Work with experienced attorney to navigate IRS investigation, P.2
Last time, we commented briefly on the topic of tax fraud, and the kind of evidence IRS investigators look out for when there is suspected tax fraud. As we noted last time, tax fraud is different from tax negligence, and it is important for those under investigation to ensure they know how to navigate the audit process to avoid any appearances of fraud.
Tax examiners, in the audit process, will ask a variety of question to attempt to gauge the taxpayer’s knowledge of any errors in tax returns. Questions will be asked about the taxpayer’s background and knowledge, familiarity with business operations, including the way books and records are kept, and whether the taxpayer is aware of any errors in the return. Tax examiners are also able to request information from third parties in their investigations.
Tax examiners will also solicit explanations from the taxpayer regarding any errors. The way a taxpayer answers can impact not only the determination of whether tax errors constitute negligence or fraud, but also what penalties should apply. If a taxpayer can show that unreported income is off-set by undeducted expenses, this can affect the outcome of the investigation.
Similarly, lack of knowledge of a tax error, if supported by a reasonable explanation, will be in the taxpayer’s favor. If a taxpayer has relied on a paid tax preparer, or the advice of a tax attorney, in a tax filing, an explanation of this reliance should be provided.
Of particular importance for taxpayers under audit is to navigate penalty determinations. We’ll say more about this in our next post.
Source: Internal Revenue Manual, Part 4: Penalty Considerations, Section 6: Penalty Considerations