Articles Posted in Audits

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Many new clients call us in a panic when they receive a letter from the IRS that their income tax return has been selected for an audit. In most cases the client knows that they overstated their tax deductions, or less likely did not report all of their income. In either case,  being caught is not a pleasant result. When the IRS audits an income tax return for deductions, it focuses on whether you have a receipt. From the basic perspective, the IRS is looking for a stack of receipts that add up to the tax deduction taken on the income tax return.

A lot of clients think that a bank statement or credit card statement is a receipt. This is not correct, since a bank statement or credit card bill only shows that the expense was paid, but not the details of the item purchased in order to verify it is a business deduction. Therefore, its important to save the actual receipts to get the tax deduction you are entitled to.

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We are all human and therefore prone to making the occasional mistake or two. This includes financial errors concerning one’s personal or business expenditures as well as tax-related faux pas. This is something that even the Internal Revenue Service acknowledges and seems to understand. However, depending on the type of mistake, the agency’s response may not seem very forgiving.

The IRS lists the following tax-related mistakes as being among the most commonly made by taxpayers.

  • Failing to provide or making errors when entering Social Security numbers

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Each year, countless Americans are duped by so-called tax preparers who commit identity theft or fraud, or at the very least, file incomplete or inaccurate returns. Possibly contributing to this problem is the fact that the IRS lost the ability to regulate the licensing of tax preparers who are not attorneys or CPAs last year following a Supreme Court ruling.

However, a new bipartisan bill that has been proposed in Congress would give the Department of the Treasury and the IRS the authority to regulate tax preparers once more. As a recent Forbes article reported, the bill would allow the two agencies to oversee “all aspects of Federal tax practice, including paid tax return preparers.”

Ultimately, this would mean people who prepare taxes for profit will once again have to pass exams, fulfill continuing legal education requirements and maintain a valid preparer tax identification number in order to be licensed to prepare taxes.

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For many who reside in the state of New York, one of their biggest fears is to be audited by the Internal Revenue Service. People who are concerned about this occurring probably believe that three years after a return is filed, they are in the clear. While it is true the statute of limitations for tax returns is generally three years, under certain circumstances it is possible that period could extend to six years. In some cases it could go even longer.

The audit period could extend from three to six years in situations where in completing the tax return, the tax player substantially understated his or her income. But just what does that mean? This situation arises when the taxpayer fails to account for more than a quarter of his or her income. The statute of limitations will start to run on either the date the filing is due or the date in which it is filed—whichever is later.

The IRS could also extend the audit period to six years in situations where the taxpayer has omitted more than $5,000 in foreign income. This might arise in situations where the taxpayer has accrued this income as a result of interest on an account that is overseas.

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Are you one of the unlikely New Yorkers who have been tagged for audits by the IRS this year? If so, take a deep breath because we are here to provide you with the information you need to get through this.

What does it mean to be audited?

A tax audit means that the IRS is going to look at your income tax returns a little more closely in order to make sure that you paid the correct amount of taxes. This includes looking at your income and deduction to make sure that they are accurate.

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Being audited is a big fear for many New Yorkers, especially around this time of year. It can not only be a long and burdensome process, it can also be quite scary because of the potential penalties involved.

Unfortunately, if you are an on-demand worker, such as a driver for Uber, Sidecar or Lyft, it is almost inevitable that you will be audited at some point in the near future, according to aForbes.com article.

As the article pointed out, these businesses don’t operate like typical big-name companies because many of the people who work for them are independent contractors, not employees, which creates some unique tax issues.

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As we discussed in an article on our website, most people don’t think of contacting a tax lawyer until they are facing some kind of problem such as being accused of not paying taxes or being audited. However, it’s best to work with a tax lawyer before that happens in order to avoid these problems in the first place.

For example, one time New York residents may run into tax issues is after receiving an inheritance. Typically, receiving an inheritance is not a taxable event, but there can be tax controversies that arise and greatly complicate the inheritance for the beneficiary or the executor of the estate.

In order to avoid this, it’s best to consult a tax attorney who can work with the estate planning lawyer to make sure that all potential tax issues are resolved.

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Tax time comes and goes every year, and residents in New York may wonder if filing taxes on foreign accounts on-time is always the best thing to do. Typically, the answer to that question is yes, but those with a first time FBAR, or Foreign Bank Account Report, may benefit from waiting to avoid tax issues. As the deadline for FBAR filings just recently passed, account holders — particularly those who are new to foreign accounts — may wonder how filing now will affect them.

To avoid tax issues, such as the need to amend a return shortly after filing, it is always beneficial to have all necessary information and documents in place. Sometimes, the required information needed to file simply isn’t available in time. While submitting a tax filing after deadline may result in penalties, the cost would be far less than not filing at all.

Some may worry that filing a FBAR is akin to admitting to committing a crime, but that is not the case. While there are those who try to use offshore accounts to hide money — the IRS has collected billions of dollars from these accounts — those that are honest in their transactions should have nothing to worry about. Certain legal protections can be taken to protect these funds from undue tax issues such as fines and audits.

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An IRS audit is the review or examination of an individual or business’s accounts and financial records in order to determine whether information is being reported correctly and the right amount of taxes were paid.

With the tax deadline last week, many Americans shifted their concerns from making sure they filed their taxes on time to wondering if they would be selected for an audit.

The IRS conducts audits at random and also when certain issues raise red flags, which we have discussed in past posts.

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Unless you are someone who likes to wait until the last minute, chances are that you have already filed your 2013 income tax return. And maybe, unless you are someone who is very neat and tidy, the papers you used to do so are still in a messy pile on your desk.

You may have stared at the pile of W2s, property tax statements, receipts and other papers, and contemplated putting them right into the shredder. But you probably decided that wouldn’t be a good idea in case you get audited, which was a good decision to make.

Typically, it’s best to keep all documents that support your both your income and deductions you claimed on your tax return for at least three years from the date you filed. For 2013 tax return documents, that means at least spring of 2017.

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