Page 70 - BCM July 2024
P. 70

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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