Audits

[Lance Emerson]

Let's talk about audits.

Most folks who do high volume tax preparation don't have a ton of audits. If they did, they wouldn't have time to prepare taxes. How about some words of experience from folks who have done the dance with revenue agents.

I'll start.

Do a pre-audit interview with the taxpayer where you're putting on the revenue agent's shoes and you're determined to assess additional taxes. Find the weak spots, then set out to patch them up as best you can. The key is to make sure there are no surprises at the audit. If you're confident of what will happen, there's no reason to be nervous.

Sound the alarm if a client speaks with a revenue agent and the client thinks the revenue agent is a really nice person who wants to help them. Most all revenue agents are good people doing their job, but their job is not to help the taxpayer avoid additional assessments. Every time I've heard "The agent was really nice" was just before a big tax bill came crashing through the roof.

Don't let the client discuss tax rules with the revenue agent. Ever.

Any bombshells will drop just as you think the interview is almost over. Remember it's a live ball until the umpire yells "Time."

Any other words of advice?

[Bird Legs]

Audits

Lance, the No. 1 rule in this office is the client does not talk with the agent and
never ever is present during the audit.
On several occassions, back in the early days of practice, clients were present at the audit. Audit No. 1. The wife was present. Husband was contractor. No change audit, client had very little income to report for the year under audit. Towards the end, the auditor looked at the wife and remarked what a beautiful ring she. Wife responded, yes,
thank you, that ring cost $20,000. The agent said on a $15,000 income for the year?
So, let us go back and take another look at these figures.
Fortunately, everything was allright and was able to explain how client could buy a ring for that amount of money.
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[Snaggletooth]

Empty Handed

In spite of the public show of trying to be honest and fair, auditors get raises and bonuses only when they are able to collect tons of money. Many times an auditor does not want to go home empty-handed, and if he can't find anything, he will continue to pick and pick and pick until he writes you up for something.

He is also on the clock, in a sense. Not only is he under pressure to find money, he is also under pressure to close out your case and move on.

Bearing this in mind:

1)If he is not going home empty-handed, give in on items of little consequence. For example, if a taxpayer comes away with an assessment of only $100, consider this a victory, write the check, and enjoy the rest of your life.

2)Remember, you can negotiate a quick and cheap settlement if the auditor is wanting to close the audit (and trust me, he is). If he gets to choose between this and dragging it out, he will usually settle quite fairly, unless dragging it out is going to result in a bunch of more money.

3)Don't fight every issue he brings up, and don't give in either. Just write down the issue, and wait until his findings are over. Look and see the total of what you are dealing with, instead of micro-arguing each little dispute.

4)Know when you have no case, and no chance to win. Don't waste your time, your clients time, or the auditors' time. The auditor will respect you for your understanding of the issues. Sometimes your client is so ill-substantiated that you cannot take his position without losing all credibility, and you should be candid with him.

Any more tips?

[Bird Legs]

Audits

Also, on occassion, will have the client go out of town on a business trip during the time of audit. That way, if a question comes up, can tell the auditor will have to get the answer from client that night, at the hotel, and have it the next day for him. Sometimes the auditor will forget about it overnight.
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[Gary]

I've only been on one audit and, to my surprise, the client got off with no additional taxes. It was a Schedule C with no records.

[geekgirldany]

Audits

As some of you know from the other board I have a client going through a audit right now. I am letting a CPA handle it. One reason is because the clients did not want to be present during the audit. The auditor wanted to meet with me a couple of weeks ago. Apparently he was under the impression that I was doing the bookkeeping. I was just in there for 15 minutes. He said "so your just the number cruncher, you only fill out the tax forms". He seemed not to like it that he was only meeting with the CPA. I believe he wanted to meet with the clients.

In my position I don't have my EA yet. The client would have to be there during the meetings correct? Can I have some meetings with the clients not there and the Auditor only?

BTW I saw on fox news that the IRS estimated a huge loss of tax revenue into the billons because of people not paying their taxes. I believe it was from the year 2001. It seemed to refer to S-Corps having something to do with it. And stated that audits of S-Corps were going to increase. Random audits.

