A tax extension grants you an additional six months to file your taxes. You’ll have more time to gather your documentation, file your forms and enlist a tax pro if necessary.
Filing an extension doesn’t increase your audit risk. Depending on your return, filing an extension may actually lower your audit risk, especially if you take the extra time to double-check all the information you provide on your return. Most audits stem from incomplete, inaccurate or missing information on tax returns.
At the same time, an extension could increase your overall tax liability. If you’re not able to pay your tax bill by April 15, you’ll begin to accrue interest and penalties on the balance until it is paid in full. If you find your tax bill to be beyond your reach, you do have the option of consulting with a tax advisor who can inform you of your options and possibly negotiate with the IRS on your behalf.
If you suspect you can’t file by the April 15 deadline, it’s still a good idea to estimate how much you’ll owe in taxes and to pay the balance on or before the April 15 deadline. You won’t have to hassle with late fees or penalties and you can concentrate on filing for your extension and gathering the needed documentation so you can file your return before the extension expires.
No one likes the thought of facing an audit, but you most likely won’t face an increased audit risk if you file an extension. While you’ll face late fees and penalties on your tax bill if you don’t pay by the April 15 deadline, an extension in and of itself won’t trigger an audit.
Just remember to provide all the requested information on both your extension request and your tax return, and double-check your figures for accuracy before filing your return. In terms of audit risk, it’s much better to have an accurate extended return than an incomplete or inaccurate return filed quickly on April 15.
Taxpayers have a variety of tax professionals at their disposal: CPAs, tax preparers, tax attorneys and Enrolled Agents. If your tax scenario is more complex than average, an Enrolled Agent is the idea person who can give you tax planning advice based on your specific tax situation. Here’s an overview of the role of Enrolled Agents.
Enrolled Agents and CPAs
While both of these professionals can be of great help to you during tax season, their roles are different. A CPA is trained to provide general financial and tax advice. An Enrolled Agent is specially trained in taxation, which means they have the background and the knowledge to understand, interpret and apply tax codes to various taxpayer scenarios.
An enrolled agent would be of help to you if you run a business, own a tax shelter, or have passive income/losses. CPAs can also act as Enrolled Agents.
Training for Enrolled Agents
As with any process related to the IRS, Enrolled Agent training is lengthy. Candidates must qualify by either working for the IRS for five years in a role that required them to know and apply tax code regulations. Candidates who haven’t worked for the IRS for five years can qualify by sitting for an intensive exam that covers all aspects of IRS tax code and regulations.
Enrolled Agents must then maintain their role by participating in continuing education courses that keep them up to date on rapidly changing tax codes.
How An Enrolled Agent Can Help
An Enrolled Agent has the authority to offer specialized tax advice for taxpayers, and they may legally represent you in audit hearings. In addition, they can offer tax planning advice throughout the year, especially if you own real estate or investment properties. An Enrolled Agent can also advise you on tax matters regarding owning a business or corporation, or if you’re considering investment income opportunities.
If your tax scenario is more complicated this year, or if you just want to check in with a tax pro, we have Enrolled Agents on staff who can help. Get started today by clicking on the white “Start Chat” button at the top of our page, or give us a call at 888-224-3004.
As with any automated technology, robo-auditing has created more problems than it has solved. This time-saving but impersonal approach has led to more and more honest taxpayers getting the short end of the deal in terms of selection for audit. Here are some ways to legally bypass the automated system:
File your return by snail mail: Sure, this may take longer and it could be weeks before you see your refund, but an actual person will screen your returns instead of the an automated system. He or she will still screen your return for errors or missing/incorrect information, but there is also the advantage of a real live human being reading your return: they are easily able to determine which information warrants an audit and which return doesn’t.
Use discretion when posting to social media: Tax evaders and fraudulent taxpayers who post humblebrags on social media about their extra money, possessions, cars and vacations will catch the IRS’s attention in no time.
First and foremost, be honest: The best way to avoid an audit–automated or otherwise–is to be honest and consistent when reporting your income on your tax returns. In doing so, the prospect of an audit shouldn’t worry you regardless of how you file your returns.
The IRS takes tax fraud seriously. If the IRS has reason to suspect the information on your tax return is fraudulent, you could end up facing an audit. By being honest and forthright with the information on your returns, you reduce your chances of your return getting flagged for an audit.
You’ve sent off your tax returns and hope the IRS doesn’t come calling for one reason or another. You dotted your i’s, crossed your t’s, triple and double-checked your figures, and signed your return. Perfect.
