Got Audit. Help Please!!!

[Bees Knees]

I know for a fact that IRS does not want amended returns to be FILED during an audit for
the years being audited.

Again, the original poster did not say the EA was going to FILE the amended returns. The original poster said the EA was going to prepare amended returns and file them with the auditor. The auditor can then decide whether to accept them as filed, or simply use as worksheets.

It has already been suggested that the amended returns could help avoid certain penalties. I don't know all the details of this case, but there are certain areas where this could be true. I know that in employment tax audits, you are treated better by IRS when you voluntarily agree to do it right rather than wait for the auditor to determine you did it wrong. So there could be certain elements here where filing an amended return with the auditor (not the service center) could help the situation, as it is clear the taxpayer is not trying to hide anything.

[OldJack]

as it is clear the taxpayer is not trying to hide anything.

Irreverent to the auditor. The taxpayer has acknowledged that he has under reported more than 25% of his income in several years. The auditor does not know that at this time but will obviously find out later. This should be considered a criminal case now and in need of legal expertise/protection that the CPA and/or EA cannot possibly provide. It could be considered malpractice to proceed as though this was a normal tax audit when you have knowledge of the facts that it could be a criminal case.

[dyne]

IRS Auditors or Agents do NOT want an amended return to be filed with the
service center for the years under audit: And during an audit one can never be sure
which returns will be audited. Generally if an undestatement of income or overstatement of
deductions is found in one year, the audit will be extended to two or three years or
more if fraud is suspected or a large amount of income is omitted. Generally IRS does
not go back more than six years even in fraud cases. If amended returns are to be filed for prior years that should be done later after the audit is completed.

It is the JOB of the Auditor or Agent to determine the correct tax liability of the taxpayer. They do not like it when an amended return is prepared or submitted or filed. Sure, they will and MUST consider amended returns but it takes away from their ability. THEY want the credit for finding any additional tax owed, and filing or preparing amended returns takes away that credit. IF there are adjustments needed, the EA or taxpayer should ADVISE the auditor of this. Some unscroupilous or unknowledgeable tax preparers have filed amended returns during an audit to thrwart or delay the audit. So, IRS does not think kindly of this.

[MAMalody]

Jainen has hit it on the head. As a prior IRS auditor this is what I would recommend.

1. Take your notice and records to the EA you have selected. Have them review them and advise you of the potential liabilites.

2. Have them go to the audit for the year in questions. In your original post you indicated that only 2004 is under review. That is all your EA should go prepared to discuss. He should not tender any amended tax returns at that time.

3. You should NOT go to the audit with your EA. You are paying him for his expertise and experience, let him do his job. (If he has not representation experience, find another EA. While this is not rocket science, with potentially $55000 of unreported income on the table you are liable for at least $16,000 in taxes (assuming no missed deductions) and penalties and interest and potentally a civil or criminal fraud issue.) You need somebody who has been around the block. If the fraud word gets bandied about, make sure you EA is instructed to tell you this...at that time it could be wise to consult with a tax attorney.

4. If the other years are questioned, have your EA get back to you to take care of those through the audit. Do NOT file anyturns, either 2003 or 2005 until the 2004 audit is closed and your auditior has not opened up the other years. If he opens them, you will know it. If he opens them, the auditor will want to make the adjustments himself. It will irritate your auditor if you filed those amended tax returns when he is going to open those years for audit. I don't recommend inrritating your auditor more than necessary. He can exercise great lattitude and discretion and you want him on your side as much as possible.

5. Your job is to be forthright with your EA. Do it.

6. Your EAs job is to keep the audit in as narrow a scope as possible, being honest with the auditor at all times and providing any information asked for within the scope of the audit.

7. Get off this board. It is only going to confuse you because you do not have the experience to understand the behind the scenes issues and without us having all the information at your disposal, we can only give your general answers, such as this one, that may not be right since we don't have all your information.

8. Good luck.

Mike

[OldJack]

Emptyhead,

Most of us on this tax forum have never been involved with a criminal fraud case. Your EA, although he may be a tax expert qualified to represent you, may be your "worst enemy" when called to testify in your court case and repeat everything you have told him and what (s)he knows, has calculated, or documented about your fraud. You should not tell your EA anything or turn over any documents to your EA until you have legal counsel.

