An audit can be a time-consuming process. While you cannot avoid a tax audit, you can minimize your risk of an audit by avoiding potential flags on their tax return. The most frequent IRS audits are caused by inconsistencies or errors in your tax return that raise red flags in the eyes of the IRS.
When you work with Milikowsky Tax Law, you get more than an experienced tax litigation attorney. You get an experienced business and tax advisor who can work with you to reduce your chances of being audited, with our comprehensive tax return assessment system and years of business experience.
California’s Top IRS Audit Attorney
Our leading tax litigation attorney, John Milikowsky, has decades of experience representing countless businesses in legal tax matters. Mr. Milikowsky is dedicated to relentlessly defending his clients in everything from state and federal tax audits to criminal tax investigations. As a full-service tax law firm, we frequently work with business owners to empower owners to identify issues on their own tax returns. While there is no way to guarantee you will avoid a tax audit, we can teach you to significantly minimize your risk of an audit.
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Milikowsky Tax Law Defends Businesses in IRS Audits
When you’re faced with the formidable presence of a tax audit, don’t panic. Reach out to Milikowsky Tax Law, and we will protect your company to keep your business in business. Our skilled tax litigation attorneys will protect your rights every step of the way.
Whether you’ve just received a letter from the IRS, or you need help analyzing your legal rights and financial data reported on your tax returns, contact us today. The team at Milikowsky Tax Law is here to help.
San Diego Tax Attorney – Your Relentless Advocate in IRS Audits
Business owners may not be sure where to start if IRS audits their company. However, an IRS audit doesn’t have to overwhelm your life or impede your ability to conduct business. With the experienced team at Milikwosky Tax Law, you can navigate the process of an IRS audit secure in the knowledge that your tax attorneys are advocating for you every day.
There is little to no margin for error during an audit, a tight timetable, and potentially severe consequences for a poorly handled interaction with IRS. Unlike CPAs who do not have attorney-client privilege, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can, review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
If you receive a letter from IRS confirming your business tax return has been selected for examination, review your return and identify the items that will likely be investigated so you can be prepared. Then, before communicating with IRS, reach out to an experienced IRS audit attorney. Having a game plan is critical. You want to be honest and prepared when speaking with your IRS revenue agent.
Anytime you file taxes, there is a chance that your tax return might be audited by the Internal Revenue Service (IRS). The agency conducts standard procedures to find any errors or discrepancies among taxpayers. The audit process is meticulous and, should you find yourself under the scrutiny of IRS, will require detailed information from you.
In the article below, you’ll learn about the audit process and frequently asked questions surrounding IRS audits.
Why was I selected for an IRS Audit?
There are different reasons you may be flagged for IRS audits. Some are due to random checks; however, you have a low chance of being audited this way. Most taxpayers have less than a 0.6% chance of receiving a random audit check.
IRS runs tax returns through its Discriminant Information Function (DIF) system to continually update their database and make sure they are tracking industry benchmarks for each industry and tax bracket.
The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, such as an imbalance of tax returns, a discrepancy between reported earnings and employer filings, or unreported cash transactions by one member of a transactional party, will trigger DIF to send your return to an IRS audit officer.
People are more susceptible to an audit if they:
- Earn less than $25,000 or more than $500,000
- File incorrect or incomplete returns
- Have large numbers of cash transactions
- Claim a disproportionate number of deductions
- Are self-employed
- Have a home-based business
- Have a cash business
- Have foreign assets
Sometimes you can be audited as a result of your business partners or investors going through an audit.
How Will I Know If I am Selected for an Audit?
You will know if you are selected for an audit if you receive a verified letter in the mail from IRS. They do not call to notify you about your audit.
What Do I Do If I’m selected for an Audit?
If you or your business are selected for an audit, make sure you read all of the information sent to you in your audit notification letter. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is. Once you know what IRS needs, make sure you collect all of the records and supporting documentation requested (but nothing additional). You will need to submit records from banks, vendors, and businesses you have worked with, invoices and pay stubs, payroll records, and medical expenses among other information.
Should I Hire an IRS Tax Attorney to Help Me?
We suggest contacting a qualified tax attorney to help guide you through your audit, to ensure you are timely, responsive, compliant, and do not unintentionally increase the scope of your audit to other areas of your business or personal finances that would otherwise remain unscrutinized.. There is little to no margin for error during an audit, a tight timetable, and potentially severe consequences to a poorly handled interaction with IRS. Unlike CPAs who do not have attorney-client privilege, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can, review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
How long do I have to reply to an IRS audit?
You have 30 days to reply to the initial audit letter. Do not hesitate, and make sure you take the appropriate steps early on. IRS is not likely to provide extensions unless you have a good reason. Your attorney can help by advocating for more time with the IRS agent. A good attorney will know many of your local IRS auditors and have strong relationships built on well-structured prior cases and mutual respect.
How Long Do Audits Take?
The time it takes to conduct an audit depends on the case. It fluctuates depending on:
- The seriousness of the tax reporting error
- When and whether the right information is provided to IRS
- Communication between the person being audited and IRS officer
How Many Years of Tax Returns Can IRS audit?
