Tag: Tax Audits

IRS Seeking One Billion Dollars For Hiring

Sanjiv Gupta CPA - 3 months ago
How Many Tax Returns IRS Can Audit Each Year?It depends upon how much resources IRS has available.   And IRS is just getting ready to increase those resources.   Obama administration has recently asked Congress for an additional one billion dollars so that IRS can go on a hiring spree.  Why not? – after all, IRS is the best money-making department for the government.Obama’s administration estimates that hiring more IRS agents can bring in $1.5 billion dollars in additional revenue.  That is lots of money and the United States can sure use it to fund all the wars we are fighting.Just to be fair, the IRS budget was trimmed down in the year 2011 and this increase will bring a total IRS budget to about 12.8 billion dollars.  Just like the Obama administration, IRS is very happy this kind of budget increases. After all – more budget means more agents and more agents means more revenue.  You don’t need a certified public accountant to do this math.NTEU president Collen M. Kelley announced in a statement that the additional funding is critical to repair the damage of the harmful cuts during the past two years.  He further clarified that the IRS collects some 93 percent of all government revenues — it only makes sense to view IRS funding as an investment towards economic recovery.How many more agents can IRS hire with additional funding?“Rough figure is around 4000 agents,” according to National Treasury Employee Union.More jobs and more revenue – what’s there to lose for slow and sluggish recovery excepts fewer dollars in US taxpayer pockets.Share your thoughts, should IRS get this additional funding?

Defending the “hobby loss” Rule with a Business Plan

Sanjiv Gupta CPA - 8 years ago
A business plan is very important where a business is concerned. As long as you have a business idea, you need to draft a business plan so that you can know how to set up the business. When a business is recurring losses, the IRS audits them. Also, the IRS reduces the inference or deductions claimed when a business is not set up to gain profit. The Internal Revenue Service has for many years defended ‘hobby loss” rule with a business plan. Listed below are some of the factors to consider like;Does the taxpayer rely on making an income from the current business?Has the taxpayer made some income from this business in previous years? If the answer is yes, how often has the business made this income and also how huge was the income?Has the taxpayer out aside reasonable time and also dedication to the business to show that he or she has plans of making some income from it?Has it been proven that the taxpayer has a tax plan of losing cash in the business to lessen its taxes from their main source of profit?Is this business used to employ family relations who are in lower tax groups?If the business in itself does not bring any income, does the taxpayer logically foresee generating income from the appreciation of equipment used in the business?Does the income reason for the business overshadow the fun parts of the business?If the business is generating losses, are these losses as a result of conditions out of the taxpayer’s power? Or, are those losses going at the start-up stage of the activity or business?Has the taxpayer made income from a comparable business in years gone?Does the taxpayer have the needed trade or activity understanding to go on with business success and also make the needed income? Or has the taxpayer seen or talked with other people who can provide the right routes and education to run the business very well?If the business is making any losses, has the taxpayer tried to modify its process to make better and enhance income?The secure harbor where the taxpayer is considered is if the business has generated some income in at least 3 years out of the last 5 years of its operation. When a business is not making profits like it should, there is a need for the IRS to come in and check if the reasons are beyond the control of the business. This helps to ensure that, the taxpayer is relieved of paying taxes.For every business, the survey will differ. This is because; every business will have a different issue from the other. So, not all the investigations come with the same results. Due to the fact that there are different companies and also businesses, there is a strategy for every trade or business type to get the best results. If you need a business plan, you may contact me at 510-709-4030.

