Even for taxpayers who think they have done everything by the book, an audit can strike fear in their hearts. During an audit, the IRS combs through financial documents, often going back years. Taxpayers with the most diligent accounting efforts and the highest degree of integrity may nonetheless have made mistakes that can equal hundreds of thousands or millions of dollars in back taxes, penalties, and interests. The experienced Texas IRS Audit Attorneys at Brown, PC guides high-profile cases through the audit process.
Our firm represents some of the best-known names in sports, entertainment, business, and finance in high-stakes audits with high-dollar consequences. Our founding partner, Lawrence Brown, has 25 years of experience in tax law representation. He started his career as a Department of Justice Tax Division trial lawyer and prosecuted complex tax cases on behalf of the government. His insider knowledge is a substantial benefit to our clients who face tax audits and appeals of improper IRS decisions.
What to Do if Faced with an Audit
An individual or company may be audited either randomly or because a tax transaction has been flagged. Often taxpayers have made every effort to file their taxes correctly, but still, an innocent error could be costly. Other times, the taxpayer is aware of inaccuracies or possible fraud. In either case, representation is crucial at the earliest stages.
Our experienced IRS audit attorneys in Texas remain an integral part of the audit from start to finish. We conduct a diligent review of our client’s records and anticipate issues that might arise. We prepare arguments to refute potential accusations that we believe the government may make against our client to minimize the damages associated with filing and calculation errors. We are also not afraid to stand up to the government and refuse access to documents to which it has no right.
Should our client be accused of fraudulent filing, hiding assets or other wrongdoing, we are ready. At this stage, we may negotiate a settlement that can prevent criminal prosecution or, if the government attorney lacks evidence, we aggressively fight the charges.
We often represent large multinational corporations in audits that involve volumes of documents. Our team is skilled at reviewing and organization of substantial data to develop a strong audit strategy.
Audit Appeal
A tax appeal is much different than an appeal of a judge’s decision in the federal courts. Instead, a neutral independent organization within the IRS hears appeals of erroneous IRS decisions. We settle many tax disputes through this appellate process, including issues related to collections due process, offer in compromise, jeopardy levies, examination, international tax matters, tax computations, innocent spouse, and penalty appeals.
In most cases, challenging the outcome of an IRS audit begins with filing an appeal with the IRS Office of Independent Appeals. While this is an office within the IRS, its purpose is to, “resolve disputes, without litigation, in a way that is fair and impartial to the government and to [taxpayers].” If an appeal filed with the IRS Office of Independent Appeals is successful, this can result in either:
- A reversal of the audit’s outcome; or,
- A settlement with the IRS that mitigates the taxpayer’s liability.
If an appeal filed with the IRS Office of Independent Appeals is not successful, the taxpayer retains the right to go to court. At Brown Tax, P.C., we handle administrative appeals with the IRS Office of Independent Appeals and tax litigation in federal court on behalf of our high-income and high-net-worth clients. Experienced legal representation is essential at both stages of the process, and, with decades of relevant experience, Texas IRS audit attorney Lawrence Brown and all of the tax attorneys at our firm have the insights and capabilities required to effectively represent our clients in challenging any and all unwarranted federal tax liability.
Why Am I Being Audited?
If you are facing an IRS audit, one of the first questions you need to answer is, “Why?” Understanding why you are being audited will allow you and your Texas IRS audit attorney to make informed decisions about your defense strategy—which will be critical for resolving the audit as favorably and efficiently as possible.
The IRS audits taxpayers for several reasons. While the IRS conducts random audits and relies on statistical formulas to select audit targets, it also targets taxpayers based on specific issues (or apparent issues) with their returns. As the IRS also notes, you may be selected for an audit if your returns “involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.”
While all taxpayers are at risk of being audited, high-income and high-net-worth taxpayers are especially likely to face audits when the IRS identifies red flags in their returns or their relationships or transactions with third parties. With this in mind, setting aside random audits and audits based on the IRS’s statistical formulas, some of the most common triggers for IRS audits include:
Reporting Little Taxable Income (or Failing to Report Income Reported By Third Parties)
If the IRS expects you to report substantial taxable income and you do not, this can raise red flags that lead to an audit. This may result from either:
- Claiming substantial losses (i.e., business losses, investment losses, or gambling losses) that offset earned income; or,
- Failing to report income that has been reported to the IRS by financial institutions, exchanges, intermediaries, or other parties.
In either scenario, the IRS is likely to closely scrutinize your returns to try to discern why they do not align with the agency’s expectations. Even if your returns are entirely accurate, in this scenario, avoiding unnecessary liability will generally involve engaging an experienced Texas IRS audit attorney to engage with the IRS on your behalf.
Reporting Substantial Income
The IRS pays particular income to high-income and high-net-worth taxpayers’ income tax returns. As a result, while reporting little taxable income can raise red flags, reporting substantial income to the IRS can increase your risk of facing an audit as well.
