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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3718
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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With regard to an IRS audit 1) If a person gets audited

Resolved Question:

With regard to an IRS audit

1) If a person gets audited and that person has K-1 income through an LLP, does the IRS auditor ever request the company books for verification of the K-1 income line accuracy?
a) if yes, when is that the case and what are the chances?
2) What are the consequences if some personal expenses (meals, goods purchased) have been run through the company?
a. In monetary values, how much will cause ‘serious’ ramifications beyond restating financial statements and paying the difference?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Sure, during the audit process, the field investigator will ensure an audit trail that verifies all numbers, all the way back to the source, as necessary.

There will be a source organization that has reported this income (further that has deducted what should be ordinary and necessary business expenses in order to arrive at the distributive share on the k-1.

Calculating the probabilities of that are nearly impossible (without knowing your experience with the IRS, the company's experience with the IRS, whether the company's calculations to arrive at the distributive share on the K-1 is questionable, etc.etc.)

In terms of your last questions, they will only ask for the amounts owed and penalties of late payment UNLESS they believe that this was done with intent, knowledge or purpose. (Then you've crossed the line to tax EVASION, rather than simple mistake.



Hope this helps.

Lane

Positive feedback (or an “accept”) is highly appreciated. That’s how we’re paid. HOWEVER, if you need CLARIFICATION, COME BACK here. Also, feel free to bookmark this page to come back for reference.




Customer: replied 1 year ago.

Thank you.


That helps.


 


Based on your experience, regarless of existing standing wiht the IRS, what is the average chance that the IRS will audit the books (individual revenue and expense items) of that LLP when a personal tax audit of an individual with K-1 income is conducted (e.g 1 in 10, 1 in 5, 1 in 3)


 


How does the IRS determine intentional vs. mistakenly? Doesn't every auditee say they didnt know, whether intentional or unintentionally?


 

Expert:  Lane replied 1 year ago.

You're asking me to do the kind statistical, peer reviewed study that I don't think exists (and I sure wouldn't trust anyone's anecdotal advice.)

How bout we chance the parameters a little, and make this is a little more calculable...

If, in that audit, they find that the number from the company is new, or completely atypical to what had always come before, I would think that would increase the chances. ..../things that just don't seem reasonable.

Tell you what ... let me do a little research (I have access to some research journal databases, and I'll try a search on the Journal of Accountancy, to which I have access.

But if this kind of research doesn't exist, then I think that this is probably the stuff of crystal balls.

Let me see what I can find ...


Lane

Expert:  Lane replied 1 year ago.

Found this:

Don't know the research methodology, and only deals with chances of being audited generally:

https://docs.google.com/open?id=0B_zySkB__jYMN1ZhWHQ3WDlzTDA

Still lookin'

Lane

Customer: replied 1 year ago.


Thank you,


 


I saw that statistic which can also be further borken out by wage classes which changed the chances from 1% all the way to 12%.


 


What I can hear from your comment is that the K1 number appears normal, the chances are low that the audit trail into the LLP books will further explored, no?


 


Do you know the answer to the second question?


How does the IRS determine intentional vs. mistakenly? Doesn't every auditee say they didnt know, whether intentional or unintentionally?


 


 


 


 

Expert:  Lane replied 1 year ago.

Evidence, evidence evidence.

What you'll see in the IRS internal manuals is that there has to be clear and convincing evidence.

You'll see "clear and convincing" over and over.

You know, when they finally convicted Al Capone, someone known by SO many to be guilty of heinous crimes like massacres (mass murder) conspiracy to bribe government officials, gun running, etc. etc., what finally sent him ti Alcatraz was tax evasion.

That might scary, but I think it tells us something else; that they don't take tax evasion lightly ...(meaning) it takes some pretty bad stuff.

I'm going to give you a link to an internal manual

Note that it takes a supervisors supervisor (not just some field worker) to make decisions regarding Fraud ... and remember this is just Civil fraud, not even a criminal issue.

My own opinion is that things need to become pretty chronic and obvious for them to cross the line to criminal intent.


Hope this helps.

Expert:  Lane replied 1 year ago.



Sorry, here's the manual link:

http://www.irs.gov/irm/part25/irm_25-001-006.html



Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3718
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks much.

Good luck, and as things unfold, if I can be of help, let me know.


Just say "for NPVAdvisor" at the beginning of the question.


Thanks again,
Lane
Customer: replied 1 year ago.


Thank you. Will do. I am not doing this for myslef but on trying to help someone else. WIth that, I just remembered one follow up if you dont mind. Is it easy to say what amount is considered material when it comes to tax evasion? E.g. I doubt a $15 lunch for personal reasons but intentionally expensed is material whereas buying a boat with jet skiis for 500K would be and running it through the company (I am just make up examples) would be. And when would those civil charges become a viable consideration upon discovering fraud?

Expert:  Lane replied 1 year ago.


...understand.

Again sooo much variability here.



First, for you,

Something that comes to mind (when you say you're asking for someone else) from a journal of accountancy article is the following:

"Section 7525 extends the common-law attorney-client privilege to tax advice furnished by a federally authorized tax practitioner; however, it may be asserted only in noncriminal tax matters. The IRS takes the position that the accountant privilege does not cover communications that took place in the context of a civil proceeding that later becomes a criminal matter.:

As a matter of fact you should read this:

http://www.journalofaccountancy.com/Issues/2011/Aug/20114034.htm



And this: ("How the IRS Defines and Prosecutes Tax Fraud")

http://www.journalofaccountancy.com/Issues/2011/Aug/20114034.htm#How




The second one, I believe, answers your question and more


Lane


Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3718
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thank you. This article is outstanding. And I appreciate your advice.


