Schedule C IRS Audit | Business Tax Lawyer & Attorney

One of the most common types of IRS audits is the Schedule C IRS audit. In this article, I would like to introduce the readers to the Schedule C IRS audit. In particular, I would like to discuss the type of taxpayers who are affected by an IRS audit of Schedule C and the key legal issues associated with such an audit.

Schedule C IRS Audit: Who is Affected?

A Schedule C IRS audit primarily concerns two groups of taxpayers: owners of sole proprietorships and owners of single-member LLCs. These are the taxpayers who conduct business in either unincorporated form (i.e. sole proprietorship) or the incorporation is disregarded by the IRS (i.e. single-member LLC).

Schedule C IRS Audit: the Focus of the Audit

A typical Schedule C IRS audit focuses on two critical areas: full reporting of revenue and substantiation of expenses.

Generally, the reporting of business revenue should not be too difficult as long as there are sufficient records, but there are exceptions. One of such exceptions is the reporting of foreign income earned by the taxpayer because of the issues of income recognition and currency translation.

Unfortunately, a typical Schedule C IRS audit rarely involves a business with well-kept records. In a purely cash-based business, this is most problematic for obvious reasons – absent records of receipt of cash, it is extremely difficult to recreate an accurate picture of the revenue intake by the business. Similarly, a lot of work will be needed to reconstruct the revenue of a business with multiple revenue conduits, constant transfers between accounts, inexplicable cash withdrawals and deposits, disorganized prepayments and other similar complications.

Schedule C IRS Audit: Substantiation of Expenses

The problems associated with the second part of a Schedule C IRS audit (i.e expenses), however, dwarf the difficulties of revenue identification. The substantiation of expenses is by far the most difficult task in a Schedule C IRS audit. Let’s explore the reasons for this problem in more detail.

During a Schedule IRS C audit, the revenue agent in charge of the audit will only allow a business expenses if it satisfies all of the following three requirements:

1. Expense is Incurred by Business Identified on Schedule C

In this context, the primary problem that plagues taxpayers is the commingling of personal and business expenses. Oftentimes, the taxpayers will pay for business expenses using a personal bank account or a personal credit card. Actually, I have had clients who used credit cards of third parties to pay for business expenses. Proving that these expenses were actually incurred by the business, as opposed to the taxpayer or the third party, can be very challenging.

2. Expense is Supported by Records

The IRS will generally require that a business expense is supported by records. If a taxpayer uses only his own memory as the basis for an expense, an IRS agent is likely to disallow such an expense.

Ideally, the taxpayer should have actual receipts for all business expenses, but IRS agents generally accept bank and credit card statements that would allow them to identify the nature of an expense. The generosity of an IRS agent in this aspect often depends on the general “flow” of a Schedule C IRS audit – i.e. cooperation of the taxpayer, his credibility and the non-willfulness of his prior noncompliance.

3. Expense is Allowable Business Deduction from Income

Even if the audited taxpayer has good records in support of a business expense, the expense must still be an allowable business deduction. The critical issue here is whether the law actually allows the taxpayer to reduce his business income by the expense in question.

In order to qualify for being a deductible business expense, the expense must be both ordinary (i.e. common and accepted in the relevant area of trade or business) and necessary (i.e. helpful and appropriate for your trade or business). It is also should be kept in mind that some of the business expenses are either capitalized or added to cost of goods sold. There are also limitations on certain types of business deductions (such as business meals).

One of the most frequent problems that arise during a Schedule C IRS audit is the issue of personal expenses paid by the business. Personal expenses are never deductible as a business expense. I already described this problem above in the context of business expenses paid through personal accounts or by a third party; here, I am discussing the opposite situation – personal expenses paid using a business bank account or credit card.

It is important to understand that the fact that an expense is paid by a business, does not automatically mean that this is a deductible business expense. An expense still needs to comply with the “ordinary and necessary” requirement and be separated from personal expenses.

Sometimes, it is fairly easy to identify personal expenses, but this is not always the case; on the contrary, a vast number of expenses can be interpreted either as a business expense or a personal expense. For example, if a business owner buys tickets to a baseball game for himself, his family, potential clients and their families, how much of it is deductible? How about a personal membership at a gold club to which the business owner often invites his prospective clients and pays for their games?

The answers to these questions should not be left to the judgment of the IRS agent in charge of the question; instead, the attorney who represents the audited taxpayer should look at the precise facts, IRS revenue rulings and similar cases to promote the argument that will benefit his client.

Contact Sherayzen Law Office for Professional Help with a Schedule C IRS Audit

If the IRS is auditing the Schedule C of your tax return, contact Sherayzen Law Office. Our professional audit team, headed by attorney Eugene Sherayzen, is highly experienced in the IRS audits of Schedule C, especially with respect to upper middle-class and high net-worth clients. We can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

What to do if the IRS Audits Your Quiet Disclosure | FBAR Lawyer Madison

This essay is concerned with a situation where the IRS audits your quiet disclosure of foreign assets and foreign income. The IRS audit can be an absolute nightmare in this case. Not only will the audit examine the accuracy of the disclosure, but the IRS may actually raise the issue of willful and non-willful FBAR penalties as well as the potential income tax fraud penalty.

So, is everything lost if the IRS audits your quiet disclosure? The answer is “no”. While the situation may undoubtedly be dire, it is not hopeless if the case is handled properly. While it is not possible to discuss in this article the whole spectrum of strategies available to taxpayers in such a situation, this article attempts to line out the three most important steps that you should do if the IRS audits your quiet disclosure.

