Tax Disputes
Common IRS Tax Disputes: When a US person receives a notice from the IRS, oftentimes they think they are all alone — and why did they get plucked from obscurity and thrusted into an IRS tax dispute dilemma. And, while these are very legitimate thoughts — the reality is that the Internal Revenue Service goes after millions of people each year for a whole host of different issues. Not all tax disputes are created equal. While some disputes are minor inconveniences in the scheme of life (although they may not seem so at the time) — others are a lot more dangerous, which can lead to a Special Agent Investigation. Sometimes, the taxpayer will owe the IRS money and other times they will receive an NC or “No Change” Letter.
Let’s take a look at some of the common tax disputes that Tax Lawyers handle for US persons on a day-to-day basis.
Tax Assessment
The Tax Assessment is one of the most common situations a taxpayer has to deal with. Oftentimes, the issue is simply that the Internal Revenue Service has different information in their records than what the taxpayer has identified in their tax return. Sometimes, it is because the taxpayer underreported their income or did not withhold and deposit a sufficient amount of tax during the year. Other times, the IRS has it wrong —
Oftentimes, these issues can be resolved relatively simply.
Tax Audit or Examination
A tax audit or examination is a more serious issue than a tax assessment notice. But, despite some of the fear mongering you will undoubtedly read online — try not to be goaded into believing this. Oftentimes, an audit is just an inquiry from the IRS involving a discrepancy in numbers.
In reality, there are two main reasons why a taxpayer is audited (although there can be several reasons for the audit):
Unreported Income
For one reason or another, the taxpayer did not accurately report their income to the IRS. It does not have to be anything nefarious — and it may be as simple as the taxpayer did not receive a 1099 for one of their consulting gigs or they received a portion of their income in cash or cash alternative — and the taxpayer may have made a mistake in reporting.
Exaggerated Deductions
This is a bit more of a headache, but as long as the deductions were legitimate then oftentimes it is not that big of a deal.
For example, maybe the taxpayer misunderstood how the 179 deduction is applied — or did not properly report losses when it came to gambling winnings (the rules had recently changed as to what can be claimed as a deduction). These would be examples of legitimate, but inaccurate deductions.
On the flip-side, if the taxpayer simply conjured up an imaginary business that does not exist for this simple purpose of claiming deductions in order to artificially reduce their taxable income — this is a bigger problem (but not impossible) to contend with.
Tax Fraud Investigation (aka Eggshell or Reverse Eggshell Audit)
If the Internal Revenue Service believes the taxpayer may have committed a form of tax fraud, then they are probably in for a bit of doozy with the audit. These are typically referred to as eggshell audits or reverse eggshell audits — because either you have information that the IRS does not have but you want to keep contained (without committing perjury) or the IRS has information you don’t know about and they want to see how you maneuver when pressed on the subject.
Either way, when Fraud is a potential issue, taxpayers should bring an experienced tax specialist attorney with you — this is not the time for bravado.
If the audit ends badly, it could end up with a referral to the Special Agents for a criminal investigation.
Penalty Abatement
In a non-offshore climate, these types of penalties typically is a result of a person either underreporting their income or exaggerating their deductions to the degree that they have an underpayment or substantial underpayment tax to the IRS.
Depending on the amount, it may result in an accuracy penalty which can be either 20% or 40%.
If the IRS is able to prove fraud, there may be a 75% penalty.
No matter what the penalty, the taxpayer has the opportunity to dispute the penalty.
Offshore Penalties
When it comes to offshore penalties, the stakes are much higher.
The reason is because oftentimes offshore penalties such as FBAR (below), Form 3520, and Form 5471 are not impacted directly by outstanding unreported income or tax liability. In other words, taxpayers may get hit with significant fines and penalties for offshore reporting non-compliance — even if they have no unreported income — which is a major problem the taxpayer advocate hopes to tackle in the coming years.
FBAR Audits
In recent years, the Internal Revenue Service has begun significantly increasing the enforcement of foreign banking financial account reporting. This has led to a huge increase in the amount of FBAR examinations, penalty assessments, and litigation.
Tax Disputes Come in All Shapes and Sizes
There are many reasons why the Internal Revenue Service may contact a taxpayer to pursue a tax dispute. Common issues include: US and offshore tax and reporting penalties, assessments, and fraud investigations. When cost-effective, taxpayers should consider hiring a Tax Law Specialist to assist them with resolving their tax dispute with the IRS.