Today’s topic is income tax and what one could do when you face a tax audit or a notice to pay more taxes. If you’re reading this article via Google search, then chances are you’re facing tax charges from the Internal Revenue Service. Or, you are skeptical while filling your tax return. Either way, you’re at the right place. So keep on reading.
In 2018, on a March morning, I was delivered an IRS letter. It was a fat envelope and I was sure this was related to my last year’s return. It was a notice to pay additional taxes. I missed out reporting my income from two sources. The total bill was for $820, towards a dividend income from two of my brokerage accounts. The envelope contained a detailed tax calculation breakdown. We have around 15 different financial accounts making the paperwork lengthy and making the IRS envelop a fat one.
I immediately realized my error, I went online and paid IRS within an hour of receiving the notice. I had to pay around $200 in fine on top of the dues.
Lesson learned well, I reviewed our tax return three times this year. I do not want to get any sort of IRS letter again, apart from the refund check.
Whether you’ve been notified via audit or investigation notice, the most important thing you can do right now is to get prepared. You have no time to waste. First, read the notice carefully, if it questions on your return, take expert help, don’t go by amateur recommendations alone.
Tax fraud or evasion charges can put a long-term strain on your financial record. From renting a new apartment to trying to buy a home, these types of charges can hold you back.
Precaution to avoid an audit
Please note tax audit can happen when you claim tax credits and deductions that are questionable.
With the latest Trump tax cuts, most individuals are better off applying for standard deduction rather than itemizing their deductions.
Unless you’re too certain that you will get more deduction by itemizing genuine claims you should straightaway go for standard deduction route and save yourself some future headaches.
To be on the absolute safer side, do your taxes by an expert
First and foremost, you should understand that roughly 1% of taxpayers will face an audit from the IRS each year. Individuals in higher tax brackets tend to have a greater chance of being audited.
Nevertheless, the risks are still pretty low. With this in mind, you shouldn’t allow an audit to delay your taxes. Get your return submitted on time to ensure that you do not face any hefty penalties.
If you do happen to get audited, you can deal with it in the future.
We will discuss two approaches to dealing with this situation
- Doing it yourself
- Hiring a tax attorney
Deal with IRS Yourself
Assess the situation, be prepared
Regardless of the figures, there is still a chance that you’re going to receive a letter from the IRS in the future. A lot of people will freak out when they get that dreaded envelope in the mail.
You shouldn’t. The truth of the matter is that there are clear ways to deal with an audit. As long as you haven’t done anything illegal, there is a good chance that you’ll be able to solve the problem without prosecution.
Remain calm and learn about your options.
The IRS sends notices and letters for the following reasons:
- You have a balance due – Don’t worry much, just pay the balance. If you don’t have the money, ask for payment plans.
- You are due a larger or smaller refund – If you’re due a smaller refund then again go by the above approach
- We have a question about your tax return – This is a possible audit, you may need to hire a professional
- We need to verify your identity – If it’s your return, you’ll sail through.
- We need additional information – See what is being asked and if you have the answers. Most of the cases it’s due to an error in filing your return. If it’s complex, again ask for professional help.
- We changed your return – Not to worry, you should be good unless there’s a financial loss for you which you don’t agree with.
- We need to notify you of delays in processing your return – This is a common cause and nothing related to information in your return, so relax.
You Have 30 Days to respond
Remember that you do not have to respond to the IRS’s correspondence immediately. Instead, you have 30 days to respond to the notice.
Therefore, you shouldn’t rush and make even more mistakes. Nevertheless, you should also do your best to get the letter returned as quickly as possible.
If you delay responding, the interest will accumulate on the amount owed to the IRS. Work diligently to respond to the IRS’s request and avoid errors along the way.
Submit All Documents And Paperwork
The IRS is most likely going to request a handful of documents from you. When responding to their letter, you’ll want to provide them with all of this information.
There is some common paperwork that the IRS will require. Your tax attorney will recommend that you submit mortgage statements, prior year’s tax returns, brokerage statements, pay stubs, receipts, and even retirement account records.