Not so fast. The IRS screens each and every return it receives, using a point assignment system known as the Differential Inventory Function System (DIF), which assigns a score to every tax return. If a return receives a high enough score, it’s flagged for an audit.
Here are some of the items that can trigger a higher DIF score on your return: W2 or 1099 information that doesn’t match the information on your return, third party information (public records, newspapers, and individuals) about possible activity that isn’t in compliance with tax codes, and entries that are questionable in the eyes of the IRS.
If the system flags your return for review or audit, by law the IRS must notify you in writing to give you enough time to prepare for the review or audit (also called an “examination”)
This is wherePublication 556comes in. This form describes the audit process and details your rights in an audit. Read it carefully and follow the instructions. Whatever you do, don’t set it aside hoping the IRS will “forget” about your return. The IRS, like an elephant, never forgets.
Your Next Steps
You may decide to enlist a qualified tax pro to help you with your case. Here are some good reasons to consider hiring a tax advisor:
The thought of interacting with the IRS on any level leaves you feeling intimidated.
You’re not familiar with the tax codes as they apply to your case
You’re not sure of the limitations of the law as it applies to your case
You would rather have a subject matter expert deal with the IRS
Less stress for you.
While you have the legal right to represent yourself in an IRS audit, hiring a tax pro makes sense if any of the above apply to you. While a tax pro can’t guarantee a great outcome, you do have better odds of reaching a reasonable settlement with a knowledgeable tax pro; after all, they deal with tax codes for a living and are subject matter experts when it comes to all things IRS.
If you’re de-cluttering at home or work and come across a stack of past years’ tax returns, your first instinct would be to shred them. After all, who doesn’t like a clean, organized file cabinet? Before you bust out the shredder, here are a few guidelines to keep in mind regarding your tax paperwork.
The IRS has a three-year window in which they can select your tax return for an audit, so the safest thing to do is to keep your tax records for at least three years. Here are some forms that should be kept with your tax return:
Your 1040 with all schedules, along with any receipts supporting your itemized deductions.
Income forms such as W2 and 1099 forms
Bank statements, K-1 forms, asset statements such as stocks and bonds
Sales receipts for any asset you sold during that tax year.
Since your 1040 form and income forms contain your social security number and other sensitive information, keep your tax records in a secure spot in your home.
If you filed your tax returns online, print out and keep a hard copy. In most cases, it’s best to hang onto your tax return copies indefinitely, especially if you bought or sold assets (stocks/bonds) or real estate.
If you filed a more complex tax return (business, estate or partnership returns for example) you should keep them for up to seven years, particularly if you’re self-employed. Same goes for any supporting documentation for those returns.
Unfortunately, the IRS tends to scrutinize small businesses more closely and tax returns with the Schedule C (self-employment attachment) tend to be more vulnerable to an audit.
If the IRS has reason to believe that you have filed a fraudulent return, they can follow up at any time; there is no statute of limitations.
If the IRS also has reason to suspect you deliberately under-reported your earnings by 25 percent or more, they will come calling regardless of how many years have passed.
In other words, play fair and chances are the IRS will leave you alone.
In any case, if you’re not sure how long you should keep your tax records, check with a qualified tax pro who can answer your questions.
Each tax scenario is different, so if you’re purging old paperwork in the name of getting organized, be sure the check with a qualified tax professional before shredding any old returns and supporting records; Googling isn’t enough in some cases.
When in doubt, consult a tax pro who can help you address the sometimes complicated question of “How long do I need to keep this, anyway?”
You come home from a long day at work to find an IRS notice in your mailbox. You tear open the envelope to find an audit notice…or worse. You know you should have a representative by your side, but which one? Today we’re going to look at a few situations that are best handled by a tax attorney.
You open your mail to find an audit notice from the IRS. At this point, it’s hard not to think of the worst possible outcome. After all, you’ve never been audited before.
The audit process is a legally binding contract between you and the IRS. Just as you wouldn’t go to civil court without representation, the same applies to dealing with an audit.
A qualified tax attorney can represent you during the audit process and explain the proceedings to you in a way that you’ll understand…free of jargon and legalese.
Your tax attorney will also see to it that the audit progresses in a timely manner, otherwise known as due process.
Your tax attorney can also negotiate with the IRS on your behalf, make payment arrangements if you owe any penalties or fees after the audit, and file for penalty abatement on your behalf.