Hiring a Tax Expert to Face an IRS Audit

Sanjiv Gupta CPA - 7 years ago
“I am nervous and unsure about the impending audit from the IRS for my 2010, tax returns. I believe that they are pointing towards the irregularities in my deductions and income. I need to know whether I would be required to represent myself to them or can it be taken care of in case I pay the arrears involved?” asked Mr. Ravi. SIn this scenario, we strongly recommend him on hiring an expert who can represent him on this tax audit. This is crucial to him as the IRS can refer his case to criminal investigation for prosecution. He not hiring a representation would tantamount to approaching the court with no lawyer.Below are mentioned some facts about IRS audits in order to help you understand the gravity of the situation being discussed.The IRS has the option of auditing you by mail, face to face in there or in your office. Amongst all the three, the face to face audits is more serious as the examiner would closely scrutinize the documents related to your income & deductions.Initially, you are interrogated on some 54 seemingly innocuous questions. What will come next would depend on the way you had handled these questions initially. Talking more than required and speaking the truth is recommended here; facing this unprepared, can fail you on both these crucial aspects.Hire a professional tax expert in order to avoid this sticky situation. The below-mentioned points are advisable to be kept in mind while hiring a professional tax expert.Choose an experienced hand over a greenhorn in this field. Hiring someone aptly qualified with hands-on experience in handling IRS audits would save you unnecessary costs over time. An experienced professional would productively channelize your fundamental rights – fairness, due process & representation – as a taxpayer, keeping your best interests in mind.Following are some of the strategies we have used at our firm ( Tax Resolution Services) for handling IRS audits earlier: If possible, obtain a “ no change” letter; making sure that any additional taxes assessed remained lowest as per the law; helping clients in reducing any accruing interest, penalties or back taxes, along with pushing away the possibility of a criminal prosecution by the IRS; Systematic steering of the client through the entire process.Other than checking the credentials at a meet-up, the candidates, as well as the company’s credentials, can additionally be verified through Google and by fishing out the ratings of the Better Business Bureau of the same. Seminar on Audit By Sanjiv Gupta CPABoE, IRS and FTB Tax Audit On The Rise | Protect YourselfWe have seen an increase in the Franchise Tax Board, Board of Equalization (Sales Tax) and IRS Tax Audits in recent months.  In the last few months, California Sales Tax Officers have also visited the businesses in various counties including Alameda, Contra Costa, Santa Clara and requested to see their sales receipts and record of their sales transactions.  In many cases, BOE has asked these businesses to bring their detailed sales record to the BoE office in Oakland CA.  Certain types of businesses like Gas Stations, Grocery Stores, Retail Stores and businesses with the majority of cash transactions are of particular interest to FTB and IRS.We feel it is important for our fellow business owners to prepare for such a visit or an audit by IRS, BoE, EDD or FTB.We will be holding a free conference call in February to discuss important steps you can take to prepare yourself for such a visit.  We will discuss many scenarios that may catch you off guard.For example:What kind of documents IRS, FTB, BoE or EDD may ask to see?How to prepare your employees for BoE, EDD< IRS and FTB visits?What should your employees know about BoE, EDD, IRS and FTB Audits?How to deal with customers when BoE,  IRS or FTB agents are at your site?What should you tell or not tell to Tax Auditors?When to get professional help with your Audit?When can you join the conference?Feb 16th, 2013 From 10:00 AM to 12:00 PMRegister and Join the Conference Call | Learn and earn a chance to win iPad Mini.

Avoiding the Dirty Dozen Audit Red Flags

Sanjiv Gupta CPA - 7 years ago
The taxpayers are warned on manipulating any information related to the filing of their tax return deductions. This can let loose the ever-inquisitive nature of the IRS and you can invite trouble upon yourself, which is best avoided at any cost. There are many factors that may flag your return for an audit and you should always consult with your tax professional to ensure that your return is in compliance with all applicable laws. In this article, I am going to point out twelve indicators/warning signals which in case exceed what is believed to be normal, can trigger an inquiry from the IRS. The twelve ‘Red Flags” as they are addressed, are listed below.Filing higher income.Failing to report all taxable income as stated by the duplicate records available to the IRS.Filing for a large charitable deduction, disproportionate to your known income.Filing for home office deduction.Filing for a deduction on real estate rental losses.Filing for a deduction on travel, business meals & entertainment.Filing the deduction for full (100 %) use of a vehicle.Filing the deduction on the losses related to a hobby activity.Filing a deduction for running a business on cash.Failing to report the account you hold in a foreign bank.You engage in transactions involving currency.Filing for deductions which exceed the average.Availing of deductions sufficing the dictates of being reasonable can actually help you avoid unnecessary hassles, which would emanate out of a situation like facing the IRS audit. A part of the mentioned “hot spots” are clear manifestations of a planned deceit; the rest can be majorly attributed to ignorance on the taxpayer’s part on filing deductions. An experienced tax expert can help you remain on desired procedures along with putting up an effective representation for you in case required.Handling the IRS audit on your own is not advisable: you wouldn’t have the expertise and skill required in handling the excruciatingly long & intimidating interrogation by the examiner. Rather the nervousness ensuing from the process holds the potential of you spilling off the restricted information to the auditor. This would worsen the matter further for you.The bill raised by the examiner would be proportional to the information you give, as he digs for more.Taxpayer has the legal right to representation. You can contact a seasoned tax expert to represent you at the IRS audits and aid you in resolving your tax issues forever. 

