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San Jose tax penalty notice attorneyTaxes are a reality that most U.S. citizens and residents need to deal with, and understanding the various tax laws that apply to a person or business can often be a complicated matter. If a taxpayer makes mistakes or oversights when filing tax returns or other tax documents, they could face penalties from the Internal Revenue Service (IRS). Being contacted by the IRS may cause taxpayers to worry that they will be subject to these types of penalties. However, not every piece of communication from the IRS will result in penalties, and taxpayers will want to understand the different types of notices that the IRS may send and their options for responding and addressing or correcting tax issues.

IRS Letters and Notices

Communications from the IRS can generally be grouped into one of the following categories:

  • Soft letters - In some cases, the IRS may identify potential issues that may affect certain taxpayers and send notice reminding the taxpayer of the actions they can take to ensure that they are in compliance with tax laws and avoid potential penalties. In some cases, the IRS may request that a taxpayer provide certain types of information or file amended tax returns. In recent years, the IRS has sent soft letters related to issues such as reporting virtual currency transactions or filing the proper forms related to foreign accounts or investments.

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San Jose, CA cryptocurrency tax lawyerThe IRS pays close attention to taxpayers’ income and financial transactions, and there are a variety of reasons it may conduct tax audits. In recent years, virtual currencies such as Bitcoin have been a growing concern for the IRS, and many cryptocurrency owners have received notices regarding their requirements for reporting transactions involving these currencies. This scrutiny is likely to increase in the future as the use of virtual currencies becomes more widespread. In fact, the IRS released a draft of the 1040 tax form for 2020, and one of the first questions that is included on this form is “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This indicates that those who own or trade cryptocurrency may face audits if they do not meet their requirements for reporting transactions and paying applicable taxes.

Tax Issues Related to Virtual Currency

Even though cryptocurrencies may be used similarly to currency issued by the United States or other countries, they are not recognized as legal tender. Instead, virtual currencies are considered property, and taxes may apply to transactions involving these currencies. If a person receives virtual currency in exchange for performing services, either as an employee or an independent contractor, this will be considered taxable income.

When virtual currency is sold or exchanged for other property, a taxpayer will be required to report gains or losses on a federal income tax return. These gains or losses are calculated by comparing the taxpayer’s basis in the virtual currency, or the fair market value of the currency at the time it was acquired, with the amount received in exchange for the virtual currency. Capital gains taxes may apply to gains made when selling virtual currency, and a taxpayer may be able to deduct losses in these transactions.

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San Jose, CA IRS audit attorneyIf you have been informed that your tax returns will be examined, or audited, you may not know what to expect from the process. Often, taxpayers are upset about having to devote more time to their tax returns, and they may be worried about a larger tax liability or concerned that they will face penalties from the IRS.

All of these thoughts are well-founded. Hiring an attorney to look out for your best interests during the course of an examination is allowed under IRS rules and may help you keep your tax liability as low as possible.

How Is One Chosen for an Examination?

According to the IRS, there are two ways your tax return may be selected for an audit. The first way is by computer programs that find incorrect amounts on your returns when compared to documents like W-2s or 1099s. 

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virtual currency, virtual currency taxes, tax audit, IRS Compliance Campaign, San Jose tax audit attorneyThe Large Business & International (LB&I) division of the IRS has announced several new compliance campaigns that signal where the IRS will allocate its audit resources. If you are a business owner concerned about the ramifications of a tax audit, it is advisable that you contact a qualified business tax attorney who can give you customized legal support. 

What is an IRS Compliance Campaign? 

The LB&I division of the IRS creates compliance campaigns in an effort to keep taxpayer examinations centered on issues. These campaigns, which are rolled out periodically, are meant to zero in on areas that present the greatest risk of non-compliance.

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Posted on in Tax Audits

eggshell audits, San Jose civil tax audit lawyer, tax fraud, tax audit, tax liabilitiesA tax audit can be a frightening situation. The United States tax code is complex, and many taxpayers are unfamiliar with its intricacies and the potential consequences that they may face if they have committed a violation. In some cases, taxpayers may face what is known as an “eggshell audit,” which is a civil audit that may potentially result in criminal charges. While this is an informal term, it refers to the care that must be taken in these situations as taxpayers seek to minimize their tax liabilities and civil penalties while avoiding criminal prosecution.

Potential Consequences of an Eggshell Audit

Eggshell audits occur because a taxpayer filed a fraudulent tax return. The taxpayer may have underreported the income he or she earned or claimed improper deductions or credits. The end result is that the taxpayer paid less taxes than he or she would have owed if he or she had filed an accurate tax return. Moreover, a return is considered fraudulent if a taxpayer deliberately intended to evade paying the full amount of his or her taxes or if he or she willfully submitted false statements or documents.

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