If the thought of interacting with the IRS on any level renders you speechless or unable to convey your situation clearly, you’re not alone. At the same time, if you’re one of those who can’t communicate well under pressure without getting intimidated or flustered, a tax attorney is a wise investment.
They can not only interpret IRS jargon, but they can also communicate directly with the IRS on your behalf via phone, letter, or email.
Furthermore, a tax attorney can also push back if the IRS agent tries to intimidate them. Tax attorneys deal with the IRS for a living, so there isn’t any tactic they haven’t dealt with before.
The IRS has the right to file criminal charges against you if they have reason to believe that you are either purposely avoiding tax payment (tax evasion) or are hiding income from the government or falsifying your tax returns (tax fraud).
Both charges carry severe penalties, including jail time. If the IRS files criminal charges against you, your first course of action is to “lawyer up” AKA hire a tax attorney.
After carefully evaluating and researching your case, your tax attorney can determine whether or not you can receive a lesser degree of punishment, and they can represent you in court.
If for any reason you neglect to file your tax returns, you’ll want an attorney to plead your case to the IRS. Those missning returns will need to be accounted for a filed.
The IRS may have some serious questions regarding the missing tax returns, and the circumstances under which they were missing, e.g., why they weren’t filed in the first place. Your attorney can not only communicate with the IRS on your behalf, they may be able to work toward a more manageable outcome after you file those past due returns.
You should retain a tax attorney whenever you are faced with an audit, criminal charges, or need to file past due returns. A competent tax attorney can communicate and negotiate with the IRS on your behalf, which can save you time and money in the long run.
If you’re facing a serious tax matter and need legal representation, we have qualified tax attorneys on staff to help you. Don’t let a notice from the IRS ruin your day. Give us a call or click the white “Start Chat” button in the upper-right hand corner of any of our webpages. Don’t go it alone when dealing with a serious tax matter. We can help.
In many ways, owning a business can be rewarding: the chance to be your own boss, to conduct business in a way that is line with your own values, and to hire staff that you think will get the job done. The IRS wants to make sure you are paying the taxes that you rightfully owe and aren’t committing fraud. Here are seven small business practices that can tip off the IRS and trigger an audit:
1. Regularly Claiming Business Losses
In some industries, this can’t be helped. Sometimes expenses far outweigh profits. Running at a loss also reduces your overall tax burden, and so the IRS is going to take an interest in businesses that report losses for two of the past five years. The IRS in this case has the option of re-classifying your business as a hobby, so you’ll want to keep meticulous records and provide documentation that can substantiate those losses.
2. Exceptionally High Salaries To Employee/Shareholders
If you are paying a higher than average salary to employees that are also shareholders in your company, the IRS will have one question foremost in their mind: Why are they being paid substantially more than others on your payroll?
3. Claiming Personal Expenses As Business Expenses
The IRS looks very closely at expenses such as medical, meals/entertainment, cell phone and travel when dealing with a small business. Unfortunately, there have been shady business owners who have had a field day with claiming personal expenses as business expenses.
Your business could attract closer IRS scrutiny if expenses in the above categories tend to be outside the norm for comparable businesses in the same industry. The burden of proof will be on you or your tax pro to demonstrate those costs were normal and customary in the course of running the business.
Keep detailed records of your business-related expenses and keep all receipts associated with them. In the event you are selected for an audit, you will be able to substantiate your claims.
4. Claiming Personal Vehicle Use/Expenses as Business-Related Vehicle Expenses
It may be tempting, but don’t do it. Nothing sends up an “audit me!” red flag to the IRS like vehicle expenses.
If your car is registered in your name but you are using it to conduct business, the IRS will look at this more closely than if the vehicle were registered in the name of your business. While not every business owner can finance a car under the business’s name, every business owner can and should keep detailed records of vehicle use for business.
Keep track of business-related mileage, fuel costs, insurance, registration and other related expenses. Only claim what is allowable under law. Keep all supporting documentation in case your business returns are audited. You will need these to support your claim of business vehicle expense.
5. Cash Business
Businesses such as hair salons, restaurants, home day care, and car washes have a higher proportion of cash transactions than other businesses. Be sure to issue a customer receipt for every transaction to document cash flow in and out of the business. Keep detailed payroll and expense records, and hold on to all supporting documentation in the event of an audit.
The IRS looks very closely at cash-based businesses, even if there is no wrongdoing on your part. Detailed records and copies of issued receipts will go a long way toward reassuring the IRS you are not committing fraud or laundering money.