Avoiding FBAR By Keeping Balances Low

Sanjiv Gupta CPA - 7 years ago
One of our readers made a comment about avoiding FBAR by keeping the balance low in your foreign bank account.  I am sure many of our readers have at least thought about this scenario at one point or another and therefore I would like to discuss this question in a blog format to point out a couple of important factors. Let’s start with our reader's comment:Thanks. I got a very good understanding of FBAR with your videos. a silly question that arises in my mind is, what if I always transfer $9000 to Indian bank and immediately transfer to Parent’s bank account thus making room for another $9000. Hence avoiding “$10000 worth INR at any point in time in foreign bankHere are a few things you want to keep in mind.Number One:-According to the Department of Treasury, you must file FBAR if you have written or verbal control over a financial asset in a foreign country. So, if you are transferring the funds to your parent's account but keeping control of that account then you should file FBAR.  Although it might be a bit hard for Govt. to prove that you had control over your parent's account if you are not listed as an account holder but the law is always open to interpretation by smart attorneys of this fine nation. Number Two:An individual is only entitled to gift up to $14000 per year without having to take their lifetime estate exemption and filing the proper paperwork.   If you simply transfer $9000 to your parent's couple times than you will be required to report this as a GIFT to your parents and you must file the proper paperwork to deal with estate taxes.Please note that the year gift exemption threshold increased every year. Here are some historic figures. YearAnnual Exclusion Amount1997$10,0001998$10,0001999$10,0002000$10,0002001$10,0002002$11,0002003$11,0002004$11,0002005$11,0002006$12,0002007$12,0002008$12,0002009$13,0002010$13,0002011$13,0002012$13,0002013$14,000Number Three: Lastly, you should also consider how you will bring the money back to the US if needed.  I won’t get into this topic today but if you don’t send the money via proper disclosure than you are simply postponing the problem.  You will run into various issues at some point.The question I have for you is that why don’t we simply file the FBAR?  As discussed much time by Sanjiv, FBAR is not a tax. It is simply a disclosure requirement.Our office can file your FBAR for last year or help with filing proper documents for delinquent FBAR’s.

Why You Won’t Be Audited?

