HOW TO PROPERLY DEAL WITH TAX INVESTIGATION BY THE IRS

In the life of every taxpayer, it is possible to be taxed at least once by the IRS. Generally, the taxation population of the IRS is 1% of all taxpayers. Of course, everyone is unwilling to be taxed, but this is not within the taxpayer’s control, because the IRS randomly checks taxes. What kinds of people are not easy to be taxed? Such people are usually very simple with tax forms. The data is clear at a glance, without any special financial events, such tax forms are not necessary for any comparison. Once a taxpayer is checked, it will inevitably cause panic emotions. At the same time, it will take a lot of time to respond to the tax check letter, and may also generate corresponding accounting fees. here, the author’s suggestion is to abide by the tax laws, save taxes reasonably, be justified and do not try to challenge government powers; once investigated, do not panic, because the tax investigation is very common; use the correct response method to try to reduce taxes and fines.       

Let us take a look at a case of tax penalty in New Jersey. A man operated a restaurant with revenue of nearly one million in New Jersey. The state government and the federal government require each quarter to declare and pay sales tax and employee tax. He had declared sales tax and employee tax every quarter, but had not paid the declared tax. The explanation here is that the sales tax is the government’s authorization for restaurants to help the government collect the tax for each customer, and the employee tax is the government’s authorization for restaurants to help the government deduct the personal income tax of each employee. Neither of these taxes is part of the restaurant’s income. At the end of the third quarter, the owner of the restaurant received several letters from the government on tax recovery. The amount to be paid includes taxes payable, fines, and interest. He mistakenly believes that recovery is to be investigated, which is a wrong concept. Tax recovery and tax investigation are completely different concepts. As long as he returns all taxes, fines and interest owed, he will not be taxed. Filing taxes on time and paying taxes on time can avoid unnecessary fines and interest.

According to the Internal Revenue Service data, the fear of tax investigation is one of the factors that affect the taxpayer’s honest tax declaration. Government statistics show that low-income people will evade taxes, and the largest percentage of falsely reported income. In contrast, high-income people are more cautious and careful when filing their taxes, and abide by the laws and regulations. Once false tax returns and tax fraud are investigated, the penalties imposed are severe. For example, misreporting income or abusing tax deduction clauses, greatly reducing tax payment, the punishment is usually a 20% fine on the basis of tax increase. Another example is deliberate tax fraud. Once detected, it will face high fines, there may be cases where all properties will be frozen and even jail time is very possible. But being investigated does not mean that you must face punishment.

Let’s take a look at another example. A man had a visa for international students. He got several W-2 tax forms during his internship. When filing a tax return this year, he filled in 1040NR and applied for the US $ 5000 tax treaty tax exemption. At the same time, his employer even wrongly deducted his social security tax and medical insurance tax. Therefore, he is eligible for a large tax refund. Note that 1040NR can only be mailed to fill out tax forms in the traditional way. He legally declared the tax form for the year. But half a year later, the state tax rebate had arrived, but the federal tax rebate had remained silent. He called the Internal Revenue Service to inquire about the situation, only to find out that he had been inspected for tax verification. Soon after, he received a notice to provide materials, and he provided the corresponding materials as requested in the letter. It took almost half a year before receiving the tax refund.

Now, the man adopted the so-called attitude determination method. He had a truthful declaration at the time of tax filing, and he had reasonably and legally completed his tax forms. Even when he was checked, there was no need for him to panic. The example mentioned above is a good example. It is worth noting that the 1040NR form of paper declaration is more likely to be taxed than the ordinary 1040 electronic tax declaration. The IRS mainly checks whether tax forms are filled out in compliance with tax laws and whether the data in the tax forms are valid. It is best for taxpayers to respond promptly and cooperate actively. The tax bureau will usually question a certain point of the tax form and ask for materials during the tax investigation, and will not generally request a large amount of information. The taxpayer should properly explain the problem of tax inspection when receiving the notification letter and provide corresponding documents. The documents submitted should be neat and clear at a glance, with explanatory letters attached. This can shorten the time required for the IRS to check tax forms and reduce the scope of review of tax forms.

 

Let’s take a look at the last but not the least scenario. A business man runs a consulting sole proprietorship company (Sole Proprietorship). He was tax-checked by the state government this year and needed to provide evidence of company income and expenses. Since his income and expenses are confused with personal expenses, even if the corresponding evidence can be provided, it is difficult to explain that those receipts are personal expenses and those receipts are company expenses, so the materials provided are messy. Even if there is evidence to verify the tax investigation, the final result is indeed because of the difficulty in distinguishing materials, resulting in an increase in personal income and an increase in the amount of tax required to be paid. Although there are no fines and interest, this result is unsatisfactory.

The best advice that can be given in a situation like this is that if you run any business yourself, you must ensure that the accounts are clear, and that personal and commercial expenses must be clear, not to be confused. It is a good idea to use “commercial credit card” and “bank business account” to distinguish personal expenses, and then keep the commercial receipts properly, so that you can prevent them from happening.

 

In summary, nothing good comes from panicking and trying to deceive the IRS when tax investigation comes up. Just listen to what they have to say and provide them with what they need so they can clarify and both of you can be on your merry way.