6. Making Late Payments or Filing Late Returns
If you are consistently late in filing your business return or paying taxes, you could increase your risk of an IRS audit.
Make every effort to file your business returns and to pay your related taxes on time. The IRS may suspect you or your business of fraud or other tactics in light of late payments or returns, so timely payments and returns will be to your benefit.
7. Shifting Income to Avoid Taxes
There is no doubt that small business owners are faced with a higher tax liability than an individual who works for an organization. It may be tempting to lower your overall business tax liability by shifting income to non-taxable entities, such as a charity. Don’t do it.
If the IRS even suspects you are shifting income to avoid taxes, they will come calling. Instead, pay what you rightfully owe. If you find yourself in over your head and can’t make the payments on time, find a qualified tax pro who can help you sort out your options.
Small business ownership can be as rewarding as it is demanding. Unfortunately, small businesses fall under suspicion with the IRS because of business owners resorting to unethical tactics to avoid paying taxes or to lessen their tax burden.
Keep accurate and detailed records. If record-keeping isn’t your strong suit, hire a bookkeeper or an admin. assistant to take care of that task for you. Whatever you do, don’t falsify records or shift income.
You may find yourself at the receiving end of an audit notice even with the best of business practices. Try not to panic and enlist a qualified tax pro ASAP who will walk you through the audit process and represent you before the IRS.
Don’t let the possibility of an audit deter you from owning a business. With sounds business practices, honest record-keeping and a good tax pro by your side, you can withstand an IRS audit.
Yesterday we illustrated how inaccurate returns or returns with missing data could result in an audit notice from the IRS. Here are some more red flags:
How Income Is Earned
If you work in a businesses where lots of unreported cash changes hands–such as salons or restaurants–your return may attract closer scrutiny from the IRS.
If you are paid in cash or earn base wages plus cash tips, be sure to report ALL earnings: cash, tips, base wages, bonuses…any and all earnings.
In fact, that’s a good rule of thumb for all industries, but cash-based industries in general attract closer IRS scrutiny.
Broke Girls…and Guys
Strangely enough, taxpayers who earn $25,000 or less have a slightly higher chance of being flagged for an audit. Most of this is due to the Earned Income Tax Credit. This stems from a high error rate in calculating the credit, as well as from dishonest taxpayers who wrongfully claim this credit. When in doubt, have your taxes filed by a tax prep pro. They stay current on IRS regulations and tax laws so you won’t have to.
High Charitable Donations
The IRS thrives on statistical data, and their access to billions of records gives them the opportunity to flag any records that are outside the norm for taxpayers in each bracket.
This includes charitable donations; if your cash donations are outside the statistical norm for your tax bracket, the IRS might show some additional interest in your return.
Keep all of your receipts for every cash and non-cash donation that you make. File form 8323 for donations over $500.00. The IRS won’t penalize an honest taxpayer who was generous with their donations, but they will penalize someone who tried to claim a charitable contribution that never existed.
Claiming Losses On a Hobby
By definition a hobby is an activity that isn’t pursued for profit. Shady taxpayers will try to write off hobby-related expenses as losses. It may be tempting–some hobbies are expensive–but don’t do it. That loss from trading/selling vintage gaming systems or comics may have hurt your bottom line, but as far as the IRS is concerned, it’s a hobby.
Foreign Bank Accounts
If you have foreign bank accounts totaling more than $10,000, you MUST report them on your tax return. Not doing so can set you up for stiff penalties and a possible audit. Your tax pro can electronically file the FinCEN form 114 on your behalf at tax time. If you have a generous amount of foreign assets, your tax pro will also need to include form 8938.
Tomorrow, we will take a look at yet more audit triggers and red flags. The IRS isn’t out to “get” honest taxpayers, but they have zero tolerance for dishonest taxpayers. Only an audit can help them distinguish someone trying to game the system vs. an honest mistake by a rookie taxpayer.
2 Types Of Errors That Will Attract The IRS’s Attention
Nothing is more stressful to a taxpayer than an audit notice. Filing the return on time was stressful enough, and now the IRS has set their lazer focus on your return. Before you freak out, there are two factors that may have contributed to that audit notice, and both of them are easy to fix.
If your social security number, date of birth, signature or other key pieces of information are missing from your return, that will draw attention to your return.
