Tax Law FAQ: Common Questions Answered

What should I do if I receive an IRS audit notice?

Don't panic — most audits are conducted by mail and involve a specific issue on your return. Read the notice carefully to understand exactly what the IRS is questioning. Gather the relevant documentation. Consider consulting a tax attorney or CPA, especially if the audit involves complex issues or significant amounts.

What is the difference between tax avoidance and tax evasion?

Tax avoidance is the legal use of tax laws to reduce your tax liability. This includes taking legitimate deductions, contributing to retirement accounts, and using tax-advantaged investment strategies. It is perfectly legal.

Tax evasion is the illegal failure to pay taxes owed, typically through underreporting income, inflating deductions, or hiding assets. It is a federal crime.

What happens if I can't pay my taxes?

If you owe taxes you cannot pay, you have several options:

• Installment agreement — Pay your debt over time in monthly payments
• Offer in Compromise — Settle your tax debt for less than the full amount owed (if you qualify)
• Currently Not Collectible — If you have no ability to pay, the IRS may temporarily suspend collection
• Bankruptcy — Some tax debts can be discharged in bankruptcy under certain conditions

Do not ignore IRS notices. The penalties and interest compound quickly, and the IRS has powerful collection tools including wage garnishment and bank levies.

What is the statute of limitations for IRS audits?

The IRS generally has three years from the date you filed your return to audit it. However, the statute of limitations extends to six years if you underreported income by more than 25%, and there is no statute of limitations for fraudulent returns or failure to file.

What are the tax implications of selling a business?

Selling a business has significant tax consequences that depend on how the sale is structured (asset sale vs. stock sale), the type of entity, how long you have owned the business, and how the purchase price is allocated among different asset classes. Careful tax planning before a sale can save substantial amounts. Consult a tax attorney well before you begin the sale process.

What is estate tax and who pays it?

The federal estate tax applies to estates valued above the exemption threshold (currently $13.61 million per person in 2024). Estates above this threshold are taxed at rates up to 40%. Several states also have their own estate taxes with lower exemption thresholds.

Proper estate planning can significantly reduce or eliminate estate tax liability through strategies like irrevocable trusts, annual gifting, and charitable giving.

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