The Internal Revenue Service conducts different types of audits. This means that individuals often face different examinations when flagged for suspicious activity. Below, we take a comprehensive look at the four primary types of audits:

Correspondence audits

This type of audit usually covers one return year and is conducted by phone or mail by the IRS. Usually, it is conducted on nonprofits and charities with the aim of gaining additional information about specific issues on their tax return. Questions revolve around a refund, deductions, or business expenses.

Although considered the lowest level of IRS auditing, correspondence audits could potentially become complex. Penalties for fraud and errors after this audit includes liens on property, payment of additional taxes, and fines. However, if everything is straightforward and the information requested satisfies the inquiry, the issue is closed with a confirmation letter from the IRS.

Office audits

The second most common IRS audit type is office audits. Although it might seem nerve-wracking being asked to go down to your local IRS field office, it usually involves similar questions to those in corresponding audits.

The IRS letter will include the documents you need to bring during your visit. Luckily, these audits often close quickly because the work is done directly with an appointed IRS auditor. You don’t have to go through the hassle of exchanging documents via mail.

Field audits

Conducted at your place of business or home, field audits are handled by an experienced IRS agent. Often, they address potential issues revolving around complex financial documents of high-wealth companies and individuals. Taxpayers that have complications with their tax returns can also expect a field audit.

Similar to office audits, you will work directly with an agent. The agent will typically require clarifications on different areas of your finances and documentation. These audits can take a long time to close, and most last up to a year.

Taxpayer compliance measurement program

Although this type of IRS audit is uncommon, it is much more thorough than the rest. For starters, an IRS agent goes through every line on your tax return. It will entail lengthy examinations because every detail will be scrutinized.

During the taxpayer compliance measurement program, the selected organizations and individuals are purportedly random. Therefore, your tax returns could potentially have no errors or issues. However, it will stretch years to complete the audit due to the lengthy, detailed cross-examination.

Understanding the tax laws surrounding offshore accounts is vital, but it can be as confusing and overwhelming as it is important. There are many ways a person can commit tax crimes in relation to offshore accounts, often without knowing. Unfortunately, in the eyes of the IRS, not knowing the law, misunderstanding how the law relates to your offshore accounts or even not knowing the accounts existed still means you are responsible for these crimes.

Here are several ways you might unintentionally commit tax fraud.

1. You simply didn’t know

It’s important to know if you have any investments in an offshore account or what they are because they may need to be reported on an FBAR. If you didn’t file this report and make the payments necessary to keep the accounts in compliance with IRS regulations, then you may find yourself facing penalties of up to $10,000 or 50% of the amount. Forgetting that you had these accounts or being mistaken about the balance can still land you in just as much trouble with the IRS as if you did it willingly. 

2. You chose not to know

Reckless disregard and willful blindness could get you in just as much trouble as knowingly committing tax fraud. Sometimes taxpayers can commit a crime through willful blindness if they intentionally avoid learning about an IRS requirement, such as failing to read their tax forms. If you willfully continue to manage an offshore account after being notified that taxes weren’t withheld from interest, dividends or capital gains on your account, it could constitute reckless disregard. Being found guilty of either of these two crimes could result in your accounts being frozen, wages garnished, property seized or worse. However, there are many ways in which taxpayers who have been victims of scam artists may also fall under these categories.

3. You thought you knew

If you’ve been scammed into committing a tax crime, there are a few things you can do. Contact the IRS immediately and explain your situation. In an instance where you committed the crime unknowingly, you should contact them as soon as you can, but be sure to document everything that happened. Whether on your own or with the help of a lawyer you should look into filing an amended return with the IRS.

The IRS’s Voluntary Disclosure Program is an option, one of many. But while the IRS has many paths to get you back on the right side of the law, beware of scammers who will pretend to be with the IRS. They may take advantage of people who are scared of fines, garnishments or prison time.

Tax deeds and tax liens are both tied to unpaid taxes. While they are grouped in the same category, each works differently from the other. Here is a quick look at the differences between the two.

What does a tax lien mean?

Tax liens are legal claims concerning unpaid taxes on a property. They is often placed on unpaid property taxes. Tax agencies can place liens against any type of property, whether it be an investment, residence, or business. The owner of a property with a tax lien cannot refinance or sell the property before clearing the tax debt.

Similarly, the IRS may place a federal tax lien on individuals who have not met their tax obligations. This is meant to compel them to pay their back taxes. After the debt is paid, the IRS will release the lien within 30 days.

Auctioning of tax lien certificates

If you are unable to pay your debt, your local tax authority may auction your tax liens. The auction transfers the tax debt to the tax lien certificate holder. Therefore, anyone who buys a lien certificate pays the entire debt, including any accrued interest.