Sanjiv Gupta CPA - 7 years ago
Last year, the US saw a huge fall in the tax audit rates by 5.3%. This reduces the probability of individuals being audited.  This research was conducted by the Transactional Records Access Clearing system.  This trend is due to the cuts in federal spending.  This process is called sequestration and this is a process that cuts down the employees who are eligible for tax audits so that the fraudulent individuals can be tracked down easily. Kevin Brown, leader of Pricewaterhouse Coopers ‘tax controversy and dispute resolution practice, rightly said that if the number of individuals decreases then it correspondingly decreases the number of audits.The National Treasury Employees Union conducted a survey and it was found out that these cutbacks could impact enforcement actions. The audits usually conduct its audits on days when the works have five to seven unpaid furlough days in the summer. The cuts are also timed in that part of the season, where there is a recruitment freeze which prevents the agency to fill up jobs.  In 2011, the IRS had 7000 full-time employees lesser than what it had during the year 2010. The staffing and other enforcement actions were lesser by 6% last year.The lesser number of individuals to be covered for auditing does not mean that the defaulters can make merry. On the contrary, it is tougher to escape this way because being one among 10,000 people definitely has more visibility than being one among 100,000 people.  The way the audits are being conducted has also changed. Earlier, face to face audits was the fashion. However, this has now been reduced and audits through email correspondence are the order of the day recently.  Audits through emails have increased to almost triple the amount of quantity around 20 years ago.The IRS has effective software systems to track if the income is not reported rightly. Most of the cases of under-reporting of income are tracked through this software by matching the income filed in the form 1099 and other related paperwork, while tax filing. Fewer audits are not necessarily a reason for the defaulters to enjoy. The fewer audits take a longer time to get completed than the frequent speedier audits that were the process some time back.If a defaulter is found to have misreported income or done fraudulent tax filing in the new long audit process, then the interest and the penalty charges that he needs to pay is exorbitant than what the frequent audits charged. This puts the cheaters in a great fix, as in the current scenario, they not only have to pay taxes due for years together but also have pay very high penalty charges of each year’s missed payments.Though the audits on individuals have been reduced drastically in the year 2012, the frequency of the audits on the corporate organizations has not changed according to the recent IRS survey. More than 17% of the organizations were qualified for audit in 2012.

How To Fix Taxes – After You File

Sanjiv Gupta CPA - 7 years ago
There are chances of mistakes to happen while filing an income tax return. In the hurry to file tax returns, people may tend to miss out on basic details and realize it once the filing is done. In such cases, there is a guideline issued by the Internal Revenue System which explains what needs to be done if the errors are found out after filing the returns. Eric Smith, a spokesman at the IRS explains briefly about this process.Whether filing an amended return is necessary or not, depends on the nature of the errors of the taxpayer. Some of them make mistakes in the arithmetical calculations or miss to attach a form. These errors do not need amended returns because there is a step by step process in the IRS to check for calculation errors or missing forms. These kinds of errors are automatically spotted by the IRS and letters are sent to the taxpayers to revise their filing. The public need not spend their time and effort for filing amended returns for these kinds of errors.There are certain other gross mistakes like misreporting of income. This error changes the final tax amount payable by the taxpayers of the government. These errors need an amended return. Benson Goldstein, who is the senior technical manager at the American Institute of Certified Public accountants, suggests that errors like people finding a forgotten 1099 Form or incorrect filing status, deductions or credits require amended returns from the taxpayers. The IRS has an inbuilt system in place to find out the nonreported income, missing to include all the 1099 forms, etc. and these people are picked up for questioning and audit.Some may file returns to claim deductions, which they were not aware of earlier or to correct a deduction or claim that they had incorrectly applied for earlier, but were not actually eligible. However, Goldstein pointed out, a majority of the taxpayers file amended returns so that they can claim extra refunds if any. However, Mr. Goldstein insists that, while filing for extra refunds, the taxpayers must wait for the original refunds to hit their account, and then file for the revised return and then get the increased refund. However, after the amended return and revised tax calculations, if it is found out that the taxpayer needs to pay more tax to the government, then it would invite some extra penalty charges.Another benefit is that the IRS gives up to 3 years' time from the date of filing a wrong return, to correct the same. For example, if a return is filed wrongly in 2012 incorrectly, then the taxpayer can correct the same till the year 2015. An amended return must be sent only by email. Multiple amended returns can be sent, however, separate envelopes should be used to differentiate the year for which the return is filed. There is an option available on the IRS website to check the progress of a particular filing

