Top Reasons Why The IRS Will Audit
By now, most of us know the IRS can be relentless in their pursuit of collecting taxes, fees and penalties - whether you or your business owes the money or not.
If you receive a letter from the IRS, especially a letter that is threatening in any manner, you should seek professional help. Our business law attorneys at Gantenbein Law Firm, also hold Master’s Degrees in Taxation and are dedicated to helping people and businesses reach quick and optimal resolutions to their tax issues.
The top reasons businesses and people are contacted by the IRS are; unreported income, failure to report income, cancellation of debt income, unreported settlements and excessive losses. If the IRS even suspects any of the above, you will most assuredly receive a letter at some point - even years later.
One of the main reasons you’ll hear from the IRS is if you file a W-2 for your income earned, but neglect to submit a Form 1099. The Form 1099 reports nonwage income such as interest, stock dividends and freelance work. The IRS already has the Form 1099 information. It’s only a matter of time before the IRS discovers your omission. Even companies like Ebay submit Form 1099s to the IRS if you sell on their website.
There’s also the dreaded Form 1099-C. In most cases, the IRS considers any debt you owe that is cancelled, forgiven or discharged as taxable income. If you have any debt you did not pay the full amount, that difference is generally considered income. In the aftermath of the Great Recession and Housing Crisis, many homeowners lost their homes to foreclosure, repossession, deed-in-lieu or abandonment resulting in cancellation or forgiven debt that will be reported as income.
If you received a settlement, depending on the type of settlement, you may have to pay taxes on that amount. Typically, settlements for personal physical injury for compensation of medical expenses, lost wages, pain and suffering aren’t considered income. However, if you received a settlement for punitive damages from a personal injury lawsuit, that money is considered income. There are exclusions regarding punitive damages awards, contacting an experienced business and tax law attorney is strongly recommended.
If you have a business and continue to file losses year after year, the IRS is likely to wonder how your business can stay afloat and will audit. If you own your own business, be careful not to declare some personal expenses as a business loss. That can trigger a red flag for the IRS. Don’t round up to the “hundreds” either. If you have an expense of $295.14, round the number to $295, not $300.
Our business law and tax attorneys represent individuals and businesses throughout Colorado. We have the most effective and efficient knowledge to handle even the most severe IRS tax issues.
Just in time for tax audit season, the IRS has new software to detect anomalies in tax returns, and are focusing on business and hobby tax expenses.
To avoid an audit, it is wise to use an experienced tax lawyer to review and file your tax return. Contact a tax attorney immediately if you are being audited.
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