Get Experienced Legal Counsel For Business Tax Audits

businessmen shaking handsThe IRS has renewed its focus of audits on the wealthy as well as business owners and professional service providers including attorneys, doctors and CPAs. These tax audits have the potential of causing significant problems for the taxpayer especially if the tax return preparer was not careful in the preparation of the returns or certain records are missing to support the return.

Many business owners might not suspect it, when the Internal Revenue Service (IRS) conducts business audits, it doesn't just examine your business -- it puts the owner under the microscope as well. Unsuspecting business owners can get caught in uncomfortable situations during audits where they end up having to justify their personal as well as their business expenses.

What the IRS is Evaluating

Here are some of the most common things that IRS agents are trained to look for during business and personal audits.

  • Does your lifestyle match your income: If your tax returns report little income and a lot of deductions, yet you drive a really nice car and wear fancy clothes, IRS agents will dig deeper. The bottom line is, if your tax return doesn't seem to match up with your lifestyle, expect to get a lot of questions about your personal expenses.
  • Do you claim a lot of personal entertainment expenses as business expenses: A lot of small business owners fudge on mixed personal and business expenses, and the IRS knows this. If you've claimed a significant amount of entertainment, meals or vacation costs as business expenses, expect the IRS to be extremely skeptical. Just saying you took someone out to dinner for business doesn't cut it. The IRS will want some sort of documentation corroborating that the excursion was indeed business-related.
  • Do you have a lot of auto expenses: Many small business owners only have one car that they use for both personal and business trips. If you claim a lot of auto expenses as business-related, you'd better be able to back it up with mileage logs and receipts.
  • Do you have a lot of miscellaneous expenses: When you are filing your taxes each year, it's best to avoid listing expenses as miscellaneous if possible. A significant amount of miscellaneous expenses is a red flag for the IRS because it indicates that either you keep poor records, you are sloppy, or you are hiding something.
  • Does your business handle a lot of cash: If your business is largely cash driven, IRS agents are taught to assume that you are skimming or diverting money into your own pocket. Again, the better your receipts and logs are, the better off you'll be.
  • Does your business use independent contractors: Many businesses hire what they call "independent contractors" to avoid paying payroll taxes, but those independent contractors are really employees. Expect extensive questioning about the role of these employees: who they answer to, who directs them, how much freedom they have, etc. If the IRS decides that your independent contractors are really employees, you will get hit with some serious back taxes and penalties.
  • Did you fail to report some business income: if an IRS agent gets the impression that you simply "forgot" to report certain items as income (usually $10,000 or more), then you might be in very serious trouble. Purposefully not reporting income is criminal, and the IRS maintains a special criminal team that it uses during audits. If this ever happens, hire a specialist in tax audits immediately, remove yourself from the process and let the audit take its course.
  • Do your payroll taxes match your reported employees: If you are using employees rather than independent contractors, make sure that their payroll taxes are complete and accurate - the IRS will be double checking your payroll taxes to ensure that they match your claimed employees.

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You Need An Attorney Who Understands Tax Law

The IRS audit is designed to ensure that the numerous representations made on the tax returns can be supported and that the complex provisions of the Internal Revenue Code are met. The IRS audit cannot be handled by someone without expertise in this matter. It should not be handled by the CPA who prepared the return nor an accountant/CPA who only represents a few cases each year.

Do not worry that hiring a professional may give some indication of guilt; the IRS is used to having business owners represented by counsel and in many instances prefer dealing with a professional familiar with the process.

It must be handled by a tax attorney who is well familiar with all aspects of tax litigation and appeals as well as representing taxpayers in U.S. Tax Court as all these factors may influence the audit. Robert T. Leonard, both an attorney and CPA, has extensive experience in audit representation and represents a substantial part of his exclusive tax law practice.

Contact A Lawyer If Your Business Is Being Audited By The IRS

If you are facing the prospect of a business tax audit, get experienced legal representation on your side as soon as possible. Call 818-224-7935 or 888-408-9486 (toll free) to arrange a free initial consultation with Mr. Leonard. You may also contact us online. We are based in Woodland Hills and proudly serve clients in Los Angeles, the San Fernando Valley, all of California and other communities across the country.