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.
The Ultimate Guide to Selling Your Business Without Triggering an IRS, EDD, or CDTFA Audit
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.
A business owner gets a strong offer. The deal moves fast, escrow opens, and everyone is focused on getting to closing. Then the buyer’s attorney sends a due diligence request that asks for three years of payroll records, sales tax returns, and worker classification documentation, and the deal slows down while everyone tries to figure out what’s actually in those files.
This happens more often than most sellers expect. A business sale is one of the most common events that puts a company on the radar of the IRS, EDD, and CDTFA, sometimes before the sale even closes.
The good news is that most of what triggers scrutiny is predictable. It shows up in the same handful of places across nearly every deal we work on.
In this guide:
Why Does Selling a Business Increase Audit Risk?
Three things happen at once when a business sells, and each one creates its own kind of exposure.
The seller reports a large transaction on a tax return, which is a natural point of comparison against prior years of filings. The buyer, often for the first time, is looking closely at the target company’s compliance history because their own liability depends on it. And the state agencies involved in worker classification and sales tax have a direct mechanism for following unpaid liabilities from the seller to the buyer, which means both sides have a reason to get the numbers right before the ink dries.
None of that means a sale automatically triggers an audit. It means the sale is often the first time anyone has looked closely enough to find what was already there.
What Is Successor Liability in a California Business Sale?
Successor liability is the reason a buyer’s attorney cares about a seller’s tax history at all.
Under California law, a buyer of business assets can become personally responsible for the seller’s unpaid CDTFA sales tax and EDD payroll tax liabilities, up to the purchase price of the business. This applies even when the buyer had no involvement in creating the liability and no knowledge that it existed.
The mechanism that protects a buyer is a tax clearance certificate. When a buyer requests one from CDTFA and EDD before closing, and the seller doesn’t have one on file, both agencies have the right to review the seller’s account before issuing it. That review can surface exactly the kind of exposure a seller was hoping wouldn’t come up.
We often see sellers assume that a clean set of filed returns means a clean tax clearance process. Filed returns and an accurate account are not always the same thing, especially if there’s been a worker classification issue, a sales tax exemption that was never fully documented, or a payroll tax deposit that was late more than once.
Do You Need a Tax Clearance Certificate to Sell a Business in California?
A tax clearance certificate isn’t legally required to complete a business sale, but most buyers and their attorneys will ask for one anyway, because it’s the mechanism that protects the buyer from successor liability.
Requesting the certificate sets a formal review in motion at both CDTFA and EDD. If the seller’s account is current and clean, the certificate is issued and the deal moves forward. If it isn’t, the agency will typically identify what needs to be resolved, which can range from a straightforward filing correction to a full liability assessment depending on what the review finds.
Sellers who request their own clearance certificates early, well before a buyer’s attorney asks for one, get to address issues on their own timeline rather than in the middle of an active deal with a closing date already set.
How Does an EDD Audit Get Triggered by a Business Sale?
Worker classification is one of the most common issues that surfaces during exit due diligence, and it’s rarely something the seller was actively hiding.
A company that has used 1099 independent contractors for years, sometimes for a decade or more, may have never had a reason to question the arrangement. Then a buyer’s due diligence team asks how those workers are classified, what the working relationship actually looks like day to day, and whether that classification would hold up under the ABC test.
EDD’s successor liability rules give buyers a direct financial reason to ask these questions before closing rather than after. A buyer who inherits a misclassification problem along with the business is inheriting the liability that comes with it.
This is also where a pending sale can add real pressure. We’ve seen deals where an EDD audit opened mid-transaction, and the outcome of that audit determined whether the sale closed on schedule, closed at a reduced price, or fell apart entirely.
What CDTFA Issues Come Up Most Often in a Business Sale?
Sales tax exposure tends to hide in a narrower set of places than payroll tax exposure, but it’s just as capable of derailing a deal.
