Multiple global forces have contributed to increased tax audits, assessments and disputes arising from international revenue authorities. Both direct and indirect taxes are susceptible to these situations. The new circumstances require multinational companies to create effective and efficient business operations to maintain compliance.
Essentially, multinational companies need to create coordinated audit and dispute approaches to remain effective in the current tax environment. Enhancing relationships with revenue authorities and prefiling rulings are viable options for many organizations.
Alternatively, companies could leverage traditional and alternative dispute resolution measures to get optimum results. Before your organization can take a positive step forward, you’ll need to comprehend your risk and exposures. With this information, you should be able to quickly manage your tax disputes and audits.
Tax controversy life cycle
Managing typical tax controversies includes multiple steps, including:
- Pre-audit prevention: This step will require you to take proactive steps before the dispute or audit begins. The U.S tax system relies on self-assessments that could include instances where you complete and file a tax return. During audits, numerous issues like requests for statute extensions may arise.
- Audit management: Once your tax audit is complete, you’ll need to respond to the results while managing the rest of the process.
- Post-audit settlement and resolution: Your team needs to set up strategic solutions to resolve any disputes.
Why does the IRS conduct tax audits?
The IRS performs tax audits to review a taxpayer’s file. Often, audits happen when the IRS suspects you of fraud or notices errors in your paperwork. Claiming false business expenses, statistical outliers, omitting income and mathematicfal errors can all result in audits.
Tax audits often reveal instances of tax evasion and fraud. Fraud occurs when you avoid or reduce taxes through misrepresentation. Tax evasion, on the other hand, requires an intentional act. The IRS is on the lookout for activities like hiding cash payments, claiming deductions falsely or creating false documentation.
While some IRS audits are random, the IRS often conducts audits based on suspicious activity. Some of the common red flags that can attract the IRS’s attention include:
- Failing to report some income
- Claiming multiple charitable donations
- Deducting too many business expenses
- Using nice, neat, round numbers
- Claiming a home office deduction
- Making mathematical errors
Overall, there is nothing inherently sinister about IRS audits. However, anyone who cheats the system consciously has reason to be concerned.