The tax certificate holder does not own the property but collects interest on any tax debt. This interest is paid until the owner pays off all debt. The interest rate is anchored in state law and may be a fixed rate or a range such as 0% to 18%.

What is a tax deed?

A tax deed offers the holder the right to ownership of the underlying property. It is also issued by the local tax authority when a property owner defaults on their tax payments. Just like with tax liens, a tax deed goes to the highest bidder in an auction.

The deed can be auctioned in person or online. State law only allows taxing authorities to sell the entire property to collect delinquent taxes. Therefore, when you buy a tax deed, you are essentially buying the underlying property.

Some state laws give the property owner a period to redeem the property before the title transfers to the selected bidder. However, they would have to pay the property’s value, penalties, interest, and due fees.

If you employ individuals to work for you full-time, you must hold back part of their paycheck for income tax. The government requires all employers to collect and pay taxes in accordance with the Federal Insurance Contributions Act (FICA).

Failure to abide by payroll tax laws could result in serious criminal charges. 

What the law says about willful failure to collect or pay tax

According to 26 U.S. Code § 3102 and Code § 3402, all employers have a duty to collect or withhold employees’ FICA taxes for the U.S. government. As such, the Internal Revenue Code section 7202 makes it a crime to:

• Willfully fail to withhold or collect a tax
• Willfully fail to account for and pay tax 

Charges in this section often apply to employment tax violations. However, anyone under the law with the duty to collect or pay taxes can face prosecution under this section.

How the government proves willful failure to collect or pay tax

If you are arrested for payroll tax violation as per section 7202 guidelines, the prosecutor will have to prove:

• A duty to collect, account for, and pay over tax: Anyone with the status, duty, and authority to collect and pay over tax
• Failure to collect, properly account for, or pay over the tax: Any responsible person with the duty, authority, and status to collect and pay over taxes but fails to do so
• Willfulness: Anyone with the responsibility and awareness of the law who intentionally fails to pay over taxes

If the prosecution cannot prove that these acts were intentional or willful, a misdemeanor charge may still apply for failure to withhold tax after receiving notice from the IRS.

Penalties for willful failure to collect or pay tax

If you are found guilty of willfully failing to collect or pay the taxes as stated under the law, you could face severe felony punishments. These could include up to five years of jail time and a fine for each offense, up to $100,000 for individuals or $500,000 for corporations. Penalties and interest may also apply.

As an employer, it is essential to understand the legal obligations pertaining to withholding and paying over payroll taxes to avoid being on the wrong side of the law. Failure to do so can escalate into fines, jail time, or both. 

On May 16, 2022, the Supreme Judicial Court of Massachusetts (SJC) ruled against the Massachusetts Department of Revenue Commissioner in the VAS Holdings & Investments LLC v. Commissioner case. 

This ruling was a reversal by SJC of the Appellate Tax Board’s decision concerning restrictions on the taxation of a non-domiciliary corporation. VAS Holdings & Investments LLC had earned capital gains from selling fifty percent membership interest in an organization within Massachusetts. 

However, the tax applied on the capital gains was invalid, and this SJC decision has various implications for businesses operating in Framingham, MA, and the state. 

How this ruling could impact businesses that operate in Massachusetts

In the VAS Holdings’ appeal case, the Commissioner agreed that the capital gain by VAS Holdings was non-taxable based on the unitary business principle. However, the Commissioner added that the capital gain may still be taxable as it indicates an in-State company’s growth. 

The Supreme Court disagreed with this argument holding that the Commonwealth’s tax may be applicable on the capital gain, but the Commissioner lacks the authority to apply the capital gains tax.

The VAS Holdings & Investments LLC ruling is surprising as its interpretation of the taxation laws in Massachusetts seems to lean more favorably toward out-of-state entities. This can impact businesses in Massachusetts as it clarifies the definition of a “unitary business.” Under Massachusetts law, businesses are considered unitary if they are “sufficiently integrated with or dependent upon other activities conducted both within and without the commonwealth.” 

In this case, the court ruled that VAS Holdings & Investments LLC was not a unitary business and therefore was not subject to the nonresident composite tax. This ruling could have implications for companies operating in multiple states, as it suggests that they may not be subject to the same tax laws as businesses headquartered in Massachusetts. 

Beneficiaries of the VAS Holdings & Investments LLC ruling

While the Supreme Court ruling translates to a loss of revenue for the state of Massachusetts, it is good news for foreign investors. Typically, the beneficiaries of the ruling will be out-of-state investors exempt from taxation on the sale of their Massachusetts business. This is where a unitary business relationship is absent. 

Startups and other businesses in Framingham, MA, or other places in Massachusetts can attract investors from outside the state. 

Furthermore, investors that had paid tax under similar “investee apportionment” methodology circumstances may wish to request a refund by filing amended returns. 

