We’ve been looking in recent posts at the various tax obligations sole proprietors need to manage in their business operations. One of the ways sole proprietors quickly learn the importance of their tax obligations is by facing an Internal Revenue Service audit. When a sole proprietor faces a tax audit, working with an experienced attorney can help ensure the sole proprietor handles the process as gracefully as possible.
Having an experienced advocate through the audit process can also help the IRS to see the business owner’s tax information and documentation in the proper light. This is particularly important in cases where a sole proprietor is found to have made mistakes in tax filing which could be interpreted by the IRS as fraud.
When the IRS audits any taxpayer, they will do their best to determine whether noncompliance is the result of fraud or simply negligence. The basic difference between negligence and fraud is that the latter is intentional deception whereas the latter is, at worst, intentional disregard for the rules.
Negligence, according to the agency’s training materials, tends to be characterized by certain circumstances, such as: having a history of noncompliance; similar, prior audit results; lack of explanations for discrepancies in a tax return; lack of organization and accuracy in business records; and failure to provide a paid tax preparer with all necessary and appropriate information to properly complete a return.
Fraud, on the other hand, tends to occur with things like: false explanations for understating or omitting income; significant discrepancies between reported and actual income deductions; concealing sources of income; errors which all favor the taxpayer; false records; and so on.
In conducting an audit, the IRS will do the best it can to discern between tax negligence and tax fraud, but it isn’t always easy to discern the difference. Having an experienced advocate is therefore critical through the process, particularly if the audit leads into a criminal investigation.