Am I Going to Jail Given the Fact I have Just Been Audited?
“I received an audit notice and am scared that when the IRS reviews my return and God-forbid finds something wrong, am I going to jail?”
This is a common perception that a mistake on an audited return leads to corporal punishment or worse. Mistakes are part of many filings (mostly inadvertent) and are dealt with as an “adjustment” to arrive at a final figure for taxation or refund. Typically an IRS representative, absent a pattern of deceit, and a large dollar amount of mistakes will often assume the best.
Audited Tax Returns-Big Corners Cut in Preparation of the Returns
“OK – I need to confess: I cut big corners on my tax returns and received a notice from the IRS that the returns are being audited. What do I do?”
This case demands that you hire a representative for your audit. Depending on how big the corners are, you may have a case that would lead to a return that is deemed to be fraudulent. What constitutes tax fraud: a willful act done with the intent to defraud the IRS -that dark area beyond honest mistakes.
For instance, your taxable income in this setting as you reported it was, let’s say, $100. During the course of your audit, the IRS representative determines that your taxable income was, in fact, $200 and there were a number of income items not reported.
Because your adjusted taxable income has increased by 100% (here from $100 to $200), there is a chance your filing may be deemed to be fraudulent. The fact you have not reported income may increase that determination.
Fraud, as it applies to taxes, is a VERY big deal. Civil fraud penalties may amount to 75% of the tax owed. Criminal tax fraud may involve penalties up to 100% of the taxes owed and may include time in prison. Be careful here!
Audit Not Going Well-Lots of Pressure From the Auditor
“I am in the middle of an audit and getting a lot of pressure from a lady that is auditing my return. She is aggressive, rude and assumes the very worst when I am unable to provide data to support my data. What do I do?”
IRS examination is not designed to be fair or to leave any amount that can be taxed, untaxed. Examiners are under pressure to get audits completed typically within 18 months are the return is filed.
You have three options here:
- Make your strongest argument that the auditor’s conclusions are incorrect as your audit case wraps up. Be ready for the fact that few if any changes happen here. After this then go to 2 below.
- Request a conference with the examiner’s manager. Here you make your best case argument that the auditor’s conclusions are wrong. Plan to have as much data as you can to support your position. This may include court cases or IRS rulings or missing documentation on the return. After this then go to 3 below.
- The Holy Grail…take your case to IRS appeals. This is the sweet spot of the IRS where representatives are seasoned and inclined to take a more balanced approach to your case that represents a reasonable (not necessarily ideal) outcome. Have your case well prepared for purposes of documentation and researched as to any legal issues affecting your return.
Always remember that the IRS offers a number of appeal points in the audit process. Properly choose your points of appeal to get a more balanced outcome in your situation.
Audits-Correspondence Audit by Mail
“I received a bill as a result of an audit. The audit occurred by mail. IRS asked me for documentation and by the time I responded I received an assessment. What do I do?”
You were caught up in what is called a correspondence audit. The Notice is called a CP-2000 notice. Under this program, information that the IRS receives is matched to information from third parties (like your employer) that should be on your tax return. If there is no match an inquiry is sent out to the taxpayer identifying the non-matches. You have 30 days to respond. When your answer does not occur timely, an assessment may follow.
First, you need to identify the item or items that IRS that do not match your return. See if your reporting is correct, or if the IRS notice is correct. If the IRS is correct, you can consent to their adjustments. Part of the notice provides this option.
If your reporting is correct then continue to contest the IRS information.
Here, the proposed assessment occurred before you responded. I would write again, indicating that your prior letter was not responded to. Include the prior letter and indicate in the letter that you do not owe the taxes and the reason or reasons for the information not being reported on your return.
If the IRS does not act on your letter, there will be an assessment that will be forthcoming. You need to pay attention to the notice of assessment that you received. File an IRS appeal request for an assessment is other than a Notice of Determination (“NOD”). For a NOD, file a petition in the United States Tax Court contesting the issue. There is a strict 90 days period to appeal the NOD to the United States Tax Court.
Ultimately, the IRS has a number of appeal points in the process of determining taxes and collecting them. Your job is to find where you are and merely get your response or appeal in.
Audited Return-Some Mistakes Found-What Will Happen Next?
“OK at the conclusion of my audit, the IRS found some honest mistakes-what type of penalty is involved?”
You may have an accuracy-related penalty applied to the taxes owing. The amount of an accuracy-related penalty equals 20 percent of the portion of the underpayment attributable to your negligence or disregard of rules or regulations or to a substantial understatement of your taxes.
For individuals, the understatement of tax is substantial if it exceeds the greater of $5,000 or ten percent of the tax that must be shown on the return.