One of the reasons you file your tax returns timely and accurately every year is that you don’t want the Internal Revenue Service (IRS) to subject you to an audit. You might trigger an IRS audit when you underreport your income, intentionally fail to pay your taxes, make false claims, or report your income under a false name and Social Security number. These schemes will prompt the IRS to flag you for tax evasion.
An IRS audit is a messy and complex process, with the IRS looking closely at your lifestyle and income to assess whether your tax return contains accurate and complete information.
While the number of tax fraud—including tax evasion, fraudulent or false returns, and aiding tax fraud—offenders decreased by 45.5% between 2016 and 2020, it still doesn’t change the fact that the penalty for tax fraud is harsh, the worst being jail time.
If you’ve been flagged for tax evasion, you must stay calm. Read this guide to know what you can do to immediately address the situation and settle the issue with less stress.
What is Tax Evasion?
Tax evasion is the deliberate act of not reporting or underreporting income to avoid paying taxes. It is a serious crime that can result in significant fines and even imprisonment. There are two types of tax evasion:
- Evasion of assessment – This refers to actions that involve defeating tax assessment like filing a false return or misreporting your income.
- Evasion of payment – This happens when you evade tax payments or conceal your assets after the IRS has established you have taxes due.
Note that you won’t be arrested for tax evasion if you made an honest mistake on your tax return. However, if proven that you willfully evaded tax payments and assessments, you may face serious consequences, such as hefty penalties and imprisonment for up to five years. Depending on the gravity of your offense, the penalty can range from $100,000 to $250,000.
What to Do if You Are Flagged for Tax Evasion
Receiving an audit letter from the IRS saying you’re flagged for tax evasion can be alarming. If you can’t present the right paperwork, that’s a recipe for disaster. Here’s a guide to help you organize your thoughts on your next steps.
1. Read the IRS audit letter carefully
The IRS informs audit candidates through the mail. The letter will indicate the subject of the audit and also the specific documents the recipient should provide.
Upon receiving the letter, you must understand the nature of the audit specified in the document. Also, note the deadline for your response. Usually, audit notices require a response within 30 days from receipt.
2. Do your research about tax evasion
As you prepare the needed documents, read about tax laws that concern your audit. Likewise, it helps to learn about your rights as a taxpayer. These include the right to:
- Professional and courteous treatment by IRS employees
- Privacy and confidentiality about tax matters
- Know IRS’s reason for asking for specific information, how the IRS will use it, and what will happen if the requested information is not provided
- Representation by oneself or an authorized representative
- Appeal disagreements both with the IRS and before the courts
3. Request additional time to organize your records
Depending on the intricacy of your case, you can always call the IRS and request an extension if you think you can’t respond to the audit letter within 30 days. Ideally, you should not rush the audit process. However, if your mail contains a “Notice of Deficiency,” the IRS can’t grant you an extension.
4. Consult an enrolled agent for tax evasion issues
The IRS may request that you show up for a face-to-face interview or attend a session in a tax court. You can attend these appointments yourself or otherwise hire an enrolled agent from a reputable tax negotiation services provider to represent you. They can help you throughout the audit process, making sure your actions do not go beyond the audit scope stated in the letter.
5. File an appeal if necessary
After the IRS concludes the audit, they will then send you a detailed examination report. However, if you don’t agree with the findings, you can file an appeal with the IRS Office of Appeals. You must file your protest within 30 days from the date of the letter sent by the IRS.
Here, you need to present your case and negotiate a settlement with the appeals officer. Keep in mind there is a possibility that the appeals officer may find additional items the auditor might have missed during the audit.
If something on your return was not previously found but could still be flagged, consider filing the appeal before the U.S. Tax Court, as new issues cannot be raised in this venue. However, if you lose the appeal, you must pay for any accrued interest and additional penalties.
Resolve Your Tax Issues with Peace of Mind Tax Help
A tax audit isn’t a situation most people are excited about. With the guide above, you now have a general idea of how an audit goes and what you should do when the IRS flags you for tax evasion. By being ready, you can avoid suffering from grave consequences, such as penalties and jail time.
If you’re facing a tax problem and need an expert to settle the issue, then reach out to us. We are a team of leading experts in tax negotiation and mediation who can help you minimize your tax liability.