It would seem that with the IRS budget cuts and audit percentages down below 1% for the majority of taxpayers, (read less than $200,000 of AGI) that citizens do not have much to fear these days about tax audits. Unfortunately, that is not the case.
The IRS and the State of Hawaii are both concerned with maximizing tax revenues through civil audits and collection, and criminal tax investigations. The reality is that, although fewer numerically, the Examination division, the Collection Division and the Criminal Investigation Division are focusing on taxpayer profiles that provide the maximum tax revenue for the audit hours spent. For taxpayers reporting income of $200,000 or more, the audit percentages rise from 2% to potentially 24%. By targeting specific return profile areas, the criminal investigation division is reporting over 94% conviction rate for criminal tax cases. The majority of criminal investigations are initiated by a referral by the Examination or Collection divisions resulting from civil audits. Foreign assets and off shore bank accounts are a major target area and the requirements of the FBAR and FACTA reporting laws require caution and attention. Foreign banks are reporting US Citizens’ accounts to the IRS.
Underreported income or extraordinary deductions will trigger red flags in the IRS computer return profile programs for specific industries. W-2, W-2Gambling and 1099 reports to the IRS will alert to potential unreported income. Once an audit is commenced a “life style” audit may reveal that the taxpayer is living beyond their reported income. The State has created a special audit unit called “Special Enforcement Section” (SES) targeting cash businesses for unreported income and General Excise tax.
The State Tax Criminal Investigation Section, after the last few years of inaction, has recently been ramped up by the hiring of two retired Federal Special Agents (ATF and DEA) and two ex-IRS agents. Their primary targets are failure to file returns and pay GET, and tax evasion.
The IRS has created a Fraud Technical Advisor (FTA) unit of specialists who consult with the auditors and collectors and train them to focus on potential fraud issues. The motive is that the Fraud Penalty can reach 75%. This practice, while legally debatable, necessitates that taxpayers be very cautious when responding to an IRS audit letter requesting information. It is well to note that IRS audit results are forward to the State of Hawaii Department of Taxation.
If you receive an IRS or State Tax notice that you are being audited or investigated, do not ever ignore it or delay responding. Once the wheels of the IRS begin to move the process of notification, collection and enforcement can go quickly. You should contact an experienced CPA and or tax defense attorney without delay.
Reg Baker, CPA (808-753-6026) has 30 years’ experience representing taxpayers before the IRS and the State Department of Taxation in audit and collection matters. If the situation appears to require legal representation, Reg may contract with Stephen P. Pingree, JD (808- 983-9520), a 35 year experienced civil and criminal tax defense attorney. Both Reg and Steve are available for free consultations to evaluate your situation.
Stephen Pingree, J.D. www.hawaiimarijuanabusinesslawyer.com