Double and triple-check your return. DIY tax prep software has warnings encoded that prohibit you from moving onto the next screen if information is missing. If it’s your first time using that tax prep software or your first time filing a return, make sure you have your social security card handy if you haven’t memorized your social security number.
Likewise, if you file a paper return for any reason, check it over to make sure you have provided all the complete and correct information.
Taking a few extra minutes to check your return could save you the headache of receiving an audit notice. Even if a tax pro files your return, read it over to make sure all information is accurate.
In fact, if your tax pro doesn’t ask you to review your return, ask to see it. Tax pros are human and can accidentally transpose digits on a social security number or birth date, so be sure to look over your return carefully.
Your employer reports your earnings to the IRS, as does your client if you are an independent contractor who earns over $600.00 from that client. Once the IRS receives your return, they compare the information you provided with the information provided to them from your employer(s) and/or client(s). If the IRS suspects that you are deliberately under-reporting your income, that may be enough for them to send out that audit notice.
When filing your return, make sure you or your tax pro have all of your current income documentation (W2, 1099 Misc. forms, etc.) at the time you prepare your return. Double and triple-check the income figures. Generally, the IRS will want to audit people who they see as most likely to under-report income: wealthy folks who may have offshore accounts and self-employed folks.
What To Do If You Discover Errors on Your Return
Your tax return is filed on time. Whew! An e-filed return with missing or incorrect information will be rejected and sent back to the tax prep office, but if you choose not to e-file, and realized there are some errors on your return, here is what you can do:
First, don’t panic. It happens to the best of us. Instead, file an amended return with the missing or correct information included. Catching errors before the IRS does can save you the headache of filing an amended return after the fact and any possible delays on any refunds.
If the thought of filing an amended return is intimidating, have a tax prep pro file it for you. That will eliminate the guesswork and the stress of filing an amended return. It’s also a good idea to have your return filed professionally if you have a complex return (itemized deductions, rental properties, investments and other transactions).
Although audits may be unavoidable, you can reduce your risk of being audited by filing an accurate return and by providing complete and correct information, including income. The IRS isn’t out to “get” you, but it does give extra scrutiny to returns that are incomplete or inaccurate.
If you are facing any kind of tax dilemma–from incorrect returns to back taxes–we have tax pros on staff who can help you. Just give us a call at (888) 224-3004 or click the white “Start Chat” button in the upper right-hand corner of any of our webpages.
(Disclaimer: The information contained in parts 1 and 2 are for informational purposes only and are not designed to replace the advice of a licensed tax professional. If you are facing an IRS audit or other complex tax issue, seek the advise of a tax professional who can best assist you with your specific tax matter).
How long does an audit last? This depends mostly on the complexity of the audit, the documentation review process, and scheduling. If both you and the auditor are able to keep each appointment as planned, that will help the audit progress smoothly and to finish up in a reasonable length of time.
An in-depth audit may require more meetings and more supporting documentation, while a less in-depth audit will take less time. Be sure to provide any requested documents or paperwork as soon as you are asked for them.
The audit is finished. What will happen next? Once your documents and records have been reviewed and you’ve had a chance to meet with an auditor (if required) your audit is officially wrapped up. An IRS audit finishes in one of three ways:
No change: There are no changes to be made to the records and there is no money owed.
Agreed: You understand and agree with the recommended changes. You’ll be asked to sign an audit report and to pay any money you may owe, but try not to panic: you can make payment arrangements. Here is where having a licensed tax pro at your side will be to your benefit. They will be able to walk you through your payment options if you owe money but are not able to pay in a lump sum.
Disagreed: You may understand the auditor’s recommendations/findings, but you don’t agree with them. Generally, you can request a conference with a manager and/or file an appeal. This is where having a licensed tax pro by your side is essential. While the IRS is not out to deceive you, the audit process can be confusing if the agent doesn’t take the time to fully explain everything to you.
There is no doubt that an IRS audit can be stressful for the average taxpayer. Anything from the straightforward informational audit to a full-scale series of appointments with an IRS examiner can rattle your nerves. It pays to be well-organized in advance and to respond quickly when you do receive an audit notice from the IRS. Find a reputable tax resolution firm that will match you with a tax pro that can guide you through the audit process, assist you, and even represent you in dealing with the IRS.
An IRS audit is never anyone’s idea of a good time. By knowing that to expect and understanding how the process works, you’ll be much less likely to break out in a cold sweat if and when you receive an audit notice. Be informed, be organized, and have a tax pro by your side to help you understand the murkier aspects of an audit. Your nerves will thank you.