What Is Tax Controversy?
A tax controversy can simply be defined as any disagreement between a taxpayer and a tax authority, or collector. Controversies will arise either with the IRS or state revenue agencies regarding issues or disagreements about reported income, deductions, credits, or a failure to file your taxes. While this may seem minor at first, these issues can lead to audits, penalties, and possibly even legal action if not resolved promptly. Some tax controversies are minor misunderstandings. But for some, they may involve serious disputes that could jeopardize their family or business’s financial well-being.
IRS Audits
One of the most common examples of a tax controversy in Denver is an IRS and state tax audit. The purpose of these audits is to verify the accuracy of a taxpayer’s return. Audits usually involve a review of income, deductions, and credits reported. You will most likely be audited by the IRS if there are glaring inconsistencies in your return or unusually high deductions. The IRS and state authorities may also choose to audit you at random. If you are being audited, it is important to stay on top of your deadlines to avoid any additional penalties. A tax controversy at Evans Case will also be able to walk you through the process and make sure you provide complete and accurate information to the appropriate tax authorities.
Tax Assessments
After the IRS or state tax authorities complete an audit, they may issue a tax assessment. This assessment indicates how much a taxpayer still owes. The government may even decide to charge you extra taxes or interest if you did not pay the sufficient amount the first time around. You may also receive penalties for filing late, paying late, inaccuracies, or failing to report certain items. Not only can these penalties be hefty, but they will continue to compound. It is possible for taxpayers to challenge these penalties or assessments. For those facing penalties in Denver, your options include:
- Filing an appeal with the IRS Appeals Office
- Requesting a collection due process hearing
- Litigating in the U.S. Tax Court
The IRS conducts multiple different types of audits each year. Each type of audit has its own specific procedures:
- Correspondence Audit: You are most likely to receive a correspondence audit if you are being audited. The IRS will contact you by mail requesting additional documentation or information clarifying specific terms of your return. These audits are typically reserved for less complicated matters that can simply be solved with additional paperwork. They are typically conducted due to minor issues like a mismatched income.
- Office Audit: An office audit is more in-depth than a correspondence audit and usually requires a more thorough examination of your tax return. During an office audit, you must visit a local IRS office in Denver and bring in specific documentation to be reviewed. These audits are usually brought on by significant deductions, certain types of tax credits, and other discrepancies that require a detailed explanation.
- Field Audit: Field audits are most common with businesses or high-earning individuals. The IRS may choose to conduct a field audit for substantial business expenses, unreported income, or complicated tax structures. During a field audit, an IRS agent actually visits your home or business to conduct their examination of your financial records.
Keeping your financial records clean and organized will help when it comes time to prepare for an audit. From income statements to receipts for your deductions, having the proper documentation prepared will make the audit go by much smoother.
Audits do not always have to be a headache. If you are being audited and have concerns, reach out to one of our tax controversy attorneys. We are here to make sure that your tax matters are handled with the utmost care and professionalism. Our goal is to keep your life running smoothly without pesky interruptions from the IRS. For more information about how our Denver team can assist you with your IRS or state tax audit, schedule a consultation today.
Unreported Income
Taxpayers are legally required to report all sources of income. However, you may forget to include cash payments or side jobs, which could lead to a tax problem regarding unreported income.
If you are audited and the IRS discovers unreported income, you could face penalties and back taxes. It is important to keep in mind some of the most common sources of unreported income before filing your taxes, no matter how small or insignificant they may seem:
- Freelance and Contract Work: Oftentimes with freelance work, independent contractors may not receive standard tax documents like a W-2. Even without this form, any income you receive as a contractor is still taxable and must be reported to the government.
- Side Jobs: For Denver residents who work a part-time job or other side gigs, it is not uncommon for tips and cash payments to go unreported. Since cash does not leave a trail, many employees do not report their earnings. However, even cash payments are legally required to be reported and declared as income.
- Income from Rental Properties: Many taxpayers make income from renting their properties. Homeowners who are gaining income from rental properties are required to report it to the government during their tax return.
- Interest and Investment Income: Income earned from stocks, bonds, or any other investments is taxable. Taxpayers must report dividends, capital gains, and interest even if you choose to reinvest them.
If the IRS is really interested in pursuing your unreported income, they have the means to find it. They may review your bank deposits and monitor your spending to identify any discrepancies. They will also be able to review any 1099 forms in your name. For Denver taxpayers who are audited by the IRS and found to have unreported income, you may face some of the following consequences:
- Back Taxes: Back taxes are your taxes that have been either partially paid or left completely unpaid. If the IRS finds you have unreported income, you will be required to pay back the taxes on the unreported amount, starting from the year that it was earned.
- Penalties and Interest: Aside from the tax that you already owe, you may be subject to penalties and interest imposed by the IRS. Interest will continue to accrue until the remaining debt is paid. Penalties for unreported income can be significant. If the unreported income results from disregarding IRS rules, taxpayers may face an additional accuracy-related penalty.