The government tries to find ways to prompt its citizens to pay pending taxes. Since 2018, one of the ways the IRS has recouped money owed to them is by restricting passport privileges. However, not all tax debt qualifies for passport denial.

Only when you have what the government considers a severe delinquent tax debt can the IRS have a legal ground to deny your passport application and renewal. In this post, we explain what delinquent tax debt is and the steps to take if your passport is restricted due to severe outstanding tax debt.

What qualifies as a severe delinquent tax debt?

According to the IRS, severe delinquent tax is legal, enforceable tax debt adding up to more than $55,000 that remains unpaid after the IRS pursues all collection methods, including levies, to obtain the tax debt.

If your back taxes amount to more than $55,000, the IRS, through the State Department, has the right to block your passport renewal and application or revoke your passport if it’s active.

Usually, this occurs, the IRS will send you a CP508C Notice. This letter explains the details of the tax debt and notifies you to pay within 90 days or face passport restrictions. If you clear your delinquent tax debt within the allocated period, the IRS won’t impose the passport restriction.

Exceptions to serious delinquent tax debt

If your debt falls in any one of these categories, the IRS will not consider your tax debt as delinquent:

• Debt being paid on time that is part of an IRS-approved installment agreement
• Debt being paid on time that is part of an offer in compromise approved by the IRS
• Debt collection currently suspended due to a request for innocent spouse relief
• Debt that is part of a collection due process hearing that has been requested as part of innocent spouse relief
• Debt suspended due to a hearing process concerning a levy to recoup the debt

Other cases when the IRS will not certify your debt as severely delinquent is if you’re:

• Bankrupt
• Situated within an area declared a federal disaster
• A victim of tax identity theft
• Under hardship and your account is not collectible
• Waiting for a pending IRS offer in compromise
• Waiting for a pending request for an installment agreement with the IRS
• In possession of an IRS-accepted adjustment that will clear the debt fully

If you believe the IRS made a mistake sending you the tax debt notice, get in touch with them through the number on your notice. You may need to send proof of your already paid taxes to address on the notice.

After you sort out your delinquent tax debt, the IRS reverses the notice and notifies the state department within 30 days.

All American taxpayers need to report their income, employment and other tax obligations to the IRS. Federal law expects you to file accurate taxes every year and failure to do this leads to severe consequences. Below are penalties for failing a false tax return and how to resolve the issue.

Criminal consequences of disclosing false returns knowingly

Individuals that intentionally disclose or submit false accounts, statements and returns can be prosecuted in court for tax fraud. According to the U.S federal tax law, high dollar tax fraud penalties include up to $500,000 for corporations ($250,000 for individuals) and a jail term of three years or both. Lower dollar tax fraud penalties can be 100% of the unpaid tax or as much as $5,000 and a jail term of one year or both.

However, the above penalties can be substantially higher depending on the type of false information provided. You could also face many more years in jail in federal prison if the crime was ongoing for a long time.

For instance, an individual who reported false returns over a five-year period will face significantly higher fines and jail terms. The IRS will also consider how much you owe them for that period.

What are the legal options for knowingly filing false returns?

The IRS CI Voluntary Disclosure Practice can help you avoid criminal prosecution after knowingly filing false tax returns. Although you may still face consequences, the penalties and fines will be substantially lower. However, it is only viable if you disclose the matter before the IRS comes knocking on your door.

Unintentionally filing false tax returns

The IRS often flags tax returns with mistakes or errors. However, an auditor will evaluate the returns to determine whether the error is due to fraud or negligence. These IRS auditors anticipate issues with the tax form and give taxpayers a bit of leeway.

Equally, the IRS will not classify tax returns as fraudulent if there is no evidence of wrongdoing. Instead, they look for badges of fraud such as falsifying your Social Security Number and claiming false dependents.

What are the legal options for unintentionally filing false returns?

Individuals that make honest mistakes will receive a letter with interest and penalties to resolve the issue. You can, therefore, make the repayment and avoid hefty fines. However, failure to do this will result in a formal IRS investigation.

With a spending plan heading towards a House vote, many are looking at one specific hot topic. That’s IRS funding of $80 billion with a little over half of that set for “enforcement,” the audit process. Many worry about increased “audit security on small business or middle-income Americans,” as stated in a letter to the Senate.

Audits are out of proportion

Between fiscal years 2015–2019, audits fell 44%. They fell 75% for millionaires while dropping only 33% for low-to-moderate filers who claimed the EITC (earned income tax credit). Some argue that the IRS depends on EITC claimants to balance their audit books. Many worry the new spending plan will support this.

How funding could affect IRS audits

Even if the legislation gets signed into law, it will be some time before it gets phased into the system. Newly hired auditors will get six months of training. After that it’s likely they will review cases worth a few hundred thousand dollars. That means audits may be likely to increase for the lower-income and the self-employed. With the progressing automated system, lower-income Americans who use less complex returns may trigger an audit.

