Tax disputes
Common IRS Tax Disputes: When a US person receives a notice from the IRS, they often think they are all alone – and why have they been torn out of the dark and plunged into an IRS tax dispute dilemma. And while these are very legitimate thoughts, the reality is that the Internal Revenue Service serves millions of people each year on a whole range of different topics. Not all tax disputes are created equal. While some disputes may present a minor inconvenience in the life plan (although it may not be at this point), others are much more dangerous, which can lead to an investigation by special agents. Sometimes the taxpayer owes the IRS money and sometimes they get an NC or “No Change” letter.
Let’s take a look at some of the most common tax disputes tax attorneys face on a daily basis for US individuals.
Tax assessment
Tax assessment is one of the most common situations a taxpayer faces. Often times, the problem is simply that the Internal Revenue Service has different information on its records than what the taxpayer put on their tax return. Sometimes it is because the taxpayer has under-reported his income or has not withheld and deposited sufficient tax amount during the year. In other cases the IRS got it wrong –
Often times, these problems can be resolved with relative ease.
Tax audit or audit
A tax audit or audit is a more serious problem than a tax assessment notice. But despite the fear you will have, you will no doubt read online – don’t try to convince yourself to believe this. Often times, an audit is just a request from the IRS that results in a discrepancy in the numbers.
In reality, there are two main reasons a taxpayer is audited (although there can be several reasons for auditing):
Unreported income
For one reason or another, the taxpayer did not accurately report his income to the IRS. It doesn’t have to be shameful – and it can be so simple that the taxpayer didn’t receive a 1099 for one of their advisory appearances, or received part of their income in cash or cash – and the taxpayer may have made a reporting error.
Exaggerated deductions
This is a bit more of a headache, but as long as the prints were legitimate, it’s often not that big of a deal.
For example, the taxpayer may have misunderstood how the deduction is applied – or improperly reported losses on gambling winnings (the rules had recently changed on what can be claimed as a deduction). These would be examples of legitimate but inaccurate prints.
On the flip side, this is a bigger problem (but not impossible) when the taxpayer has simply conjured up an imaginary business that doesn’t exist for that simple purpose of claiming deductions to artificially reduce their taxable income.
Tax fraud investigation (also known as eggshell or reverse eggshell audit)
If the Internal Revenue Service believes the taxpayer may have committed some form of tax fraud, it is likely a little bit done with the investigation. These are usually called eggshell audits or reverse eggshell audits – because you either have information that the IRS doesn’t have but that you want to contain (without committing perjury), or the IRS has information you don’t know about and who they want See how you maneuver when you press the subject.
In any case, if fraud is a potential problem, taxpayers should bring along a seasoned tax attorney – this is not the time for bravery.
If the exam ends badly, it may result in a referral to the Special Agents for a criminal investigation.
Reduced sentence
In a non-offshore climate, these types of penalties are usually due to an individual either underreporting their income or transferring their deductions to the extent that they have an underpayment or significant underpayment tax to the IRS.
Depending on the quantity, this can result in an accuracy penalty which can be either 20% or 40%.
If the IRS can prove fraud, a penalty of 75% can be imposed.
Regardless of the penalty, the taxpayer has the option to dispute the penalty.
Offshore penalties
When it comes to offshore penalties, much more is at stake.
This is because offshore penalties such as FBAR (below), Form 3520, and Form 5471 are often imposed not directly affected by outstanding unreported income or tax liability. In other words, taxpayers may face significant fines and penalties for non-compliance with offshore declarations – even if they do not have unreported income – which is a huge problem that taxpayers want to address in the years to come.
FBAR audits
In recent years, the Internal Revenue Service has begun significantly improving the enforcement of reporting on foreign banks’ financial accounts. This has resulted in a huge increase in the number of FBAR exams, criminal exams, and litigation.
Tax disputes come in all shapes and sizes
There are many reasons the Internal Revenue Service can contact a taxpayer to pursue a tax dispute. Common problems include: US and offshore taxes, as well as reporting penalties, valuations, and fraud investigations. If this is cost effective, taxpayers should consider hiring a tax law specialist to help them resolve their tax dispute with the IRS.