Those suggesting otherwise on this forum should reconsider/weigh that your representation could possible cause great harm to this taxpayers case and possible prison time.

[Bees Knees]

Those suggesting otherwise on this forum should reconsider/weigh that your representation could possible cause great harm to this taxpayers case and possible prison time.

Just wondering...assuming this taxpayer is telling the truth and that the understatement is the result of poor bookkeeping skills, on what grounds would the government prosecute this person for tax evasion?

[OldJack]

Just wondering...assuming this taxpayer is telling the truth and that the understatement is the result of poor bookkeeping skills, on what grounds would the government prosecute this person for tax evasion?

Just the facts. Check the original post where the taxpayer says the returns were prepared with " I have no intention to underreport and it was a result of no bookkeeping and I filed the tax with guesses and estimates."

And those guesses resulted in under reporting of more than 25% of income and nothing was done to correct until the IRS notifies they will audit. Oh please, this taxpayer would never have fessed-up without the audit and (s)he knew (s)he was under reporting to the tune of big-time. Most internet business revenue is well documented by way of credit card or pay pal payments. How hard is it to add up deposits to ones account. This taxpayer will be lucky (or have excellent representation) if (s)he doesn't view the world from behind bars. It would be best if our advise or representation did not help the taxpayer get there.

[dyne]

I have been involved with fraud cases many times. A pattern of ommitting income
for several years is a badge of fraud. So is keeping books and records which reflect
income or expenses which IRS establishes as being clearly wrong. If the taxpayer
knows that income was ommitted, I believe that is a badge of fraud. A badge of
fraud is a fact which indicates fraud was committed. IRS has a long list of such
badges of fraud. I was always amazed that taxpayers would report little or no
income and yet live in expensive homes and drive fancy cars. And surprise, they
were caught by IRS. Often it is obvious to the auditor or agent early on during the
examination (or audit). IRS has a number of indirect methods which it uses to
determine unreported income and they are good at using these methods. The civil fraud penalty would still be asserted if criminal prosecution is not initiated. All tax preparers should study IRS indirect methods, most have no clue. Fraud is INTENT, which would seems to be difficult to prove but IRS does it routinely.

[RLymanC]

Unreprted Income

In your original post you stated that you estimated income one year and guessed on the other.

You can get a printout of your gross income from E-bay for the years in question and take all the guess work out, this in turn would give you the required income records for the audit.

Just a thought,,,,good luck, these things are never fun, even with minor problems.

[jainen]

send her to jail

Criminal fraud is VERY difficult for the IRS to prove, and also very costly (including the cost in public relations--yes, the IRS is sensitive about complaints it is picking on some small-time home business). If the taxpayer is cooperative and accepts the correct tax assessment and penalties, IRS will not send him to jail.

Civil fraud is much simpler. Penalties can be over 100%, and the IRS doesn't actually have to prove anything.

[Bees Knees]

Yes, proving criminal intent and prosecuting is very difficult and costly, but IRS
does it every day.

And those guesses resulted in under reporting of more than 25% of income and nothing was done to correct until the IRS notifies they will audit. Oh please, this taxpayer would never have fessed-up without the audit and (s)he knew (s)he was under reporting to the tune of big-time. Most internet business revenue is well documented by way of credit card or pay pal payments. How hard is it to add up deposits to ones account. This taxpayer will be lucky (or have excellent representation) if (s)he doesn't view the world from behind bars. It would be best if our advise or representation did not help the taxpayer get there.

Going to jail for this, and being assessed civil fraud penalties are two different things.

Give me an example where a taxpayer fessed up prior to the audit and willingly paid the penalties, and then still went to jail?

OldJack, can you give an example of this?

I can give you an example of this not happening to a client that owed even more than this taxpayer and was substantially under reported more than this taxpayer. The word fraud was never even considered by the IRS. The auditors were happy just getting the taxpayer to pay $100,000 in additional taxes and penalties.

Again, OldJack, before scaring the bejeebers off this person, can you give us an example of anyone going to jail who cooperated with IRS, told IRS prior to the audit about the under reporting, and paid the additional tax and penalty?