 


1) If you have any more such sources (rather too many then too few) which factually identify tax evasion consequences, past court decisions, and IRS examples of tax evasions that lead to civil or criminal investigation/prosecution, that would be absolutely fantastic. I need more information to support a my position.


 


 


2) I understand that an investigation of a company where personal expenses are deducted as an expense can result in civil penalties (75% penalty) and possibly criminal (imprisonment) consequences. Yet, the materiality question is still not clear to me. Is $100 material over the course of the year or $100,000 in order to trigger such ramifications?


 


3) In case company books are audited, couldn’t almost all expenses be argued to be business expense (football tickets ->game was attended with a client; car lease -> used for business purposes only; lake house rent -> client meeting; dinners - sales efforts; electronics - used in the office; cable bills - used for the office and work etc.), no? Would the IRS ask for supporting documentations of each expense item? And if so, what kind? e.g. names of people who attended the football game? Driving log of the car? Verification of the electronic items?


 


4) Last one could be a yes/no question. Could in any way medical expenses be argued to be business expenses e.g. prescription drugs or care services?


 


 


 


 


 

Expert:  Lane replied 1 year ago.

Thank you for continuing with me here.


Let me do a little more research for you. I'll focus today on tax court cases using Westlaw. I can get you something by the end of the day here (probably before, but I don't want to over commit).

I have several meetings throughout the days and will be devoting the time between both to food, this and returning phone calls.

Also, be advised that this is research. I am not an attorney, nor an enrolled agent. I will, however, be providing citations for all federal district, tax and supreme court cases.

...hope this is acceptable.

Lane
Expert:  Lane replied 1 year ago.

First, lets deal with what the IRS has posted publicly, which will limit the ability to claim mistake.

Regarding "3)" above, the IRS in publication 463 (Chapter 5) discusses "HOW TO PROVE EXPENSES." Under that heading they discuss the following sub-headings:

What are adequate records?
What if I have incomplete records?
Separating and Combining Expenses.
How long to keep Records and Receipts, and
Examples of Records



How to prove expenses:

http://www.irs.gov/publications/p463/ch05.html#en_US_2011_publink100034066



What are adequate records?

http://www.irs.gov/publications/p463/ch05.html#en_US_2011_publink100034069



What if I have Incomplete Records?

http://www.irs.gov/publications/p463/ch05.html#en_US_2011_publink100034079



Separating and Combining Expenses.

http://www.irs.gov/publications/p463/ch05.html#en_US_2011_publink100034084



How Long to Keep Records and Receipts

http://www.irs.gov/publications/p463/ch05.html#en_US_2011_publink100034093



Examples of Records:

http://www.irs.gov/publications/p463/ch05.html#en_US_2011_publink100034095





That should cover number three pretty definitively. Must go to the office now. More later.

Lane



Expert:  Lane replied 1 year ago.

Just a quick update:

The Materiality question is turning out to be an element of fact rather than law.

If you are an attorney you'll know what this means.

Essentially since 1929 it was looked at as a rule of law and one could go to decisions, find levels of items (in terms of amount) ruled material by judges in similar cases/situations and get a feel for what would be considered material, albeit still relative to the "size" of the case (income/expenses in question).




From Steven Toscher, July 1995

"In 1994, the Court of Appeals for the Ninth Circuit decided United States v. Gaudin,/2 holding that the materiality requirement of Title 18, United States Code, Section 1001 ("Section 1001"), the general Federal perjury statute, was a question which must be submitted to the jury under the Fifth and Sixth Amendments to the Constitution. The Ninth Circuit's decision was contrary to the "black letter law" established in Sinclair v. U.S., 279 U.S. 263 (1929), that materiality was a question for the court and not a jury. The Ninth Circuit concluded that Sinclair could not be squared with the Supreme Court's later decisions."

"The Government petitioned for and was granted certiorari in the Gaudin case and in June of 1995, the Supreme Court unanimously affirmed the Ninth Circuit and ruled that the Fifth and Sixth Amendments to the Constitution required that the issue of materiality in Section 1001 prosecutions be submitted to a jury./4 Although there was a concurring opinion by Justice Rehnquist (joined in by Justices O'Connor and Breyer), the concurring opinion does not question the core of the Ninth Circuit's and the Supreme Court's reasoning - - that since materiality is an element of a crime which is in part factual, the Constitution requires that that element be submitted to the jury for a decision."




What does this mean? Essentially that the materiality is something that both in court cases and as a derivative, even in field work, is now MUCH more variable.

In the case of a court case, the question of materiality is put to a jury. in the case of non-jury cases and other hearings, the materiality as a derivative of the Gaudin Decision will be much ore situational, relative ..


... can't put a number on it.



lane
Customer: replied 1 year ago.

Thanks so much for the sources and detailed answers. I have been doing quite a bit of reading today as well utlizing your links to branch further out on various topics which helped me put quite a bit of puzzle pieces together. Your help is much appreciated.


 


I will have to go through your source in the morning and continue with the reading. I am still working but look forward to see if you can find anything on Westlaw in the interim, expecially with regard to case decisions on running personal expenses through the company. I know those resources are extremly expensive, thus, do you know of a free source or one with a free trial?


 


Hope to connect tomorrow.


 


I hope I am not bugging you too much. Your feedback is very helpful in finding my answers and I am glad I found you online


 


Best

Expert:  Lane replied 1 year ago.

Me too.

Once you've gotten into it and want to drill down a little more, let me know if I can help


Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3718
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you

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