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Many Santa Ana residents fear a tax audit when they are contacted by the Internal Revenue Service. Many individuals do not know whether an IRS audit will reveal what the IRS considers to be tax fraud and it is important to contact an experienced Orange County tax litigation attorney if the IRS sends you notice of an audit through a phone call or a letter.

There are many things that may lead to an audit including unreported or underreported business income and overstated expenses that may have reduced a California resident’s tax liability. Many individuals who become embroiled in tax fraud controversies did not intentionally attempt to defraud the IRS and made bad tax decisions based on ill conceived advice from a tax preparer.

One of the many types of tax schemes that may raise a “red flag” for an audit is giving too much money away to heirs without paying a gift tax. Giving money to heirs makes sense to many older individuals because giving money away reduces the size of a taxable estate and can avoid triggering the federal estate tax. An Orange County resident can give up to $13,000 away annually without incurring any tax and married couples can give away $26,000 jointly to any person-tax free.

Any gift that is above the yearly exclusion counts against the lifetime gift exclusion, which is $5 million or $10 million for married couples. Once that limit is passed then a 35 percent gift tax applies.

Although these amounts are greater than most Orange County residents are capable of giving away during their lifetime, some wealthy area residents who take ill conceived advice regarding the gift tax exclusion may trigger an audit which can result in more serious penalties than any supposed gain from the unpaid gift tax.

Source: Forbes, “What Your Advisor Might Pitch Next,” Deborah L. Jacobs, Aug. 19, 2011