Tax Audits

In January, 2024 we finished a IRS tax audit, highlights:

  • $4,000,000 revenue plumbing business
  • Full audit resulted in no change, a total success, Letter 3401-S, Form 4605-A, Form 886-X, Form 401-1.
  • Started as employee / independent contractor reclaissification audit, and auto expense, expanded to full audit, and possible additional years.
  • Closed down additional years, audit contained.
  • Produced multiple reports, general ledger, multiple years of income statements, balance sheets, and many other reports
  • Quickbooks online based
  • IRS focused on Balance Sheet, very complex
  • Bottom line, being both a CPA and Attorney is invaluable

A Tax Audit is frightening and dangerous.

If you have received a notice from the IRS or a state tax audit from the  Colorado Department of Revenue that your tax return is being audited, you should hire Denver Tax CPA Philip Falco to represent you during your IRS tax audit.  You obtain the attorney-client privilege and tax skill as a CPA.

We have experience in the following types of audits and audit matters:

  • Employee / Independent Contractor misclassification audits – common and dangerous.
  • IRS 1099-K Credit Card to revenue audits.
  • IRS business expense audits, typically automobile mileage, supplies, travel & entertainment.
  • S Corp audits and flow-through audits.
  • 1040, Schedule A and Schedule E audits.
  • CDR 104 audits.
  • Audits during criminal investigations.
  • Colorado Department of Labor and Unemployment audits*.  This can have unforeseen devastating consequence, professional representation is advised.
  • United States Department of Labor hour and wage audits.
  • IRS Audit Triggers.
  • IRS audits – in person, and correspondence.

The sooner you secure representation the better.  Philip Falco, Attorney, CPA has handled many audits and, according to his experience, many needless issues can be avoided,

The goal is to contain an audit as much as possible.  The fear is that irregularities would be uncovered and the scope of the audit expanded and compounded.  This is our focus: containment and conclusion.  We have represented many taxpayers in tax audits.  Experience is really worth the investment in this specialized area.

Employee / Independent Contractor Misclassification audits

Many businesses try to avoid or defeat payroll taxes by treating workers as independent contractors as opposed to employees. This is a serious mistake with enormous consequences. Some workers will even conspire with employers and agree in writing that they are independent contractors, not employees. These written agreements are almost always worthless. The question of employee versus independent contractor is determined by some 20 factors, only one of which is a written agreement. IRS and State tax enforcement agencies consistently challenge the issue of employee versus independent contractor status and as a result have established specialized audit groups that concentrate in this one area of tax avoidance. When the IRS or State tax agencies discover this misclassification of workers, they make very large employment tax assessments against the EMPLOYER, not the employee. The IRS and State agencies then share their findings with each other which leads to large tax assessments by both agencies against the EMPLOYER, not the employee. Experience proves that these assessments are so large that they usually result in the complete demise of the business and result in enormous personal liability to the owner/employer. The employee, on the other hand, suffers no consequences.

You may feel that you will not be discovered because your worker(s) benefit by not having taxes withheld, and they would never “turn you in.” Do not fall prey to this false confidence. When tax time comes around and the worker(s) cannot pay their income taxes, they will roll over on you and claim that they were employees and thought that you were withholding taxes. You can wave the written agreements in the face of the IRS or State agent, but the agreements will mean nothing unless you have met ALL of the many other factors that define independent contractors. Or, when you are forced to terminate or layoff a worker(s) you can bet they will apply for Unemployment and name you as the employer. Or, if a worker is injured on the job, they will immediately apply for Workers Compensation. In both instances the agencies involved will research your State employer status, find that you are not showing the worker(s) as employees and open an investigation. In short, you, the employer, always lose and end up with large tax assessments. The employee escapes liability every time. However, if you truly believe a worker should be classified as an independent contractor, obtain publications from the IRS or a State agency and make sure your worker meets ALL or the overwhelming majority of the many factors that determine independent contractor status.

Competent audit representation commands many skills including:

  • Painstaking attention to detail.
  • Unquestionable grasp of the Internal Revenue Code.
  • Organization.
  • Issue Spotting.
  • Argument articulation.
  • Courage to defend the taxpayer is critical.

I can tell you from past experience that collections can lead to audits or mini audits.  I have represented businesses where employment tax is owed for the failure to pay or file form 941.  Revenue Agents are assigned to these case quickly.  The revenue agent will get to know the business quickly as well.  Problems also arise from the failure to file form 940.  A Notice of Levy, Form 668-A(ICS) issued by an Revenue Agent will signal a potential audit or ‘visit’.

If you are unsure of the appropriate actions to take, please call us.

Click here to review our blog entry on IRS Pre-Audit Investigations.  These are typically referred to as IRS audit red flags.

IRS Settlements, Appeals and Tax Litigation

We also perform IRS reconsiderations.  If the IRS is auditing your return, we can negotiate a settlement on your behalf. In the event that a settlement cannot be reached, we can assist you in the appeals process.

Advantages of Using Us:

We provide IRS audit representation as well as IRS audit assistance.  With attorney representation, you have the attorney-client privilege to protect you.  A CPA has a limited privilege that does not extend to IRS criminal investigations.  If the audit goes wrong for the taxpayer and the matter is handed to criminal investigations, your CPA representative can be subpoenaed to testify against you.  This seems cruel and harsh but it is true.

On the other hand, attorneys typically lack rudimentary accounting and tax training that CPA’s have.  Many tax attorneys hand off the hard work of accounting and tax compliance to CPA’s.  This may result in double billing and a lack of depth of knowledge of a matter.

Only a dual licensed Attorney – CPA has the reliable combined training and licenses you can rely upon with your sensitive tax audit.  We obtain a deep understanding of your finances in question and provide you with forceful representation through the process.

Also, here is a list and explanation of various IRS Audit Letters.

General Types of Audits:

  • Field audit.  These are usually the most comprehensive IRS audit and are performed by experienced IRS agents.
  • IRS office audit.  This is done at the IRS office.  These appear to be straightforward audits but are peppered with booby traps.  IRS office audits typically expand in scope by examining additional years and additional categories.
  • Correspondence audit.  This is usually done by IRS letter requests.  They can be founded in math errors and errors in filing status. However, we have noticed an increase in these audits.  They typically focus on questionable matters entered on Form 2106, Employee Business Expenses.  These audit present dangers particularly because they span multiple years. They begin with one year but once an unfavorable result is sustained it can spill over to additional years.

Give us a call 303-626-7000