil and criminal tax liability related to the original returns. The amended returns do not impact the selection process with respect to the original returns you filed. Moreover, the amended returns will go through their own screening process and could still come under audit or criminal investigation.
Amended returns can be viewed as criminal admissions and will restart the three year statute of limitations. While you may think the IRS or applicable state taxing authority will believe your actions are as commendable as you do, you are sorely mistaken. Attempting to make your wrongs right will not prevent criminal tax charges related to the original or amended returns. As the IRS sees it, you shouldn't have lied to begin with. For this reason, you should contact a seasoned dually licensed Criminal Tax Defense Attorney & CPA prior to filing amended returns to discuss the best manner to correct any pattern of intentional misrepresentations you've made in the past.
The Audit Process
It isn't as easy to sneakily understate taxable income without getting caught as you may think. Any good auditor can spot the telltale signs that your books have been cooked. Most auditors have a bachelor's degree in accounting and are trained to look beyond the numbers. Additionally, as fraud detection technology continues to advance, it is becoming increasingly harder to lie on your tax returns and avoid the civil and criminal tax exposure that will naturally result. It is important to realize that most tax returns aren't reviewed by individual IRS agents as part of the audit selection process. With nearly 230 million federal tax returns to review each year, the IRS uses technology that statistically recognizes when taxpayers most likely have submitted inaccurate income tax returns. This technology not only makes tax returns easier to review, but also eliminates at least some human error that would otherwise occur during the initial review process, making it less probable that you won't be caught when you've made intentional misrepresentations on your returns.
These various computerized technologies catch reporting irregularities in tax returns by comparing the data you've provided with data supplied by various similarly situated third parties. All returns receive a "score" that is based on the tax return you provided in statistical comparison to tax returns submitted by similarly situated persons and/or business entities. The higher the score, the more likely it is that there is taxable income that has been understated. Once a tax return has been tagged by the IRS as likely to contain inaccuracies, the IRS will determine whether it is necessary to audit or criminally investigate, which is the ultimate purpose in conducting a tax audit or criminal tax investigation. Not all inaccuracies will merit a thorough investigation into the records in question. However, the chances that any given taxpayer will face an eggshell or reverse egg shell audit or be criminally investigated dramatically increase based on any badges of fraud apparent in the fact pattern.
Once the IRS has determined that an audit is necessary, the audit can be conducted by various means. The IRS can request that certain documentation be sent, the IRS can request an in-person meeting where an extensive interview is likely to take place concerning your businesses practices and the ability to substantiate tax returns, or a meeting can take place at your home or business where a high-risk examination will be conducted on every line item contained on your business and/or personal tax return(s). You should assume that the more involved the audit is, the more likely it is that you will bear civil or criminal tax liability, and the greater the need to seek a dually licensed Tax Attorney & CPA's assistance.
It does not automatically make you a crook to receive an audit notice. However, an audit should be handled with care and the utmost caution. Audits are often costly, stressful, and last a long time. Audits can last longer than a year, depending on the complexities involved, the documentation requested, the parties' availability to schedule and conduct meetings, and whether you agree with the ultimate conclusions made by the IRS or another state taxing agency.
Intentional Misrepresentations
Should you have a long history with making misstatements on your personal or your business's tax returns, or purposely engaged in inaccurate tax accounting and reporting methods, there is still redemption, especially where you are not currently under audit or criminal tax investigation.
When a taxpayer that has intentionally committed tax crimes (including un-filed foreign information returns and affirmative evasion of U.S. income tax on offshore income), and reports the tax fraud themselves (including a pattern of non-filed returns) via a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution, while simultaneously receiving a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very tax preparer that you hired from potentially being required to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation, or prosecution. Moreover, only an attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law, which is considered a crime. Only an attorney trained in criminal tax defense is competent to understand the risks and rewards involved in voluntary disclosures and how to protect you when you are unable to receive a voluntary disclosure.
To avoid risking an inadvertent criminal tax admission, it is best to create some distance between you and the auditing agent. You should contact a dually licensed Tax Attorney and CPA immediately and avoid voluntarily engaging in communications with the IRS absent an attorney's presence or consent. This does not mean that you should become MIA and ignore the auditing agent and the inquiries. The IRS does not go away, and the IRS will not let up because you can't be reached. Rather, it is best to seek representation and obtain a representative who can act as an intermediary between you and the auditor or investigator. An attorney can help you avoid making any inadvertent admissions that could prove that you intended to engage in tax evasion.
