What is IRS auditing?

[taxea]

Anyone have a reference for gaining knowledge on what IRS is concentrating their audits on? taxe

[S T]

$Millinon Question

I think us as preparers would all like to know. I try to audit proof the best I can, but if IRS is changing strategy that would also be good to know.!

Responses will be more than welcome on this post!

Sandy

[taxea]

No Kidding! I know that since they upgraded their computers they are doing all kinds of automated queries. I just think it would be nice to be able to warn those clients with documentation when they try to get around the rules. I provide options to my clients about many issues they may consider especially when I suspect they are not being upfront If I am sure they are trying to cheat and they won't heed my warning I give them back their paperwork. taxea

[erchess]

Audits

The IRS will audit Tax Returns and Requests for Refund.

Furthermore they will focus their attention in places where their ever evolving experience leads them to think that they will find more tax monies due and collectible. They do seem at the moment to be emphasizing the benefits of having dependents and especially the EIC. They also seem to be emphasizing the issues of automobile mileage and the underlying records and whether mortgage interest is really deductible given the limits on the principal borrowed especially if not used to buy build or maintain a new home. Furthermore I believe that they are gradually increasing their knowledge of everyone's income and increasing their vigilance for deductions that look odd given the rest of the return. Even several years ago a colleague of mine prepared several returns for custodians at local universities. She claimed that each lived in a 750K sq foot home and had a 250 K sq foot home office. There was an IRS inquiry before tax season was over. It also turned out that she, an unenrolled preparer in her first year with our firm, was holding herself out to clients as a CPA.

But if we know the laws and explain them to our clients then most of the problem from audits will fall on those who lie to us and the taxing agencies. And if we happen to make a significant mistake, well that's why we have E and O insurance.

I don't like the taxing agencies because down deep I resent the fact that in a dispute the burden of proof is normally on the taxpayer. However, I have not heard of a case where a government employee invented income that a taxpayer did not have but created some document to make it seem that they did or invented some other reason not to accept a deduction or a credit. I may not like the rules but as long as both the taxing agencies and my clients play by the rules, I know how to win audits.

[DaveO]

The audits I've had this year have focused on Schedule "C" including Form 8829 and Form 2106. Travel, M&E and Other Business expenses have been the main items. I will have my 5th audit of the year next week with 2 of the 5 being repeat customers.

As long as the records are good I have no problem winning. Some people just don't have good records and they in turn pay the price.

[taxea]

DaveO...are these physical (face to face) audits or CP2000?

In all my years I have never been a party to anything I couldn't handle via phone, fax or amended return. taxea

[DaveO]

These are face to face office audits. I had probably another dozen or so CP2000 notices over the course of the year which were all incorrect to one degree or another.

[S T]

Why

Dave,

Any idea why you are receiving so many notices and audits?

Can you share your thoughts on this?

Sandy

[FEDUKE404]

Nice house !

...Even several years ago a colleague of mine prepared several returns for custodians at local universities. She claimed that each lived in a 750K sq foot home and had a 250K sq foot home office....

Dang - were they living and working in the Biltmore Estate (750,000 square feet?)

All kidding aside, how did a "custodian" ever get considered for OIH in the first place??

FE

[taxea]

"CP2000 notices over the course of the year which were all incorrect to one degree or another."

Sandy to your question...it has been my experience that this occurs because the IRS has their computers programmed to match various items. If the computer does not find an exact amount on a certain line of the return it generates a CP 2000 letter. The IRS is unaware, for the most part, that this letter has been issued unless it is responded to.

If it is not responded to the computer is programmed to generate a followup every 60 days.
If there is continued non-response the letter changes to An Intent to Levy and on it goes. taxea

[joanmcq]

Once you understand how the computer match at the IRS works, you as a pro should not get a lot of CP2000s. I do get one for every year for a couple who files single for federal for whom the primary on the mortgage is not the one working and reporting the intrest. Even though the other partner (first on the mortgage) is the dependent of the other, they don't seem to get that. So the filing partner gets a notice for overreported mortgage. Easy to clear up, but a pain. But they do also catch in the net a small amount of dividends and withholding which for two years he hasn't given me the 1099 (he's forgotten about it too). So part is correct and part isn't. This one there isn't anything I can do about. But making sure you have all the stock sales reported correctly, and getting all the W-2s and withholding, and doing those pesky stock options correctly, and not missing the W-2 Gs or reporting SE income as wages.....well those you shouldn't get a lot of.

[BHoffman]

Sch C with EIC is what I'm betting on.

[erchess]

Dang - were they living and working in the Biltmore Estate (750,000 square feet?)

All kidding aside, how did a "custodian" ever get considered for OIH in the first place??

FE

I believe that the preparer in question felt that the results of following the law (which for these returns she knew perfectly well how to to do) were socially unjust so she prepared returns that got them either the refunds she thought they deserved or as close to what she thought they deserved as she thought she could get by with. Let me be clear - she was committing tax fraud in the interest of her own ideas of social justice.

I have heard of tax offices in which there is human oversight of returns, especially those done by people new to the firm especially if they are also new to the tax business. The firm I was with at that time had such oversight in my first years but eventually replaced that oversight with computer checking and even turned the process of doing the computerized checking over to the people who had prepared the returns. There was I think one year when the computer sometimes demanded that a second preparer sign off on the return but it was found that most checks were perfunctory at best even though doing these checks for someone increased your end of year bonus. The computerized checking allowed the preparer to override the diagnostics except in the case of returns being electronically filed, of errors the IRS would have rejected. Note that paper returns were not subject to the latter level of checks.

[FEDUKE404]

Preparer making tax rules on the fly?

I believe that the preparer in question felt that the results of following the law ...were socially unjust so she prepared returns that got them either the refunds she thought they deserved or as close to what she thought they deserved as she thought she could get by with. Let me be clear - she was committing tax fraud in the interest of her own ideas of social justice.

WOW - A scary situation!!

I have an entire list of things I feel to be "unfair" about the tax laws, to include parents who make "too much" and get no college tuition relief, or same for new college grads and their own college loan interest limitations, especially as opposed to many of the EITC folks who flat out LIE to get their free government money each year (RAL, please!!). Unfortunately, with the sad economy and the incoming crowd in Washington, my personal tax unfairness list is likely to grow.

As for the checking aspect, the GIGO principle generally applies. I've always felt that merely eyeballing the finished product ("does it pass the smell test?"), especially for unproven employees, can prove far more than a computer "error check." One would think that your/her firm might now be on the IRS target list, which further compounds the misery for the innocents.

Thanks for the input!

FE

[David1980]

I have heard of tax offices in which there is human oversight of returns, especially those done by people new to the firm especially if they are also new to the tax business.

If the accuracy of the returns isn't relevent to the business model it can actually be to the advantage to have inexperienced tax preparers. With the "shoppers" if you have someone who will give extra deductions because they just don't know better you can have the highest refunds with no clear foul intentions.