Dealing with IRS and other Tax Audits

Sanjiv Gupta CPA - 4 years ago
It’s one of those fears that bog the minds of rich people and even ordinary taxpayers—getting audited by the IRS. But what are the chances that you’ll be audited by the government for your tax returns?The chances of a tax audit are very low these days. Taxpayers with moderate income levels have a 1 percent chance; while those earning $1 million and up were audited at a 7.5 percent clip.For companies, the rates are also low. Firms with total assets of less than $10 have a 1 percent chance. Those with assets between $1 and $5 million have a 1.2 percent rate, while firms with asset size of between $5 and $10 million have a 1.9 percent chance of being audited. Even the middle-sized firms or those with assets between $10 and $50 million had a low 6.2 percent chance of being audited.Sure, the chances of getting a visit from the IRS have shrunk to all-time lows. But that should not be enough reason for you to be complacent. It still pays to know what to do just in case someone from the IRS knocks at your door or you get a letter from the said agency.Individual Tax AuditYou may not be a millionaire but there are conditions that can increase your risks of being visited by the IRS:• Being self-employed. There are lots of write-offs that self-employed taxpayers can claim, unlike most employees. These range from a home office to the use of a car and the IRS may have queries about these claims.• You have itemized deductions that are a lot higher than those of taxpayers with comparable incomes. The tax department will likely flag your return when it notices that there’s a big difference between your write-offs and averages.Should you get a notification that you are to be audited, don’t panic. Keep in mind that the audit will be done in a professional manner. And if you can give the IRS people the right paperwork then you will be off the hook, so to speak.You must not also think of ignoring the IRS. Your problem won’t go away. Worse, your interest and penalties will continue to accrue. So the earlier you deal with it, the better.Types of AuditThere are three types of audits. The more common is the correspondence audit, which is handled by away. According to the Transactional Records Access Clearinghouse, 76 percent of individual audits were of this kind.These computer-generated correspondences may tell you that there was a mathematical error on your return, or that your return wasn’t the same as the 1099 statements that the IRS received from your bank or broker. In these cases, you simply send the money that you owe.The letter may also dispute a tax break that you claimed. If you can’t prove that you were correct, then you will have to pay additional taxes.But what if you’re right? You’ll have to collate the right paperwork then send it back to the IRS through certified days within 30 days of receipt of the letter. You’ll also have to prepare a letter that includes a copy of the correspondence audit plus your reference number.In some cases, you simply have to go back and get receipts. But there are cases when you can’t do that. Instead, you may have to get a written acknowledgment from the charity that you gave to in order to claim a charitable contribution.This is a task that you can handle yourself, especially if the issue is simple enough to reply to. You may ask a tax pro to help you out, but you’ll obviously have to pay him or her for the serviceIf you feel you are deserving of the tax break but you want a stronger case or reply to the IRS, a tax professional can be of significant help. He or he can prepare your return to respond to the agency and give you a better shot at defending your case.The second type is field audit, which is conducted in person at your home or at IRS offices. However, the chances of an IRS guy dropping by your home are very low these days. The agency is no longer conducting a lot of field audits because these often mean additional expenses.This type of audit is conducted when the IRS has lots of questions about your return. The agency may also resort to this type of audit when there is a certain write-off that is difficult to handle by mail.The field audit in an IRS office shouldn’t last more than four hours. However there will likely be a follow-up visit, or the agency would require you to pass additional paperwork.The last type is the ‘random’ audit. Among the three types of audits, this is the least likely that the IRS will conduct. You have a very slim chance of being selected for this audit.But then again, it pays to be prepared.The random audit is perhaps the most detail-oriented and intrusive of the three types of audit. IRS agents may even ask for your birth certificate and marriage license just to check your filing status.This is also the type of audit where a professional expert can help you. There’s a good chance that something will happen at the audit that can cause the agency to demand you to pay more. With the help of a pro, you’ll be ready just in case the proverbial can of worms is opened.Attitude During the AuditWhether you are going to the IRS office or accompanied by a tax pro, you need to behave professionally during the audit. Don’t become argumentative, and treat the agents with respect.Be honest and truthful with your answers. But you should also answer straight to the point. Avoid talking too much because the more you talk, the more questions that the agency will have.You should also come to the office prepared and organized. You don’t want to upset the agent with your messy folder and jumbled receipts.If you are unable to provide the document the agent is looking for, politely ask if there’s any other documentation that you may provide in lieu of the document. For example, you claimed the business use of a vehicle but couldn’t show receipts for gas. Maybe a calendar of your business meetings may be accepted as a substitute.You can go through the appeals process if you disagree with the contention of the agent. This is where a tax pro can help you as he or she would be able to handle this step.So what happens if you have to pay the IRS more money but you don’t have cash? You have three choices—one is to pay with a credit card, although you will have to pay a convenience fee of around 2.35 percent. You can also for an installment agreement or request for a compromise.Business IRS AuditsAgain, the chances of a business getting audited by the IRS have gone down in the past few years. But this still should not give your company a false sense of security.What are the possible issues that the IRS will look into your company’s tax returns? Here are some of the red flags that should make the IRS agents knock on your door:1. Net loss in more than two of the past five years.2. Excessive deductions for travel, business meals, and entertainment3. High salaries paid to shareholders4. Shifting income to tax-exempt organizations in a bid to avoid payment of taxes5. Claiming 100 percent business use of a vehicleLike in individual tax audits, it is important for a business to be prepared if it has been picked for an audit. There’s a silver lining to being audited, as if the agency’s findings show that there is no change to the tax liability then the business won’t be audited on the same issue for the next year.Hiring a tax professional is the first step that you need to undertake if your business has been pinpointed by the IRS for auditing. Don’t be anxious in thinking that this will indicate that your business is guilty, after all, the IRS is very much used to this practice. A tax professional can help you through the audit.You can even sign a power-of-attorney agreement to give your tax professional the legal authority to deal with the IRS directly. This is ideal if you are unsure of what to say and what not to say during the audit. This basically takes you out of the loop and puts your tax professional in.But there are three things that you, as the business owner, should remember when your business is faced with the prospect of being audited by the IRS:1. Review the audit letter carefully.An IRS agent won’t just barge into your door and announce an audit. The agency will send an audit letter to your office informing you that your firm has been picked for the audit.Be cautious with scammers who will masquerade as the IRS by sending you email messages or leaving phone messages. Those guys will attempt to hack your personal data. The real IRS doesn’t communicate through email or phone.Once you receive the letter, open it promptly. Read and understand what the IRS needs from you.If your company doesn’t have a financial adviser, you can hire an accountant or tax professional to help you review the review letter. He or she will also identify the issues that the agency has flagged.Don’t ignore the letter because the IRS will not go away. Worse, the auditor may become more suspicious and even antagonistic.2. Organize your records.The next step is to organize your records. Gather and organize all your business records from the previous tax year even before you meet with the tax professional and IRS auditor.These records range from receipts and invoices from income and expenses, accounting books and ledgers, bank statements, leases or titles for properties and hard copies of tax-prep data. You should also make sure that you have the specific documents requested by the IRS for review.3. Answer the questions honestly.During the audit, the IRS agent will ask you a lot of questions about the information reported on your business tax return. Simply answer the questions of the auditor—no more, no less. Giving any information that you are not required to give may put you in more hot water.Similar to dealing with individual tax audits, providing unasked-for information may give the auditor more questions to ask. The last thing that you want to happen is for the auditor to uncover more issues about your tax returns. IRS auditors won’t forgive tax debt or mistakes, so any admission that you may have will be used against you.Be straightforward in replying to the questions. However, don’t manufacture excuses. IRS agents would know if you’re making any.Also, don’t be antagonistic with the auditor. It would only make things worse for you and your business.In order to avoid future audits, you should track bank transfers and other financial records aside from receipts. Anything that you cannot explain on the standard IRS form must be explained on paper. Of course, double-check all your calculations before filing your returns.Aside from keeping proper documentation, you can avoid getting picked for an audit by deducting ordinary and necessary business expenses as allowed by the IRS. So even if your company is chosen for an audit, you have nothing to be afraid of.Indeed, getting a letter from the IRS informing you that you are to be audited can be very worrisome. But if you know how to deal with tax audits, then you don’t have anything to be afraid of. It also helps to have a tax professional guiding you to be assured that you can respond to whatever audit findings the IRS guys have with you or your business.
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