What Happens If the IRS Audits Me and I Do Not Have Receipts? So if you don’t have substantiation then don’t panic because there’s lots of ways to substantiate an expense when it comes to that so what the code technically requires is that in order to take a business expense for example that the expense has to be incurred in the tax year and it has to be related to the business or as to be necessary to the business so as to be ordinary and necessary in business so in order to prove that the expense was incurred in the tax year technically the code does require receipts but the phrase that we use around the office as we like to point out the integrity of data so to the extent that you go in and make a presentation of the auditor and you may not have every single paper receipt but to the extent that you can provide a general ledger or a profit and loss statement or that the expenses in general look to be well organized and well presented and they make sense in the context of a whole so for example you’re missing a category of receipts or you’re missing a major receipts but you have all the other documents related to the audit then the auditor may let that slide you’ve got well organized financial records you’ve got other receipts you’ve demonstrated a good record-keeping practice and.
Blog
How to Prepare for the California Payroll Tax Auditor to Interview Your Independent Contractors
Once you have your files together for each independent contractor or if you have strong evidence that these people are independent contractors, the next phase is preparing your contractors to be contacted and potentially interviewed by the EDD auditor. You need to be careful here, very careful, because you are walking a fine line.
However, best practices in California dictate that you should gather about five people that are your best sources for 1099 information and create a reference sheet for the tax auditor to reach out and contact them.
The reaction that you are going to get from the tax auditor will be a mixed bag. Some auditors appreciate the help and some will buck a little because it appears that you might be trying to control how you are running their audit.
What is an IRS Taxpayer Advocate?
The IRS Taxpayer Advocate helps taxpayers resolve problems with the IRS and also recommends changes to help prevent problems in the future. The Taxpayer Advocate handles those issues when the tax problem is causing significant financial difficulty, when you or your business are facing immediate, adverse threat and when you have tried to contact the IRS repeatedly to no avail.
Installment Agreements and the IRS: Settling Your Debt
In an ideal world, everyone would be able to pay their taxes in full and on time, but sometimes it just isn’t possible. If difficult circumstances mean that you are coming up short during a tax season, it is probably the source of a lot of stress and anxiety.
The instinct to avoid the issue may be strong, but it can cause your problems to multiply exponentially. Interest, penalties, and other severe consequences can begin to build up. The most important thing for anyone struggling with their taxes to know is:
- the IRS can usually work with you, but only if you work with them, and
- calling a tax attorney is often a better idea than seeking out the advice of your CPA.
How to Hire a Tax Attorney to Deal with the FTB
One of the main reasons that I started blogging was to help people. I wanted to motivate “self-help” style legal solutions by taking the knowledge that I have as an attorney and making it available on the web.
How Does the CA Employment Development Department Handle Tax Liens?
We have talked about how tax liens are handled by the Franchise Tax Board and the California Department of Tax and Fee Administration in past blog posts. Now we would like to take up the final taxing authority you deal with as a business owner in the state of California: the Employment Development Department, or EDD.
To lead into this article, let’s start with the definition of what this agency is responsible for.
IRS Audit Issues for Cannabis Businesses
To enforce federal tax code compliance with IRC Section 280E, the IRS runs compliance initiative projects. This is probably in accordance to the noted “high likelihood that a good deal of cannabis dispensary owners were non-filers and not reporting their sales.”
Virtual Currency Transactions and the Audit Process
The IRS will ask for your wallet ID and blockchain addresses to gather detailed information about any virtual currency transactions.
If you fail to adequately respond to the IRS’ letters or fail to amend improperly filed virtual currency earnings, it is likely that the IRS will initiate an audit.
Although audits may be conducted both via mail and in-person, it is likely that the IRS will conduct your virtual currency audit via mail. The audit process “officially” begins when the IRS issues you an audit request.
While audit requests can vary in content, there are several preliminary questions the IRS will ask about your virtual currency income. You can expect that they will ask you to disclose all accounts, including:
- Wallet ID and blockchain addresses; and
- any digital currency exchanges utilized, along with their respective user IDs, email addresses, IP addresses, and account numbers relating to those platforms.
In addition, the IRS will most likely require detailed information about any virtual currency transactions, including:
- The date and time each unit of virtual currency was acquired.
- The basis and FMV of each unit at time of acquisition.
- The date and time each unit was sold, exchanged, of otherwise disposed.
- The FMV of each unit at the time of sale, exchange, or disposition, and the amount of money or the FMV of property received for each unit, and;
- An explanation of the method used to compute basis relating to the sale or other disposition of virtual currency.
If you are unable to provide the IRS with specifics of when your cryptocurrency or NFTs were purchased or sold, the IRS will assume that you disposed of your virtual currency in chronological order, beginning with the earliest unit of cryptocurrency or NFTs purchased or acquired.
This default method is known as the first in, first out (“FIFO”) basis. See Internal Revenue Service Notice 2014-21. The FIFO method has several drawbacks, especially if you’re a high-volume cryptocurrency user.
The FIFO method isn’t recommended during times of inflation or fluctuation, as it does not accurately reflect production costs.
While the IRS will assume you sold your cryptocurrency or NFTs at an inflated rate, it will not take the same consideration into account when calculating your production costs.
The result? FIFO makes it appear as though you earned more than you actually did. For this reason, you will most likely incur larger tax liabilities- which is why the IRS prefers to utilize this particular method.
It is imperative that you maintain organized transaction records at all times. Organized records are the key to ensuring that you’re accurately reporting your virtual currency earnings.
It is also important that you respond by the date stated on your audit notification letter. Failure to do so may result in the IRS issuing you a tax penalty by default.
Generally, the IRS can include returns filed within the last three years in an audit.
However, it is highly unlikely that the IRS will review three years of records, especially since the IRS has only recently begun sending letters and issuing virtual currency tax directives.
WHAT HAPPENS WHEN I SEND MY RESPONSE TO THE IRS?
How To Report Your Virtual Currency Earnings
Individuals earning more than $600 in staking or rewards are required by the IRS to report the earnings and send in Form 1099-MISC.