[Bees Knees]

I would venture to guess that even if emptyhead did this on purpose, the fact that emptyhead agrees ahead of time to pay the tax and penalties, nobody is going to send emptyhead to jail.

Can anyone provide a citation of a case where any taxpayer in a similar situation served jail time?

If not, you are shooting from the hip!

[Snaggletoof]

At it Again

Oh Boy!! Old Jack and Bees Knees are at it again. And the rest of us have a ringside seat!!

My two cents worth first begs a reality check before anything else. I think some of us are being very polite to Emptyhead, and we should all try to be. This, however, involves giving people the benefit of the doubt, and at the risk of sounding callous, I can't give this to Emptyhead.

I can't buy the idea that a 25% under-reporting of revenue is just a slip-of-the-bookkeeper's pen. Especially not to the degree of dollars that has been discussed. It could be the result of a bookkeeping system so vacuous that the tax return was filed with numbers pulled out of the sky. And I must add that the numbers if pulled out of the air were known to be extremely in the taxpayer's favor when the return was originally filed. Sorry to sound so rude to our guest poster, but I wasn't born yesterday -- but more importantly the other parties to be dealt with weren't born yesterday either.

The scene of a contrite taxpayer owning up to his shortcomings and trying to make it right with an EA delivering corrected dollars and prescribed civil penalties to the IRS will probably be enough for the IRS to not go further. They see this kind of stuff all the time.
However, if this does go to the criminal division, an EA delivering accurate, timely, and perfunctory records will give the prosecutor a "slam dunk" on this one.

I think the chances of this going criminal are extremely slim -- but not particularly because the customer exhibits contrition. Going criminal puts an administrative burden on the IRS that they don't really want unless there are really big bucks involved or the IRS is really "out to get someone." If Emptyhead is really worried about this going to their criminal division, I would seek a TAX attorney (not an ordinary attorney) to resolve this who will not deliver a "slam dunk" as described above. Otherwise I would use the EA and do what she says. As mentioned before, she will be able to see the particulars and advise better than those of us on this board, who are very much uninformed on the particulars.

And 1040Xs? Agree with Bees, have them prepared by the EA, and offer to give them to the auditors. I believe the IRS hates it when a 1040X is mailed in after a return is chosen for audit. When this happens the auditor is immediately out-of-touch with the 1040X and has to fight the administrative boondoggle in the IRS to reconcile everything. Often this can take years to finally bring this in synch, and at times, never. Giving a 1040X to the auditor puts him in command of the changes if he accepts them.

[OldJack]

<< If not, you are shooting from the hip! >>

And so are you shooting when you advise that this is not "probably" a criminal case of tax evasion. You don't know and it is the taxpayers neck on the line to go without legal counsel on a tax professionals ego advice. Tax evasion is a felony punishable by fine of up to $100,000 and/or up to 5 years' imprisonment, plus costs of prosecution. The elements of the crime are willfulness, an attempt to evade tax and additional tax due (code §7201). Guessing comes close to willfulness. The taxpayer knew or should have known (s)he was substantially under reporting and made no amended return before audit. Yes, there is a good chance that it could go either way with proper representation, however, as a tax professional you have nothing good to offer with protecting the client if you have to testify. Statements you make at the audit can and will be used against the taxpayer in court. Show us a case where the EA was successful in claiming client privilege on tax return matters.

As to criminal cases, If you want that information I would suggest a search on doctors criminal court cases as there seem to be quite a few in prison at least that was so in the past. We have a large special prison in Springfield, Missouri, as I understand it is used mainly for such taxpayers. The taxpayer has a right and should be scared.

Personally, I have not had a client that substantially under reported income that would fall within the tax evasion percentage. How many of those here that are proposing EA representation (without legal counsel) have experienced such cases? Where is Black Bart and his polls when we need him?

[Jiggers]

e-Bay &amp; Sales Tax

Another problem that this taxpayer is going to have is the possibility that there is state sales tax owed on the sales that probably have not been reported to the state.

States are looking for more and more ways to collect tax, and going after e-Bay sales is one of them. $20,000 in unreported sales is equal to $1,600 in tax at 8%. Most probably these sales are subject to sales tax.

The states do have reciprocal agreements with the IRS and the various state unemployment commissions.