Because intent is the hardest element to prove when it comes to imposing criminal tax penalties, an attorney's assistance is imperative throughout the audit process. By letting an experienced tax attorney guide, you through the audit, you can take a step back and avoid engaging in conduct that IRS and other tax auditors or criminal tax investigators could view as exhibiting behavior driven by remorse. In this sense, an attorney can help you avoid providing direct evidence that can be garnered by your statements, conduct and body language and can later be used against you should the IRS decide to prosecute. Because anything you say can and will be used against, you are likely your own worst enemy when it comes to an audit or criminal tax investigation.
Absent direct evidence that you have engaged in tax evasion, circumstantial evidence will be procured to attempt to prove your guilt. However, circumstantial evidence is not given the same weight as direct evidence, making it much harder to prove the tax agency's case against you. Generally, circumstantial evidence may include your tax records and books, admissions and statements made by employees, and evidence provided by any other additional third-party with or without your knowledge. While there is ultimately no avenue to avoid a taxing authority procuring circumstantial evidence against you, it is generally much easier to overcome circumstantial evidence than direct evidence at trial.
When intentional misrepresentations have been made, it is likely that that you don't have documents to prove items on your tax returns and you may need to reconstruct it using third-parties' records. However, taking this task on alone without legal assistance is not recommended under any circumstance. While it may be necessary to obtain these records to reconstruct your transactions, these third parties are likely to be questioned or subpoenaed by the IRS or state tax authority, so it is best to have your Attorney handle any interactions with them.
When you have intentionally tampered with your numbers, it is impossible, or at minimal, unlikely, that you'll be able to back up your transactions unless the bookkeeping and records have been manipulated to match your stated income. For this reason, it is necessary to obtain a dually licensed Tax Audit Attorney and CPA immediately to try and get your bookkeeping and records in compliance to attempt to mitigate your civil and criminal tax liability. Your attorney will often attempt to create reasonable doubt with the auditing or investigating tax authority as to faulty accounting potentially leading to the misstated tax returns as opposed to blatantly willful criminal tax conduct.
When you don't have the documentation to substantiate your tax returns, you may need to reconstruct the items using third-party records. While it may be necessary to obtain these records to reconstruct your transactions, these third parties are likely to be questioned by the IRS should it be necessary to investigate. While the financial damage may have already been done and you will likely be pinned with civil liability, a Tax Attorney dually licensed as a CPA can help you get you and your business in compliance with the tax regulations at issue and can help limit continued ongoing exposure.
While you may think that you can handle the IRS or any other state taxing agency on your own, you are taking on an extreme risk that can result in life changing civil and criminal exposure if you are wrong. Given the inherent presumption that you are guilty until you prove you're innocent, intentionally underreporting your income makes the chances that you can outsmart the taxing authorities slim to none. As uniquely trained and extensively experienced Criminal Tax Defense Tax Attorneys & Kovel CPAs, we provide a one stop shop to adequately achieve optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us.
The Consequences
Severe consequences can result when an individual taxpayer or a business files tax returns that contains blatant and intentional inconsistencies. Even innocent mistakes that may seem minor can lead to an extensive investigation into your business practices. Once the audit is complete, there are three possible outcomes: it will be determined that the taxpayer does not owe money to the IRS, which is rare (particularly when intentional misrepresentations have been made), the taxpayer owes additional money and interest to the IRS and civil and/or criminal penalties could be imposed, or the case could be passed on to the IRS's criminal investigation division so that the case can be developed and prosecuted. The chances that you'll be criminally prosecuted and potentially serve time in prison skyrockets once the audit is handed to the IRS' criminal investigation division, which has a 90% conviction rate.
If you have not submitted a tax return for one year or longer, or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back incompliance with state and/or federal regulations without enduring criminal prosecution.
David Klasing has dual credentials as both a Tax Attorney and a CPA with a master's degree in taxation. David has an expansive understanding on the auditing process and the methodology used by the IRS and state tax authorities to both criminally investigate and develop a case for criminal tax prosecution. Based on his extensive experience working with the IRS, FTB, CDTFA, EDD and BOE, he is uniquely equipped to assist you as he anticipates the steps the tax agency will take prior to those steps being taken, leaving you exponentially less likely to be exposed to draconian civil fraud penalties and/or criminal tax prosecution. Although David is based in California, he has three decades of experience in serving clients across the nation, and internationally, concerning primarily their federal civil and criminal tax liability. No matter what state or country you reside in, David can provide counsel in federal tax controversy, planning and compliance matters.
To schedule a reduced rate initial consultation and learn firsthand how David Klasing Esq. M.S.-Tax CPA and his team can assist you during this critical time, contact David Klasing by calling 800-681-1295 or schedule online HERE.
Here is a link to our YouTube channel: click here.
Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]
SOURCE Tax Law Offices of David W. Klasing, PC
News published on and distributed by:
