Our fears can be overwhelming when a letter received comes from Internal Revenue Service (IRS). Getting a letter of notice doesn’t mean you’ve done something against the law. The IRS would only want to review the tax returns you have filed.
Upon receiving the notice, contact IRS immediately to avoid the second letter. Coordinate with the IRS and State department of taxation.
Failure to respond to the second notice could lead the IRS to make legal actions. Your account could be frozen, or you can go behinds bars. Avoiding income tax audits would not help.
What Are Income Tax Audits?
In an income tax audit, IRS wants to confirm and verify your tax returns. Tax audits like to make sure that deductions from income are accurate. However, reports show that three-fourths of taxpayers paid more taxes and penalties after an audit.
Penalties include additional interests, civil penalty, and civil fraud penalty. The IRS will determine what sanctions would you incur during the process.
Additional interests may incur for that individual who failed to file tax returns on time. Taxpayers who also pay taxes late could have this type of penalty.
A civil penalty is for a person, business or a corporate entity. The Civil penalty incurred due to the incorrectness of data on their tax returns. The civil fraud penalty is for the underpaid taxpayers resulting in fraudulent activity.
Lastly, the criminal penalties like convictions for tax evasion after income tax audits.
How Are Your Tax Returns Selected for an Audit?
The odds of being selected if you are earning millions of dollars is 16 percent. Chances of being chosen for zero income is 5 percent. Selection may be through computer programs and statistical analysis.
Discriminant Function System is a computer program. Through the use of statistics, they determine the likelihood of accuracy of your tax return.
Unreported Income Discriminant Function is also a computer program. This system rate the possibility of having unreported incomes. The system would look into the income and spending habits of people.
The third is the Information Returns Processing System (IRP). The IRP is a computer system storing a tremendous amount of data from different stakeholders. IRP matches the report filed by the taxpayers.
Lastly, is the Audits of Related Entities. The IRS may audit related tax returns for your investors, business partners, and other individuals.
What Are the Three Basic Types of Tax Audits?
Maybe you have raised red flags that trigger an audit. Perhaps your personal income dropped abruptly or tremendous tax deduction from your business. There are three basic methods.
First is the correspondence audit. A correspondence audit is the most common type brought by a simple mistake.
Second is the field audit when the IRS comes to you. They may come to your home, workplace or related places.
Lastly, the office audit, when you are requested to pay a personal visit to IRS. You would likely meet the auditor and discuss some related matters.
Get Assistance and Help!
If you have an upcoming income tax audit and it’s stressing you, get help. Visit Sacramento Tax Attorney | Get Help Resolving Your Tax Issues | Rex Halverson & Associates. They have some lawyers with valuable experiences and offer a variety of services.
Don’t stress yourself out. Professional legal advice is vital for income tax audits. The initial consultation is free.