Federal Audits

Federal audits usually start when a taxpayer is notified that his or her return has been selected for examination. The Internal Revenue Service (IRS) will let you know that it needs certain records. Examinations may take place by mail or in your home, your place of business, or an IRS office, as determined by the IRS. The Los Angeles federal tax audit lawyers at the Ben-Cohen Law Firm can represent you during the process of a federal audit. We can explain any proposed changes to your tax return at the end of the audit process and advise you on whether you may have grounds to appeal the result.

1. Identify returns

2. Review returns

3. Select/Assign returns

4. Audit returns

Source: GAO analysis of IRS information. | GAO-16-103

In conducting a federal tax audit, the IRS must follow the rules set forth in the Internal Revenue Code. However, certain aspects of the Code are open to interpretation, making it important to retain a knowledgeable tax attorney who can keep up with these changes and make sure that your tax returns are compliant before the audit or advise you on how best to address issues.

The Internal Revenue Code has been interpreted by Treasury Regulations, judicial tax decisions, and IRS rulings. For example, the Treasury Regulations, which are divided into proposed, temporary, and final regulations, provide official interpretations of how particular Sections of Internal Revenue Code should be administered or applied. The final regulations are the highest authority, ranking above all other IRS rulings, and they must be followed by the IRS. However, changes to the Internal Revenue Code may reduce the need for taxpayers to comply with a particular final regulation. Moreover, temporary regulations provide guidance until final regulations are adopted. It is important to be aware that the IRS may in some cases present its position to the courts, lose, and still apply its interpretation of the law to your federal audit. The federal tax audit attorneys at our Los Angeles firm keep abreast of the latest developments in tax law, following important court decisions and positions adopted by the IRS that may impact civil or criminal audits.

Internal Revenue Code Sections 6662(b)(1) and (2) authorize the imposition of a penalty if the IRS finds that your negligence or disregard of the rules caused you to underpay taxes, or if the underpayment is greater than a computational threshold that is called a substantial understatement. Section 6662(b) also empowers the IRS to impose five other accuracy-related penalties. For example, an accuracy-related penalty may consist of 20 percent of the portion of an underpayment that may be attributed to the taxpayer’s negligence or disregard or to a substantial understatement.

Although the IRS may assess penalties under both Section 6662(b)(1) and Section 6662(b)(2), these penalties may not be stacked to result in a total penalty amount in excess of 20 percent of the underpayment. You usually will not be subjected to an accuracy-related penalty if you establish that you had reasonable cause to underpay and acted in good faith. One example of reasonable cause is relying on your tax professional for a position taken on your tax return. Moreover, a penalty may be waived if you relied on “substantial authority” for the position that you took on a return.

If you agree with the changes proposed after the audit, you can sign an agreement form and pay additional taxes. You will need to pay interest on any additional tax. This is calculated from the due date of the return to the date of the payment. You may pay when you sign the agreement or wait until you receive a bill that includes the interest. Assuming that you pay the amount due within 10 business days of the billing date, you will not need to pay further penalties or interest.

When the amount that the IRS requires you to pay exceeds what you are able to pay, we can help you prepare an offer in compromise, which is an agreement to pay less than what you owe. However, if you disagree with the changes proposed by an examination, or the IRS declines an offer in compromise, we can help you decide whether you have grounds for challenging such decisions that fall within the scope of the tax laws, and represent you in an appeal.

For many people, a federal tax audit is a daunting process. Our Los Angeles federal tax audit attorneys strive to make this process less stressful. We provide experienced representation at every step and can provide counsel related to criminal tax audits as well, should that become necessary. The tax attorneys at the Ben-Cohen Law Firm have a depth and breadth of knowledge in tax law and routinely employ legal strategies unavailable to accountants and other tax professionals in an audit.

Pedram Ben-Cohen is an attorney, a CPA, and a Board Certified Taxation Law Specialist who can help you with your Federal tax audit. Contact us at (310) 272-7600 or complete our online form to set up an appointment. We can also assist clients who need a collection defense attorney or guidance with other tax-related matters. We represent people throughout Los Angeles County, including in Santa Monica, Malibu, Beverly Hills, Burbank, Pasadena, Sherman Oaks, Venice, and West Hollywood.