How the IRS picks returns for auditing

The IRS utilizes software that ranks tax returns via a numeric score. The higher a score the more likely an audit gets triggered. The system often tags a return where credits or deductions concerning income fall outside acceptable ranges. An example is a taxpayer who claims a $100,000 charitable deduction on a $300,000 income. The agency’s software may flag that as that is disproportionate to what its system expects.

Other triggers for an IRS audit might be refundable tax credits (like the EITC), unreported income, auto or home office deductions and round numbers.

The goal of the funding

The IRS said in a report last year the funding will cover almost 90,000 employers, not just auditors, but IT workers and customer service representatives. In the end, the goal is to modernize the agency’s taxpayer services while increasing crackdowns on corporate and high-income tax evaders who drain hundreds of billions from the American people annually.

Many people hire a tax preparer to make sure their taxes are done quickly and on time. Unfortunately, hiring a professional does not guarantee that your income tax return will be completed error free.  Even if the error in your taxes is the fault of your preparer, the IRS holds you responsible for paying any additional taxes, interest or penalties and the fees associated with the error. Here are four things that you can do if you realize that your tax preparer has made a mistake on your return.

Contact your preparer

If you receive a letter from the IRS that claims there are mistakes in your text return, contact your tax preparer immediately. Service will vary by company, but many tax preparers may offer to pay any fees, penalties or interest charges in part or in full if you can demonstrate that they were at fault. Check the contract you signed with your tax preparer for language addressing your rights in cases of their mistake since they may not offer these reparations if you do not advocate for yourself. Even if you are not able to recoup the cost of the mistake, speaking with your preparer will help you better understand the error for subsequent tax seasons.

Pay all penalties promptly

If the IRS claims that you owe additional taxes and fees due to a mistake in your tax return, make sure that you pay them promptly, even if you were not directly at fault. Regardless of whether your tax preparer will later cover their expense, you are the one who will face additional financial penalties if the IRS does not receive the money in a timely fashion.

Know the statute of limitations

If you identify an error in your tax return, it is a good idea to check your tax returns for the prior three years to assess whether similar mistakes had been made previously. In most cases, the IRS can review, analyze and resolve tax issues for the prior three tax seasons. After that point, your taxes are outside the statute of limitations and you cannot be fined or reimbursed, even if an error is discovered. However, if your tax preparer made a substantial error, the IRS can pursue legal actions as far back as six years. It is worth noting that there is no statute of limitations protecting individuals who knowingly file fraudulent tax returns, evade taxes or fail to file taxes.

File a complaint

If you believe that your preparer purposely made an error on your tax return, alert the IRS and tax professional organizations. You should especially file a report if you believe your tax preparer behaved unethically, violated the terms of the contract you signed with them or deliberately avoided contact with you.

Federal law requires American taxpayers to report their employment, income and other tax obligations to the Internal Revenue Service (IRS) annually. Intentionally failing to satisfy these filing requirements can have severe consequences. In this post, we look at the penalties for knowingly failing to meet IRS tax obligations and possible options to resolve your case.

Criminal consequences of filing a false tax return

According to U.S. federal tax laws, if you intentionally submit or disclose a false return, account, statement or any other document, you may be criminally prosecuted on tax fraud charges in a court of law.

The penalties for intentional failure to submit correct tax information include:

• $10,000 ($50,000 in the case of a corporation), one year jail time or both if you knowingly disclose any return, list, account, statement or other fraudulent documents
• 10,000 ($50,000 in the case of a corporation), one year jail time or both if you knowingly furnish to the Secretary any fraudulent information

However, in such tax fraud cases, fines and penalties can increase significantly, depending on the false information provided and the duration of time it occurred. As such, you could potentially face more years in federal prison if guilty.

For example, this small business owner who pleaded guilty to knowingly filing false returns, having not reported a six-year associated income equaling $450,000 to the IRS, is facing up to three years in federal prison.

Legal options for resolving intentional tax law violation

If you knowingly violate federal tax laws by falsifying reports or otherwise and want to avoid criminal prosecution, your best option is to utilize the IRS CI Voluntary Disclosure Practice.

While this may not guarantee that you will receive automatic immunity from prosecution, a voluntary disclosure could help avoid a criminal prosecution case. However, a CI only applies if you knowingly violate federal tax laws and disclose the matter before facing an IRS audit or investigation.

In this case, a voluntary disclosure could help minimize your penalty and eliminate the risk of federal charges. Remember to consult your attorney to confirm whether you qualify for a voluntary disclosure or not.

If you intentionally file false returns, you could face severe fines, jail time or both. It’s easier to acknowledge your mistake through a voluntary disclosure before the IRS opens an audit or investigation.