There are a variety of reasons why the IRS may choose to perform a tax audit on a business. While some audits may be performed as a matter of routine, others may be triggered by discrepancies on tax returns or the claiming of certain types of deductions or business losses. Business owners will want to understand the procedures followed during an audit and the types of documents and information the IRS will consider. By working with a tax law attorney, a business can determine the best ways to meet the IRS’s requirements and avoid or minimize its potential penalties.

Records and Documents the IRS May Request During an Audit

In many cases, audits of businesses will be conducted by mail, although there are some situations where the IRS will choose to perform a field audit in which an agent will visit a business and review information in-person. During an audit, the IRS will review certain types of records to determine whether there are any discrepancies between the business’s finances and what was reported on a tax return. The IRS may ask a business to provide multiple different types of records, including:

• Financial records - The IRS will review a business’s books to address any issues related to earnings, expenses, profits, and losses. Additional documents may also be provided to verify this information, such as bills or receipts for business expenses, purchase records for equipment or materials, or canceled checks for payments made to vendors, suppliers, or contractors.

  ...

In today’s digital world, there are a multitude of lucrative opportunities for investors. Recently, many people have been able to make significant gains by investing in non-fungible tokens, or NFTs. These digital tokens use blockchain technology, similar to what is used for cryptocurrency, and they allow a person to maintain or transfer ownership of certain types of intangible assets, such as digital images, videos, or video game characters. As the buying, selling, and trading of NFTs has increased, the IRS has taken notice, and taxes will apply to these transactions. NFT creators and owners will need to be sure to understand what types of taxes they may be required to pay when engaging in these types of transactions.

Taxes on Digital Transactions

While the IRS has not yet issued guidance on how transactions involving NFTs will be taxed, investors will most likely be able to avoid potential penalties by treating these transactions the same as those involving virtual currencies. Since NFTs are often purchased with or traded for cryptocurrency, buyers and sellers may also need to address additional tax-related issues during these transactions. 

If an NFT is purchased using virtual currency, the buyer may need to report a gain or loss in the value of the currency. For example, if a person purchased a certain amount of virtual currency for $500, and the currency was valued at $1,000 when they traded it for an NFT, they will need to recognize a capital gain of $500.

Property owners in the state of California are often subject to high property taxes. Fortunately, while a home or commercial property may increase in value, California laws limit the amount by which property taxes can be increased. Each year, property taxes cannot increase by more than 2 percent, regardless of how the value of the property has changed. However when ownership of property is transferred, this may trigger a reassessment of property taxes based on the property’s current market value, and the new owner may be required to pay higher taxes than the previous owner. In cases where the parties to a transaction did not fully understand the tax consequences of a transfer of ownership, a deed may be rescinded, ensuring that property taxes will revert back to their previous levels.

Requirements for Deed Rescission

A deed rescission will return ownership of property to the previous owner as if the sale or transfer of property had never occurred. To be legally valid, a deed rescission must be mutual, meaning that all parties involved in the transaction must consent to the rescission. A rescission must be performed within a reasonable amount of time. Since each situation is unique, rescissions will be handled on a case-by-case basis, and a County Assessor will determine whether a rescission was completed promptly and within a reasonable time period. An assessor may look at factors such as whether the parties received benefits prior to the rescission, including earning income through ownership of the property.

All parties involved in a rescission must be restored to the position they were in before the transaction took place. Any payments received must be refunded, or other property received in exchange for real estate must be returned to the original owner. An assessor may look at different forms of evidence to determine whether the parties were restored to the status quo, such as bank records showing that funds were transferred or tax returns that demonstrate that the proper party received income from their ownership of the property.

Over the past decade, the rates of expatriation, in which a U.S. citizen renounces their citizenship or a long-term resident of the United States ends their legal residence status, have increased significantly for a variety of reasons. Because U.S. citizens and residents are required to pay taxes on all income they earn, including income earned in foreign countries, expatriation may seem like a good option to alleviate a person’s tax burden. However, expatriation has tax consequences, and upon renunciation of U.S. citizenship or termination of residency status, a person may be required to pay taxes based on the assets they own. Failure to do so can result in significant tax penalties. Fortunately, an experienced attorney can help expatriates understand the tax laws that apply to them and ensure they are taking the correct steps to avoid penalties.

Recent Case Demonstrates the Consequences of Misreporting Income and Assets

In a recent case prosecuted by the Justice Department, the founder of a Russian bank pled guilty to committing tax fraud when he expatriated from the UnitedStates. After the bank became a publicly traded company that was worth billions of dollars, the founder renounced his citizenship. When doing so, he falsely reported that his net worth was only $300,000, and on his tax return for that year, he falsely reported an income of around $200,000. In actuality, the court found his net worth was over $1.1 billion.

The man’s false reporting led to an underpayment of taxes by more than $248 million. After he was arrested and charged with tax fraud, he pled guilty to the charges. Under a plea deal, he agreed to pay over $506 million, which included the taxes owed, statutory interest, civil tax penalties, and a fine of $250,000.

There are many different issues that can lead to tax penalties, including failing to file the correct forms and report certain information to the IRS. In a recent blog, we looked at the potential penalties that may apply if a taxpayer fails to file Forms 3520 and/or 3520-A. These forms are used to report transactions involving foreign trusts, and in some cases, a taxpayer may be required to pay a penalty of 35% of the amount that was transferred to or distributed from a trust. For those who have not filed these forms as required, it may be possible to mitigate this issue by using the Streamlined Domestic Offshore Procedures, which is commonly known as streamlined compliance.

What Are the Streamlined Procedures?

Individual taxpayers who meet the standards of being “U.S. persons” may use the Streamlined Domestic Offshore Procedures to fulfill all of their reporting requirements and correct any errors that may have led to an underpayment of the taxes owed. While these taxpayers will be required to pay a penalty, it will often be lower than the penalties that would apply otherwise.

The streamlined procedures will only be available for taxpayers who acted non-willfully when they failed to meet their requirements. Negligence, ignorance of tax laws, inadvertent errors, or other actions taken in good faith may be considered to be non-willful conduct. Deliberate attempts to avoid paying taxes or purposeful failure to report income or assets is considered willful conduct that will disqualify a person from using the streamlined procedures.