Don't get caught cheating on taxes describes auditing strategies which create mental anguish for a targeted taxpayer. It offers advice and helpful solutions to reduce the net worth assessment which sometimes can stop the audit in its tracks...
The article takes the mystery out of what to expect if you are selected for a tax audit.
Pity you if you cannot account for overstated claims or undeclared revenue, your troubles are only beginning.
We now live in the age of high technology. Information is intercepted instantly and freely between government departments, banks and businesses.
Assuming that the assessor checked the municipal tax roles and found you live in a high value district and learned from the license bureau that you drive a $40,000 car. Further computer checks would show that you also own a country place and a boat as well.
Yours is a cash business. Nobody knows how much you really make but your tax obligations have been practically nil because of substantial business and travel expenses which have always been accepted until now.
Unless you have proof of a large inheritance or a substantial lottery win you are a prime candidate for the Net worth Audit.
The concept of a Net worth Audit is simple. It is a tortuous, stressful and a long drawn out affair. Because of unexpected delays and complications the audit can go on for years Taxpayers often become angry and lose composure as every element of the business and private life is called to question. Documented proof is needed for every detail. Assessors carry with them at all times a security device on a key chain. They are always ready to press the panic button in case of trouble with infuriated taxpayers. Protection is never too far away for the auditor. They are well prepared knowing their work is going to create for you a nightmare of disturbing proportions.
An audit doesn't only concern a single tax year. You would be so lucky if this was the case. The Net worth Audit is normally for the three previous tax years. All final assessments carry penalties and high interest .Your spouse's returns are also checked whether or not you paid her or him a salary to lower your taxes.
If by chance the examiners discover false invoices [select invoices are scrutinized for irregularities] or other indications of fraud they will turn the case over to the department's special investigative branch that may show up at your door and seize all your files. This will not happen if you are on the level. If fraud is detected there are no limitations to how far back they can go in years or how much pressure they can apply to the transgressor.
The Internal Revenue Manual contains a long list of topics that the auditor must cover, including bank accounts, nontaxable sources, and a survey of personal assets (securities, stocks, bonds, etc.) as well as household assets. The agent will also investigate liabilities, line by line.
If the taxpayer gave a financial statement, the agent will verify it line by line. This includes all taxable and non-taxable sources, especially the “cash on hand” item.
The agent will also determine the taxpayer's living cost, as these must be added to the eventual net worth computation. Case law allows the agent to estimate living costs when the taxpayer cannot furnish them. Thus, the agent will consult living costs statistics that are widely available for the government and other sources for such items as clothing, food, transportation, and the like
Bank statements
Assessors assigned to your case will phone and politely request all of your bank statements for the three years selected. They will want to know how much money you had in the bank on December 31 prior to the audit period and how much you had at the end of the three year period on December 31.They not only want to see your business accounts but your personal accounts also. They will want all the accounts of your spouse as well. All of the information is laboriously entered in the computer for future study.
Perhaps a week or two later you will receive another request for all of your cancelled checks and your deposit and withdrawal slips. They usually call when you are having lunch or supper and make you feel like throwing up.
Business and personal expenses are separated, typed and stored in your dossier with the other information. If an inkling of a doubt exists a business expense is deemed personal for tax purposes.
Questions about various transactions require intelligent answers and clear explanations.
Delays between requests for documents are related to studying, typing and recording of the data. Assessors are also assigned to several taxpayers simultaneously, besides as long as they are confident of a big catch they really don't care how long it takes. The longer it takes the more the taxpayers repayments, penalties and interest liabilities add up.
