It is never a good feeling when you open your mail and receive notice that you are subject to a tax audit. Tax audits can result in you having to pay additional money for tax, interest, and penalty liability.
While tax audits can result in significant additional liability, they do not have to do so. With proper representation in a tax audit, you can minimize the liability that you have to pay and possibly even pay no liability at all.
Our team of Los Angeles tax attorneys at the Hillhurst Tax Group has been very effective in representing its clients in tax audits. With the aggressive representation provided by the Hillhurst Tax Group, you can be successful in reducing and possibly even avoiding liability in your tax audit.
What is a Tax Audit?
A tax audit is a review of a taxpayer’s accounts and financial information to make sure that information is properly reported according to the tax laws and that tax liability is
Federal tax audits are started by the Internal Revenue Service (IRS).
State tax audits are started by the applicable state tax authority in the relevant jurisdiction. In California, the most common state tax audits are commenced by:
● The California Franchise Tax Board for California income tax audits;
● The California Employment Development Department for California employment tax audits; and
● The California Department of Tax and Fee Administration for California sales and use tax audits.
Tax Audit Types
There are four types of IRS tax audits:
● A correspondence audit is an audit that you receive in the mail that requests more information about a certain issue on your tax return. Correspondence
audits are the most common type of IRS tax audits.
● An office audit is an audit that requires you to go to an IRS office. Office audits typically are more detailed and involve more issues than correspondence audits.
● A field audit is an audit that involves the IRS visiting you at your home or business to personally examine relevant records. Field audits generally are the most intrusive type of IRS tax audits and are more comprehensive than correspondence audits or office audits.
● A Taxpayer Compliance Measurement Program (TCMP) audit is an audit periodically conducted by the IRS to measure general taxpayer compliance and
revenue lost from taxpayer noncompliance. With a TCMP audit, every line on your return is examined and must be substantiated with documentation.
Why Tax Audits Happen
There are many different possible explanations for why correspondence, office, and field tax audits occur. Among the most common triggers for a tax audit are:
● You have tax attributes on your tax return that taxpayers making similar amounts of income do not have.
● You earn a significant amount of gross income.
● You avoid income tax liability by utilizing tax deductions to “zero-out” or significantly reduce your taxable income.
● You forget to include an item of income.
● You make a deposit of more than $10,000.
● You report a significant amount of itemized deductions.
● You are self-employed.
● You have a home-based or cash business.
● You report your hobby as a business.
● You have cash or assets in a foreign country.
● You have investment income.
● You claim the earned income tax credit.
What Does a Tax Audit Involve?
A tax audit involves a process of communication between you and the IRS or the state tax authority conducting the audit. This communication may be as simple as providing a single document in a correspondence audit. Alternatively, this communication may be as complex as submitting to an interview about multiple issues in an office audit or a field audit.
In any event, there are two key elements to communication in any tax audit. First, you should not adopt a “head in the sand” attitude and simply ignore the audit. You need to communicate. Second, you need to communicate properly. The Hillhurst Tax Group has extensive experience in handling tax audits and knows how to effectively communicate with the government.
How Long Does a Tax Audit Take?
As described below, there are statutes of limitations that require that any additional liability from a tax audit must be assessed within a certain time period. However, once the tax audit starts, there is no magic time period by which the tax audit must be completed.
As general rules of thumb, correspondence audits will take less time than office audits, field audits, or TCMP audits, and business audits will take longer than personal audits.
What to Expect After a Tax Audit
There are three outcomes to any tax audit.
First, the best result is if no change is made to your return. The Hillhurst Tax Group has represented many clients through the years when no adjustment was made to their tax returns.
Second, a change is made to your return, and you agree to the change. You will have to make arrangements to pay any liability that is due.
Third, a change is made to your return, and you disagree with the change. You then have the right to request a conference with a manager, go through mediation, or file an
appeal of the audit decision.
