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 What Is Income Tax Law?

The 16th Amendment was passed in order to give Congress the power to create and collect income tax. This led to the passing of the Internal Revenue Code, or “IRC.” The IRC is enforced by the Internal Revenue Service, or the “IRS,” which is the federal government agency responsible for collecting taxes.

The IRC sets the standards for all tax laws, including federal, state, and local tax regulations. According to the IRC, income tax is a specific type of tax that the government imposes on personal income. An example of this would be how when you receive a paycheck, a certain percentage is deducted from the total amount. This deduction generally accounts for different levels of income taxes and state or federal programs, such as Social Security benefits.

If your employer deducts income taxes from your paycheck, this will be reflected when you file your state and federal taxes for the year. This is why you sometimes receive a tax refund or excess payment after filing your taxes; it means that you paid more income tax than was necessary for the year.

However, not everyone is subject to income tax laws. An example of this would be how the federal government does not collect income tax from those who are unemployed. Additionally, some states do not subject their residents to state income taxes.

What Is An Income Tax Audit?

A taxpayer may be subject to a tax audit if the IRS does not believe that they have paid their fair share of taxes, or that they have deducted items that should not have been deducted.

During an income tax audit, the taxpayer will meet with an IRS representative who may ask specific questions regarding their tax returns. This meeting is to ensure that the taxpayer did in fact provide a full report of their income and that any deductions that were declared were lawful and appropriate. If the IRS representative determines that the taxpayer was honest, the case will be closed.

However, if the IRS discovers that the taxpayer was lying or did not report specific income that should have been reported, they will likely be subject to supplemental taxes and monetary penalties. As such, it is imperative that taxpayers maintain records of their past tax returns, as well as expense records in order to support their deduction claims.

Additionally, if the IRS demands payment of less than $50,000 in taxes within a single year, the taxpayer may petition the U.S. Tax Court to review the matter. They may dispute the amount of income taxes that they owe before this court, who will determine the matter. It should be noted that the judgment that the U.S. Tax Court issues will be considered as final, meaning, it cannot be appealed.

What Is A Small Business Audit?

Business owners, especially small business owners, must be cognizant of their state’s tax laws and regulations associated with their work and organization.

A small business may be audited meaning the business’s financial records, policies, and procedures are reviewed in order to ensure that the business is in compliance with applicable laws and regulations. This audit may be done internally by the business owner, in order to better their business voluntarily. Alternatively, an external auditor or an IRS agent may audit the business.

There are many ways in which auditing your business could be beneficial. Auditing your financial affairs helps you as the business owner have more confidence that your finances are in order. An internal audit also gives investors that same level of confidence, who will be glad that the records are in order, and that you took the initiative to ensure that that is true.

There are some instances in which some lenders will also require an audit. Essentially, entities or individuals who may infuse money into your business can legally demand to see that your business’s financial records are in order.

Conducting an internal audit may bring significant problems to the surface. An example of this would be how a restaurant owner may need to know the cost of materials that are used in making dishes for diners. A retail shop owner would need to know the cost of acquiring a customer. If the cost of running an ad on social media is more than the revenue that the customer brings to the business, the cost of running that ad is generally not worth the price.

Internal audits can help pinpoint these problems, and other issues such as embezzlement and fraud. Alternatively, an internal audit may simply find accounting errors that can be addressed before causing further issues for the business owner.

What Are Some Different Types Of Audits?

Internal audits are fulfilled by a representative of your company, generally a person that regularly works for your company. It is important to note that these audits may not solely focus on reviewing financial documents, but they can also oversee internal policies and procedures.

It is common for a business to lack a written policy regarding an issue that arises during the year. At the time of an internal audit, you should revisit that issue and ensure that there is a written policy in place to prevent future problems.

Having an internal auditor is useful in that they are someone who already is familiar with the business. However, a potential disadvantage would be that they may have some bias that prevents them from seeing the numbers and records accurately.

Additionally, many small businesses do not have the resources needed in order to conduct an internal audit. While large companies such as corporations generally have in-house audit departments, a small business generally does not have access to that privilege.

An external audit is the exact same process, the difference being that the auditor is not someone who is employed by the business that is being audited. Hiring an outside auditor can help prevent the bias issue that was described above. Additionally, hiring an outside auditory largely alleviates the burden of one of your employees being responsible for the audit. If an organization such as the federal government requires your business or organization to undergo an audit, that audit must generally be conducted by an external auditor.

Finally, an IRS audit is an audit that is required and conducted by the IRS, as was previously mentioned. These audits are most commonly triggered by an inconsistent tax return. However, there are other factors that could increase your odds of being audited by the IRS. These include:

  • Reporting suspiciously high-income levels;
  • Claiming losses for several years in a row; and/or
  • Taking numerous deductions.

It is important to note that if you have any of these factors, it does not mean that you’ll automatically be audited. However, these are factors to be aware of as they do increase the likelihood of being audited by the IRS.

Do I Need A Lawyer For A Small Business Audit?

If you have any questions regarding small business audits, or if you are being audited, you should speak with an experienced and local tax attorney. Your lawyer will guide you through the process and protect your interests, and will also be able to represent you in court, as needed.

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