Resale certificates that were accepted without proper documentation are one of the most common findings. A business that made wholesale or exempt sales for years, based on certificates that were never fully verified, can have exposure that only becomes visible when a buyer’s due diligence team asks to see the paperwork behind each exemption.
Use tax on equipment and out-of-state purchases is another recurring issue, particularly for businesses that grew through several rounds of equipment purchases without consistently applying use tax to items that weren’t taxed at the point of sale.
And for businesses in food service, hospitality, or retail, POS configuration issues, the same kind that show up in a standalone CDTFA audit, tend to surface in due diligence too, since a buyer’s accountants are often more thorough than a routine filing review would be.
Does a Business Sale Increase IRS Audit Risk?
The IRS doesn’t have a successor liability mechanism the way CDTFA and EDD do, but a business sale still changes a seller’s audit profile.
A large gain reported in a single tax year is a natural point of scrutiny, particularly when it’s a significant departure from prior years of filings. How the purchase price gets allocated across assets, using Form 8594, matters directly to both the buyer and seller, since the two parties are required to report consistent figures and a mismatch is the kind of thing that draws attention.
Installment sale structures, earnouts, and any unresolved issues from prior PPP loan forgiveness or Employee Retention Credit claims can also surface during a sale, since due diligence tends to be more thorough than the seller’s usual annual filing process.
What Should a Seller Do Before Going to Market?
The businesses that move through due diligence with the fewest surprises are the ones that looked at their own compliance picture before a buyer did.
That starts with requesting tax clearance certificates from CDTFA and EDD early, rather than waiting for a buyer’s attorney to ask for them. It continues with a review of worker classification for anyone treated as a 1099 contractor, particularly relationships that have lasted years without formal reassessment. Resale and exemption certificate documentation is worth pulling together in one place, since due diligence teams will ask for it and having it organized in advance says something to a buyer about how the business is run.
Purchase price allocation is worth discussing with a tax advisor before it becomes a negotiating point in the deal itself, since the earlier both sides align on the allocation approach, the less friction it creates later.
None of this needs to happen the week before listing the business. It works best done months in advance, while there’s still time to correct something before a buyer’s due diligence team finds it first.
Where This Leaves Business Owners Preparing to Sell
A business sale puts a compliance history in front of more people than it’s ever been in front of before. Buyers, their attorneys, their accountants, escrow companies, and in some cases the state agencies themselves are all looking at the same set of records at the same time.
Most of what creates friction in that process isn’t fraud or willful noncompliance. It’s the kind of issue that builds quietly over years of normal operations, a classification decision made once and never revisited, a certificate accepted in good faith and never re-verified, a filing habit that worked fine until someone with a reason to look closely actually looked.
Getting ahead of that review, rather than discovering it during escrow, is usually the difference between a deal that closes on schedule and one that doesn’t.
Frequently Asked Questions
What is successor liability when selling a business in California? Successor liability means a buyer of business assets can be held responsible for the seller’s unpaid CDTFA and EDD tax liabilities, up to the purchase price of the business, even if the buyer had no knowledge of the debt.
Do I need a tax clearance certificate to sell my business? It isn’t legally required to close a sale, but most buyers request one from CDTFA and EDD because it protects them from inheriting the seller’s tax liabilities. Sellers who request their own clearance early can address issues before a buyer’s timeline forces the issue.
Can an EDD audit stop a business sale? Yes. If worker classification questions come up during due diligence and an audit opens before closing, the outcome can affect the purchase price, the timeline, or whether the deal closes at all.
Does selling a business trigger an IRS audit? Not automatically, but a large reported gain, purchase price allocation issues, or unresolved prior claims like ERC or PPP forgiveness can increase scrutiny compared to a typical filing year.
How early should a business owner start preparing for tax due diligence before a sale? Months in advance, ideally as soon as a sale is being seriously considered. This gives time to request tax clearance certificates, review worker classification, and organize exemption documentation before a buyer’s due diligence team asks for it.