Tax Audit Statute of Limitations
The general tax audit statute of limitations requires that any additional liability from a tax audit must be assessed within three years from the due date of the applicable return or the date you filed the applicable return, whichever is later. Thus, any additional liability from a tax audit of a year 2018 Form 1040 personal return that was filed on June 1, 2019 must be assessed by June 1, 2022.
However, there are exceptions to this general “three year” statute of limitations. If there is a large amount of unreported income, the statute of limitations time period can be increased to six years. In addition, if tax fraud is involved, there may be no statute of limitations at all.
How to Win a Tax Audit
Winning a tax audit is similar to winning an athletic event; it requires preparation and performance.
Preparation has three elements in a tax audit.
First, you should pull together whatever evidence you have to substantiate your tax return in response to the tax audit.
Second, you should hire a representative who has all knowledge of any tax law issues relevant to your tax audit, extensive experience in handling tax audits for clients,
and an excellent track record in representing clients in tax audits.
Third, you should work with your representative to develop a strategy for the tax audit. Your representative should advise you on which arguments are likely to prevail and
which arguments are likely to fail.
While preparation describes what you should do in advance of your tax audit, performance describes how you should proceed during the audit.
As described above, communication is critical during a tax audit. Your representative will know when to push a point with the auditor and when to be amiable and develop rapport with the auditor.
As a coach would guide you to success in an athletic event, your representative should guide your performance and lead you to victory in your tax audit.
It is also important to remember that winning a tax audit will mean different things to different people. If you have a strong case, it may mean no adjustments to your tax
return and no additional liability. If you have a weak case, it may mean minimizing your additional tax liability or avoiding a penalty or even criminal punishment.
The Hillhurst Tax Group has the necessary knowledge, experience, and track record to help you win both IRS and state tax audits. Based in Los Angeles, the Hillhurst Tax
Group is very proficient in California state tax audits, whether brought by the California Franchise Tax Board, the California Employment Development Department, or the California Department of Tax and Fee Administration.
If you want to win your tax audit, you should retain the aggressive representation provided by the Hillhurst Tax Group.
Tax Audit FAQ
How can I avoid a tax audit?
The time to act to avoid a tax audit is when you prepare your filed return. While there is no guarantee that you will avoid a tax audit (especially a TCMP audit), avoiding such actions as reporting a business loss, describing your expenses in general terms, filing late, amending a return, and failing to answer all tax return questions, are some of the steps that can reduce the likelihood of a tax audit.
Is there any chance of extension of tax audit date?
As long as it is requested for a reasonable reason (i.e., “I am out of town and need time to pull together the documentation to respond to the audit”) and it is not excessive in time (i.e., 30 days), an extension of the date for your tax audit can be obtained.
How does a sales tax audit work?
Any sales tax audit will begin with a notice of audit from the applicable state sales tax authority. You will then have to gather the records requested in the audit, typically including your detailed general ledger, journal entries, sales and purchase journals, sales and purchase invoices, and resale and exemption certificates. You also should be prepared to discuss any issues with your records, including changes in accounting systems, tax calculation systems, or tax reporting systems, and incomplete or missing records.
What happens if you fail a tax audit?
If an adjustment is made to your tax return from a tax audit, you still have certain opportunities to resolve the matter favorably. You can request a conference with a manager, go through mediation, or file an appeal of the audit decision.
Do filing taxes late increase the chance of an audit?
If you file your tax return on extension (within the legal period to file on extension), you should not increase your risk of being audited. However, if you file even later (beyond the legal extension period), it may be viewed as evidence of taxpayer noncompliance and increase your risk of being audited.
How far back can tax audits go?
The general rule is that any additional liability from a tax audit must be assessed within three years from the due date of the applicable return or the date you filed the applicable return, whichever is later. In cases of a large amount of unreported income (six years) or tax fraud (no time limit), a tax audit can even go back further in time.
How do you know if your taxes have been audited?
You will receive a notice from the IRS or the applicable state tax authority advising you about the tax audit.