It is best to submit everything upfront. This will prove that you have nothing to hide.
If you’ve inline accounts in all your banks and financial institutions, getting W2, W9, 1099’s should be very simple to gather.
Know Your Rights
You are protected under federal laws. The IRS agent cannot treat you badly. By law, they are supposed to treat you in a courteous and professional way.
You also have a right to privacy and you deserve to know why the IRS is requesting the information in question.
Speak with an attorney and get to know more about your rights as a taxpayer. This will give you more room to defend yourself.
In some cases, there is a chance that the consumer did something wrong. They may have made a small mistake on their tax return.
That could have decreased the amount of taxes owed. When this happens, you will receive a letter in the mail. At this point, you will have several options, you can go ahead and pay the owed taxes.
Alternatively, you can dispute the findings. If you agree that you made a mistake on the tax form, you should go ahead and pay for it. Just send the IRS a check the amount requested and get it over with. You can also pay the IRS online.
How To Prepare For Future Audits
It is undoubtedly true that pretty much anyone can get audited at any point. You might believe that you’re invulnerable, but this couldn’t be further from the truth.
Before you get audited, it is pertinent to take steps to protect yourself. You should always keep records and tax returns for at least three years.
Also, keep your bills, receipts and bank statements. Having these documents handy will prove to be immensely beneficial in the event that you do get audited.
Hire an attorney to deal with the IRS
As we discussed before, facing charges from the Internal Revenue Service is a serious matter. sometimes the notice will be for additional taxes to be paid. Mostly you’ll know immediately if that claim is genuine. Missing out reporting 1099 incomes are the maximum cases when you’ll get such notices.
As a first solution, pay it up, ask no question and pay the taxes, the notice will include a detailed breakdown of the calculation. Most of the cases paying down the tax are the solution.
But if IRS questions about your deduction and credit claims, you’ll be in for more complexities. You need legal representation. More importantly, you need credible legal representation.
Understand your case
Before you start looking for a tax attorney, it’s important to know how you got in the position that you’re in. Were you not paying your taxes on time?
Were you purposely avoiding your taxes? Are you a small-business owner who’s accountant left them astray?
Whatever the case, try to nail down the basics. Write down how you got here, why you got here, and gather as many documents as possible that can shed light on your financial situation.
Having all these documents together before you start looking for a tax attorney will help you find the right attorney for your case.
Look for experience
There is no such thing as a shortage of experience when it comes to litigation with the IRS. Naturally, the more experienced a tax attorney is the better they’ll be at negotiating with the IRS.
Like many things in life, nothing can outweigh experience. Ask the potential attorneys how long they have been practicing as well as how many cases they want against the IRS.
A credible lawyer will have this information readily available for you. After all, they are a business at the end of the day.
They should be able to prove their experience and success the same way a job applicant would.
If they won’t take the time to help you understand what’s happening, they likely don’t have what it takes to win your case.
Keep in mind that the IRS wins over 80% of the criminal cases they take to court.
Understand what you’re up against
Any communication you have with the IRS can be used against you. This is why it’s so important to act punctually and professionally.
Despite their impressive conviction rates, the IRS would rather settle on your case then prosecute you. A good tax attorney can help you avoid the courtroom and negotiate with the IRS to settle the debt.
If things seem bad now, they’re only going to get worse if you avoid the problem. The IRS has no limitation on how much of your paycheck of bacon garnish.
Furthermore, the vast majority of bankruptcies do not cover your unpaid taxes. Debt resolutions for your assets will not resolve your tax debt. If you’re in a situation where you’re losing your home and are needing to sell your assets,
You want to make sure that you have proper documentation to share with the IRS.
Final thoughts: Act Quick
Whatever you do hire a tax attorney. Even if the charges have already been filed. The goal is to avoid indictment.
Being prosecuted by the IRS to become a black stain on your financial record that prevents you from moving forward in your life. despite the cost associated with a tax attorney, the cost of losing a case against the IRS is much higher.