IRS audits tax returns from the past three years; however, most are from the past two years. Only when IRS agents find discrepancies within the audit they are conducting do they dig for information older than three years. Most audits do not look for information past six years. Though in cases of criminal audits IRS can look back 9 years and longer.
If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.
4 Consequences of Unpaid Business Taxes
John Milikowsky, Esq. | Founder | John Milikowsky represents U.S. and foreign businesses and individuals in sophisticated business transactions involving U.S. tax matters. Relentlessly defending each client in federal and state audits and criminal investigations to protect their civil rights and provide financial security.
Unpaid business taxes create more than a balance due. They introduce enforcement risk, trigger agency scrutiny, and can expand into multi-agency exposure across federal and California tax authorities.
For many businesses, issues begin with missed filings or delayed payments. What follows is often a sequence of notices, penalties, and deeper review. Understanding how these situations develop helps you respond early and maintain control over the outcome.
How Unpaid Taxes Escalate
Tax liabilities rarely stay contained. A missed payroll deposit, an underreported return, or a delayed filing can lead to additional review. Once an agency identifies inconsistencies, that initial issue may expand into a broader examination of your business operations.
Federal and state agencies share data. Adjustments made at the federal level often flow into California, where the Franchise Tax Board and Employment Development Department may apply their own analysis. What starts as a single issue can quickly involve multiple agencies reviewing the same set of records.
Recent enforcement has also focused on pandemic-era relief programs. Businesses that received PPP or ERC funds may see those records reviewed alongside payroll tax filings and income reporting. Discrepancies tied to those programs can reopen prior tax years and introduce additional exposure.
IRS Notices and What They Signal
An IRS notice is not just a reminder. It is the beginning of a defined process with deadlines, response expectations, and potential escalation points.
Each notice outlines a position taken by the agency. In some cases, it reflects a balance due. In others, it signals a discrepancy that may lead to audit activity. The timing and substance of your response influence how the matter develops.
Delays, incomplete responses, or providing unnecessary documentation can expand the scope of review. In contrast, a structured response grounded in documentation and strategy helps contain the issue and keep the process focused.
Penalties and Accumulating Costs
Penalties for unpaid business taxes accrue quickly and continue until the balance is resolved. Failure-to-pay penalties typically accrue at 0.5% per month, while failure-to-file penalties may reach 5% per month, both subject to caps. Interest continues to build on both the underlying liability and associated penalties.
Additional penalties may apply when returns contain inaccuracies. If income is underreported or deductions are not substantiated, the IRS may impose accuracy-related penalties of 20% of the assessed amount following an audit determination.
Even short delays can increase total liability. Over time, what begins as a manageable balance can grow into a significant financial obligation.
Federal Levies, Liens, and Asset Exposure
When tax liabilities remain unresolved, the IRS may move into enforced collection. This includes issuing levies against bank accounts, accounts receivable, or other sources of income. Federal programs may also intercept certain payments owed to the business.
Tax liens establish the government’s priority over other creditors. This affects financing, asset sales, and overall business operations. In the event of insolvency or liquidation, the IRS maintains a superior claim to proceeds.
In more advanced cases, the IRS has the authority to seize business assets. Equipment, vehicles, and real property may all be subject to collection actions when liabilities are not addressed.
When Civil Matters Become Criminal
Certain patterns of noncompliance can elevate a civil tax issue into a criminal investigation. This typically involves willful conduct, such as intentionally underreporting income, falsifying records, or diverting funds intended for tax obligations.
Payroll tax issues are a common entry point. When employee withholdings are not remitted, the IRS views those funds as held in trust. Misuse of those funds can lead to significant penalties and potential criminal exposure.
Other factors that may contribute to escalation include inaccurate cash reporting, fabricated deductions, and overlapping issues such as workers’ compensation or insurance-related fraud. In these situations, multiple agencies may become involved.
Criminal tax matters carry substantial consequences, including fines and potential imprisonment. Early legal strategy plays a critical role in how these cases develop.
California Enforcement Considerations
For businesses operating in California, unpaid federal taxes often lead to parallel state-level exposure.
The Franchise Tax Board reviews federal adjustments and applies California tax law to those changes. The Employment Development Department may examine payroll classifications and wage reporting. The California Department of Tax and Fee Administration may review sales and use tax reporting if discrepancies are identified.
These agencies operate independently but often rely on shared data. A single issue can result in multiple reviews, each with its own set of rules, calculations, and enforcement tools.
Managing the Situation Early
Unpaid tax liabilities can be addressed. Options may include structured payment arrangements, negotiated resolutions, or strategic responses to agency positions. The effectiveness of these options depends on timing, documentation, and how the matter is presented.
Early action allows for more flexibility. It creates the opportunity to clarify positions, limit exposure, and guide the process before enforcement actions begin.
As notices arrive or balances grow, the way you respond shapes what happens next. If you are dealing with unpaid tax liabilities or have received a notice, connecting with Milikowsky Tax Law early can help you evaluate your position and move forward with a clear response strategy.