Income tax returns that get filed by taxpayers oftentimes are incorrect. At times this is due to simple mistakes, oversight, accidents, confusion or misunderstanding of law. At other times, the records are incorrect as a result of gross negligence or wanton disregard of law. Sometimes they are incorrect since the taxpayer knowingly and willfully intended them by design to ensure paying less income tax. Whatever the reason, any incorrect returns identified need to be corrected, either at once or after criminal proceedings conclude, if undertaken. Having tax investigation insurance, can turn to be of invaluable support for business owners for example, during such moments.
How Business Owners Respond to Tax Inquiries
When tax investigators or inspectors confront taxpayers to check why their income tax returns are incorrect and require their cooperation to rectify the anomaly, these taxpayers might either be cooperative with them or not. If they do cooperate, it gets much easier determining how much true income a taxpayer has earned, or which expenditures may be allowed under law to determine the correct tax figure. Taxpayers who choose to cooperate may avail their books, records or other documents and aid the investigator or inspector in establishing how much extra income tax is due them.
When taxpayers fail to cooperate, the investigators could be confronted with quite some serious dilemma in determining the amount of extra income defaulted from payment. They thus resort to other ways of obtaining the requisite information for calculating the outstanding tax due.
Nature of Tax Investigations
When conducting a criminal tax investigation, the inspector aims at identifying the amount of unreported income that has unpaid tax outstanding. This is alongside identifying any disallowed expenditure that should attract payment of tax. It is usually challenging to attain the figure of outstanding taxes in exacting details. However, investigations might not necessarily target the precise amount of amount of income unreported at this stage. Still, business operators can benefit greatly by protecting themselves from the rigors that come with such inquiries by acquiring tax investigation insurance ahead of launching their operations, among other helpful measures. The unreported figure needs to be substantial, relative to the reported amount, if any. There are minor cases where small amounts of income fail getting reported and might not be necessary to investigate. The tax investigator should remain alert at all times to major cases using the criteria with aim of identifying and documenting the amount of unreported income. Tax inspections could as well target identifying expenditures disallowed by law that have already been deducted on tax returns and for which the investigator requires identifying and gathering evidence. This task is not an easy one, especially when taxpayers fail to cooperate with investigators.
Certain techniques and methods are available for an investigator to reconstruct or recalculate the true income and expenses of taxpayers, even without their cooperation or availing their records and books. It is very likely that taxpayers will provide less cooperation as the tax investigator involves the criminal justice system and where the taxpayers have engaged in fraudulent actions and are liable to imprisonment. As such, tax investigators usually possess certain technical skills which enable them to reconstruct or re-calculate the income and expenses of a taxpayer. That said tax investigation insurance is among the commendable ways that owners of businesses can afford some income protection if they experience hefty penalties due to improper reporting of tax returns.