- Criminal Charges: In rare cases, unreported income could result in criminal charges. If the IRS conducts an investigation and determines a pattern of tax evasion, it could have serious consequences for Denver residents who have intentionally ignored their taxes.
Being audited or investigated for unreported income can be a stressful experience. If you have concerns about the potential impact of unreported income or you have already begun accruing penalties, we strongly recommend that you consult with one of our Denver tax controversy attorneys as soon as possible. We may be able to help you file amended returns to correct past returns, reduce your penalties, and negotiate a reasonable solution.
Disallowed Deductions
Some taxpayers may attempt to use deductions or tax credits in order to lower their taxable income. The IRS or state may question and even disallow these deductions. Taxpayers have the ability to challenge a disallowance and may be able to reinstate their deductions or credits to lower their tax liabilities. Some of the most commonly disputed deductions among Denver taxpayers include:
- Charitable Contributions: Donations to charitable organizations can be deducted from your tax return. However, non-cash donations like clothing or furniture must be accurately appraised if they exceed a certain value. Deductions that are made based on their inflated values may also be flagged by the IRS. The IRS requires written acknowledgement from the charity that no goods or services were received in return for all donations over $250.
- Business Expenses: Business expenses are often under heavy scrutiny from the IRS. The government requires that all expenses are “ordinary” and “necessary,” meaning they are specifically meant for the business and are helpful for business operations. Travel and entertainment expenses are not deductible unless they are directly related to the business. The same goes for any home office or vehicle expenses. Any personal use of a home office or company vehicle is not deductible.
The government may disallow deductions for a number of reasons. Whether there was insufficient documentation, such as receipts, appraisals, and other supporting documents, or there were inaccurate valuations when filing your return, the IRS will be sure to jump on any red flags that are raised during the process. For Denver taxpayers who are interested in challenging their disallowance, we urge you to consult with one of our tax controversy attorneys today to discuss your case.
Our team is available to help minimize your tax liability and help you manage any penalties you may be facing.
Collection Efforts
Denver residents with unpaid tax debts may face collection actions, such as levies, liens, garnished wages, or possibly even asset seizures. If the IRS or state has initiated collection actions against you, it might be time to get in touch with a trusted tax controversy attorney. Evans Case may be able to help negotiate payment plans or find a way to stop further collections efforts.
- Tax Liens: The government may put a lien, or a legal claim, on your property if you have unpaid taxes. A lien may severely impact your credit score and make it difficult to sell your property until all debts are paid.
- Tax Levies: A levy is a more serious action taken by the IRS where they seize your property in order to fulfill your debts. They may do this by withdrawing funds from your bank accounts, garnishing your wages, or even seizing physical possessions like cars or real estate. With a lien, the government has a claim on your assets. With a levy, you are forced to transfer ownership of your assets to the IRS to cover your debts.
The IRS can also garnish a portion of your Social Security benefits if you are receiving them. These collection actions can have a seriously negative impact on your financial situation, making it difficult to pay bills or cover basic living expenses. Asset seizures can be particularly devastating for Denver taxpayers with unpaid debts.
For help keeping your assets and property secure, call Evans Case today. If the government is threatening to put a lien or levy on your property, our tax controversy attorneys may be able to help find a solution that works for you.
Offers in Compromise
Depending on your financial situation, our tax controversy attorneys at Evans Case may be able to help submit an Offer in Compromise (OIC) that will allow taxpayers to pay their debts for less than the full amount they owe. In some instances, these disputes may not be able to be resolved at an administrative level and could require the intervention of the Tax Court or U.S. District Court.
The IRS will consider a few different factors when determining your eligibility for an OIC:
- Income: The IRS will closely review your monthly income and living expenses to decide whether the taxpayer will be able to pay the debt over time. They will also address any future potential income to determine whether you will be able to pay later.
- Asset Equity: The IRS will also consider equity in assets like real estate, vehicles, retirement accounts, and bank accounts. Denver residents with high-value assets may have a lesser likelihood of OIC approval.
The importance of having an experienced tax controversy attorney at your side cannot be overstated. Our Denver team is committed to helping clients minimize their liabilities and avoid unnecessary penalties. Contact our Denver team before it’s too late and see how we can help take some of the stress off of your tax controversy.
Call Evans Case to Discuss Your Tax Controversy Today
For Denver taxpayers dealing with a tax controversy, help is available. Whether you are being audited by the IRS or are dealing with collection actions, our attorneys are here to help you avoid costly disruptions. Our team works with each client to create a customized solution that best fits your needs. We understand the stress and financial burdens that these interruptions can have on your day-to-day life.
Contact us today to schedule a consultation and see how our Denver team can help you resolve your tax controversies with confidence.