If you are facing an audit after reporting substantial income to the IRS, here too, it will be important to have an experienced Texas IRS audit attorney on your side. You will need to take a proactive approach to the audit to ensure that the IRS does not impose undue liability, and this will require effective representation by an attorney who has in-depth knowledge of the relevant provisions of the Internal Revenue Code.
Claiming Substantial Business Deductions or Losses
Claiming substantial business deductions or losses is another common trigger for IRS audits targeting high-income and high-net-worth taxpayers. While various provisions of the Internal Revenue Code allow businesses and self-employed individuals to deduct their expenses and offset their taxable income with any losses they incur, abuse of these provisions has resulted in enhanced scrutiny over the past couple of decades.
When facing an IRS audit related to business deductions or losses, documentation is key. If you (or your Texas IRS audit attorney) can use documentation that you have on hand to substantiate the figures in your (or your business’s) returns, this will usually help facilitate a streamlined and favorable resolution.
Claiming Tax Credits (or Other Tax Benefits) for Which You Don’t Qualify
Along with improperly claiming business deductions and losses, improperly claiming tax credits can trigger IRS scrutiny as well. This includes improperly claiming family, disaster, and business-related credits that are available to some taxpayers but not others.
Claiming other tax benefits for which you or your business doesn’t qualify can also increase your risk of facing an IRS audit significantly. For example, the IRS is continuing to aggressively target fraud under the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) and other pandemic-era programs.
Inaccurately Reporting (or Failing to Report) Foreign Income or Assets
Inaccurately reporting (or failing to report) foreign income or assets is another common trigger for IRS audits targeting high-income and high-net-worth taxpayers. Under the Internal Revenue Code, U.S. taxpayers are required to report their worldwide income from all sources. Failure to accurately report income from foreign investments, foreign real estate holdings, work performed overseas and other foreign sources has become a top enforcement priority for the IRS in recent years.
The IRS is also aggressively enforcing high-income and high-net-worth taxpayers’ obligations to report foreign assets under the Bank Secrecy Act and Foreign Account Tax Compliance Act (FATCA). If a taxpayer fails to accurately report foreign assets—especially if those assets have been reported to the IRS by a financial institution or other third party—this has the potential to create substantial liability exposure.
Using Sophisticated Tax Mitigation Strategies
High-income and high-net-worth taxpayers can use a variety of sophisticated tax mitigation strategies to minimize their federal income tax liability. These include the strategic use of trusts, conservation easements and other tax planning tools. While these strategies can—and often do—fully comply with the Internal Revenue Code, they also present a relatively high risk for triggering scrutiny from the IRS.
Here, too, thorough documentation is key. When taxpayers can affirmatively demonstrate compliance with the Internal Revenue Code, IRS audits are unlikely to lead to significant liability. Conversely, when taxpayers cannot affirmatively demonstrate that their tax mitigation strategies stay on the right side of the line between tax avoidance and tax evasion, they can face substantial liability for back taxes, interest and penalties.
Math Errors and Other Common Mistakes
In addition to the issues discussed above, math errors and other common mistakes can trigger IRS audits as well. If you are facing an audit, an experienced Texas IRS audit attorney will be able to assist you with assessing the accuracy of your (or your business’s) returns and help you make informed decisions about how to deal with the IRS. If there are issues that need to be addressed, your attorney will be able to advise you regarding the options you have available and then work with the IRS on your behalf to target a favorable resolution that avoids unnecessary consequences.
Understanding the Three Types of IRS Audits
IRS audits can take three different forms. While each type of audit presents its own risks and opportunities, all audits can ultimately lead to the imposition of liability for back taxes, interest, and penalties if the IRS determines that the taxpayer has underpaid. The three types of IRS audits are:
Correspondence Audits
Correspondence audits take place by mail (and potentially over the phone). Typically, a correspondence audit indicates that the IRS has identified a relatively minor oversight or inconsistency in a taxpayer’s return. However, as with all types of IRS audits, while this may be an issue that needs to be addressed, it is also very possible that the IRS’s concerns are misguided and unwarranted. Our tax attorneys can help you make informed decisions about your next steps.
Office Audits
An office audit takes place at the IRS field office nearest the taxpayer’s home or office. During an office audit, the taxpayer will be required to submit records to the IRS’s field office for examination. The taxpayer will also typically be required to answer questions from an IRS revenue agent during an “interview.” Avoiding miscues when submitting documents to the IRS and answering questions during an interview requires experienced legal representation.
Field Audits
A field audit takes place at the taxpayer’s home or office. This is the most invasive type of IRS audit, and facing a field audit often signifies that the IRS has significant concerns about substantial tax evasion or tax fraud. When facing a field audit, experienced legal representation is critical, and high-income and high-net-worth taxpayers who have received notice of an impending field audit should engage a Texas IRS audit attorney to represent them as soon as possible.
Learn How a Texas IRS Audit Attorney Can Help
If you are faced with an audit, retain legal counsel as soon as possible. Brown, PC has the top Texas IRS audit attorneys available to guide you through this challenging process. Do not hesitate to contact our office today.