1. If the IRS Audits Your Quiet Disclosure, You Should Not Panic

An IRS audit is always a stressful event. The stress increases exponentially if the audit involves a quiet disclosure of foreign assets and foreign income.

While your situation may be difficult, you should try to resist the panic. Panic is an emotional condition where a person starts acting irrationally and may follow a course of action that may worsen the already difficult situation.

2. If the IRS Audits Your Quiet Disclosure, Do Not Try to Handle the Audit by Yourself

Do NOT attempt to solve the IRS audit of your quiet disclosure by yourself, even if you believe that you were non-willful in your original noncompliance. This is extremely dangerous and may result in imposition of non-willful or even willful penalties. US international tax law is so complex that you may easily get yourself in trouble even if you believe that you are doing well.

There is a myth that the IRS is somehow gracious when a taxpayer represents himself and will be willing to reduce the penalties – this is completely false, especially in a situation involving a quiet disclosure. The IRS agents follow procedures and they will follow them ruthlessly until they run into a legal defense built by a lawyer. Without such a defense, there is nothing to stop the IRS from imposing penalties to the extent an agent believes is justified by the facts of the case.

3. If the IRS Audits Your Quiet Disclosure, You Should Immediately Find and Retain an International Tax Lawyer

Get yourself an international tax lawyer to help you with an IRS audit of your quiet disclosure. This can be a highly complex situation and you should have a professional by your side to guide you throughout the process. This is the best way to assure that your case will be handled properly.

In this case, a professional must be an international tax lawyer, not an accountant. I am always suspicious of cases where accountants start to go beyond their professional capacity and take on the legal defense of their clients’ cases. While it may be tolerable in simple domestic cases (though still not recommended), it may result in a horrific outcome where the IRS audits a quiet disclosure.

Sherayzen Law Office Can Be Your International Tax Lawyer if the IRS Audits Your Quiet Disclosure

If the IRS audits your quiet disclosure, consider retaining Sherayzen Law Office, Ltd. as your international tax lawyer to represent you during the IRS audit. Sherayzen Law Office is an international tax firm which focuses on helping its clients with their voluntary disclosures and the audits of these voluntary disclosures. The firm is not only a leader in the field, but it has also extensive experience in combating and reducing the IRS penalties associated with prior tax noncompliance.

IRS Audit Reconsideration

Have your tax returns been subject to an IRS audit? You should be aware that IRS procedures may allow you to contest the findings through IRS Audit Reconsideration, provided that you meet certain requirements. If the amount is significant or you believe that the IRS was erroneous in its determination, you contact Sherayzen Law Office, PLLC.  Our experienced law firm can assist you with your IRS Audit Reconsideration and help you avoid making costly mistakes.

This article will explain the basics of audit reconsideration. It is not intended to constitute tax or legal advice.

IRS Audit Reconsideration: Reasons the IRS May Reconsider an Audit

There are various reasons for which you may request IRS Audit Reconsideration. For example, if you were not able to appear for your audit, or if you moved during the audit and did not receive correspondence from the IRS, the IRS may grant the request. Additionally, if you believe that you have additional important information to substantiate your case that was not available to you during the audit, you may be allowed to have the IRS reconsider the audit. Further, if you disagree with the assessment from the audit, a request may be granted, depending upon the IRS’ discretion. You are well-advised not to make the determination by yourself about whether you have a sufficient reason for IRS Audit Reconsideration; this is a question for an experienced tax attorney.

Process for Requesting IRS Audit Reconsideration

In general, there are several steps you will need to take if you are requesting IRS Audit Reconsideration. If you are planning upon making the claim that you are presenting new evidence that you did not present before at the audit, you usually should first obtain all the necessary documentation that you will need to substantiate your claim and make sure that the evidence supports the correct tax years in question. You will then need to file a letter explaining your request for reconsideration, along with photocopies (originals will not be returned to you) of the evidence supporting your new claim.

The IRS notes that, provided you meet certain requirements, your IRS Audit Reconsideration request may be granted if: “You submit information that we have not considered previously. You filed a return after the IRS completed a return for you. You believe the IRS made a computational or processing error in assessing your tax. The liability is unpaid or credits are denied.” On the other hand, the IRS usually will not accept IRS Audit Reconsideration request if you signed an agreement agreeing to pay your amount of tax liability (such as a Form 906, Closing Agreement; a Compromise agreement; or an agreement on Form 870-AD with IRS Appeals), if the amount of tax you owe is due to the result of final partnership item adjustments under the Tax Equity Fiscal Responsibility Act (TEFRA), or if the United States Tax Court, or another court, has rendered a final determination on your tax liability.

Once the documentation for the IRS Audit Reconsideration is received by the IRS, the IRS may send you a letter requesting follow-up information regarding your request. The IRS may delay collection activity once your initial letter is received; however, collection activity will resume if you fail to respond to request from the IRS for additional information within 30 calendar days, or if the IRS deems your documentation insufficient to support your claim.

Once the IRS has completed its review of your IRS Audit Reconsideration request, you will be notified as to whether your position was accepted or rejected. If you position was accepted, the IRS may either abate your assessed tax, or partially abate the tax, depending upon the circumstances. If your position is rejected, your assessed tax will stand. If you disagree with the results you may either pay the amount (either in full, or by making other payment arrangements), or by seeking certain other remedies. In future articles, we will explain other options you may have at that point.

Contact Sherayzen Law Office for Help With An IRS Audit

If you are currently being audited or the IRS already rendered its decision and you are looking for a way to challenge it, contact Sherayzen Law Office for professional legal help. Our experienced legal team will thoroughly analyze your case, determine the available options, implement the chosen course of action (including preparation of any tax forms) and rigorously defend your interests during IRS negotiations.