Page 70 - BCM July 2024

ACCOUNTING

Avoiding a Tax Audit

The IRS can be forgiving of mistakes, but it does not like fraud.

he IRS recently announced plans to signi cantly ramp curate and that additional taxes are not owed.
T up the number of audits for so-called “wealthy tax- • e auditor nds an acknowledged mistake that might
payers” and large corporations. ey’ve also announced a result in additional tax liability plus penalties and interest. e
coordinated enforcement strategy for tackling the tax returns error may be in favor of the bowling center, in which case the
of “large partnerships, digital assets, o shore accounts and government is legally obligated to refund any overpaid taxes.
unpaid back taxes.” • e audit nds a mistake with which the business dis-
As if that weren’t enough, the IRS also has agrees.
a new unit formed speci cally to focus on e IRS usually is sympathetic to honest mistakes and will-
pass-through entities such as S-corporations, ing to discuss underpayment of taxes that may result from the
Limited Liability Companies (LLCs) and many so-called “gray areas” of our tax rules. ey’ll frequently
partnerships. But with only a very small frac- negotiate the amount of taxes due. But they don’t like fraud.
tion of businesses — around 1 to 2% — actu- A disagreement over an auditor’s ndings is referred to the
MARK E. ally being subjected to an IRS audit, does the appellate level of the IRS, where the representative is usually
BATTERSBY owner or operator of a bowling center need more knowledgeable and empowered to be more lenient.

to worry? Even there, however, the bowling proprietor does not have
When the IRS claims it will target only individuals and to agree. While further appeal is still possible, the additional
businesses with incomes more than $400,000, data from the taxes demanded by the auditor can go unpaid.
U.S. Census Bureau shows that a small business with only ve A recently created “Alternative Dispute Resolution Program
employees would bring in more than $424,000. What’s more, Management O ce” will, in collaboration with other IRS
despite the IRS’s increased emphasis on special targets, most operating divisions, help taxpayers resolve tax disputes earlier
audits continue to be generated randomly. and more e ciently. Plus, there always are the courts if a
While some risk factors, such as having a high income, dispute can’t be amicably resolved.
can’t be avoided, the risk of an audit can be reduced with an e main purpose of the U.S. Tax Court is to review de -
awareness of certain ciencies asserted by
“red ags” used by the IRS for additional
the IRS to ensure the income, estate, gift or
individual or business The statute of limitations for IRS examinations employment taxes.
isn’t avoiding taxes by is three years from the due date of the federal e Tax Court is the
over-reporting expens- only judicial body from
es, taking ineligible tax return. That fi gure is doubled to six years if which relief may be
deductions or misclas- there’s ‘substantial understatement of income.’ obtained without the
sifying employees. payment of disputed
Substantial or un- taxes.
usual deductions also Any business that
are red ags, as are business losses for multiple years. Don’t loses in Tax Court may appeal the case to the U.S. Court of Ap-
forget that under-reporting or hiding income is more di cult peals. If the Tax Court decides in the IRS’s favor, future appeal
with third-party payees required to report amounts to the IRS. requires an “appeal bond” guaranteeing payment of any tax
When a tax return is selected for an IRS audit, it will most de ciency nally determined.
likely be through a correspondence audit. However, should e statute of limitations for IRS examinations is three
the IRS request an in-person meeting, typically at a regional years from the due date of the federal tax return. at gure
o ce, the notice usually contains instructions about prepar- is doubled to six years if the tax return contains “substantial
ing for the audit and the particular items being examined. understatement of income,” usually de ned as omitting more
Answering the auditor’s questions — and nothing else — is than 25% of the bowling center’s taxable income. If a fraudu-
important. e auditor may ask numerous questions about lent tax return is led, there is no time limit.
the information on the tax return, but volunteering informa- Despite the increasing number of IRS programs targeting
tion or records the bowling center is not required to submit speci c categories of taxpayers, honesty and clarity can go a
should be avoided. long way toward avoiding and dealing with an IRS audit —
Every tax audit can have one of three possible outcomes: and the potential consequences. Naturally, a quali ed profes-
• e auditor veri es that all information is correct and ac- sional can help avoid, cope with and appeal audit results.

68 • BCM • JULY 2024 www.bcmmag.com

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