[lsmith]

Audits

First thing, get the power of attorney. After you find out what they will be looking at, get the information from the client and do not have the client involved. Further information can be obtained by calling them. If the auditor wants a brief meet the client and wife, advise them how to dress and what to wear and not wear (Jewelry). Let them have the preparer, cpa, accountant, ea, etc handle all the questions. If they do meet, advise them to not volunteer any information and keep answers simple (yes, no, etc) If they are unsure of something tell them that you will get back to them with that.

[Lance Emerson]

Dilemma

This is a great discusson!

"1)If he is not going home empty-handed, give in on items of little consequence. For example, if a taxpayer comes away with an assessment of only $100, consider this a victory, write the check, and enjoy the rest of your life."

I did that with my last audit. My belief was that the clients were honest, and the revenue agent was being cooperative and letting some deductions go with verbal testimony instead of perfect documentation. The agent believed the taxpayers were honest as well, and didn't try to drag them through the mud. The auditor found a tax due of around $200. I recommended that my clients pay it to settle the issue, and they were quite happy about it. However,...

I couldn't get it out of my mind why, if the auditor thought the folks were honest, they'd be hit with just a little bitty amount.

How about the rule that says the IRS can't do repeat audits if they've audited the taxpayer in the past and found no change in tax? This is an important rule. By assessing my clients a piddly amount, that gives the IRS free reign to audit them again whenever they feel like it. Now I wonder if I gave them good advice to setttle.

"He said "so your just the number cruncher, you only fill out the tax forms". He seemed not to like it that he was only meeting with the CPA. I believe he wanted to meet with the clients.

"In my position I don't have my EA yet."

Been there! Get your EA! It doesn't have anything to do with your position. You can do it. You'll get tons of help on this board. You won't believe the respect you'll get when the agent sees "EA," or "CPA" or whatever you're going for.

I stepped in to an audit for another preparer of a legitimate dependent. It was a person supporing her mother. I couldn't believe they were even questioning it. I saw the response you got, and mine was exactly the same. The agent talked down to me and acted like I had no idea what I was doing. We were in the office for an hour and a half, and agreed to come back at a later date with verification.

I then got POA, which lists me as an Enrolled Agent, along with my Central Authorization File number (you'll apply for and get that automatically for audits). When I went back with the clients, the agent raised her eyebrows and said "Oh. You're an Enrolled Agent."

I swear the interview took less than seven minutes, and that includes a bunch of small talk. The agent closed the file, no changes. I was upset that they wouldn't listen to me as a mere preparer, then they completely changed their attitude when I was able to officially announce myself as an EA.

Get your EA. It won't open all the doors for you, but I guarantee it will make revenue agents more reluctant to argue with you.

[DTS]

Lance

I totally agree with you. This is a wonderful discussion and many of us will learn from it. Some very good advice here!

Dennis

[Lance Emerson]

Fishing Expedition

So, whaddya do when the auditor asks for copies of prior year returns and subequent year returns when those returns have absolutely nothing to do with verifying the year in question? They ask every single time.

Do you say no and risk making the auditor disagreeable? Or do you just bow down and turn over whatever they want, whether it's legitimate or not?

Personally, it depends on how solid the client's verfication is. If the client has all the documentation they need, I don't care if I make the auditor mad. However, many times you're relying on the auditor's good graces, and there's a bit of extortion going on. "I'll give your client a pass on this, but you have to let me go on a fishing expedition."

I know some practitioners will not produce any returns that aren't directly related to the return in question. Any other opinions?

[BOB W]

Audits

Lance> It's always a tough call whether to give additional info or not. I find the most auditors like to close their cases ASAP. I do not bring anything with me other than was asked in the audit letter, this way when they ask I don't have it with me. I tell them to give me a list at the end of the session and we will reschedule another audit time. Usually he/she forgets and closes the audit at the end of the session.

I always give them what they want, after I ask them WHY. Most times they ask for copies of tax returns because it takes to long to get it from their files. When I have to reschedule a new followup session I try to make it a month or more down the road. Sometimes they change their mind and close the case, because we can't get together sooner.

[Gretel]

Audits

Thanks so much to anyone who shares their experiences and opinions. I learn so much that I hopefully still remember when I have my first audit. I am so glad about this new board.

[Lance Emerson]

"I do not bring anything with me other than was asked in the audit letter, this way when they ask I don't have it with me."

Good idea to not bring anything you don't want to turn over. However, why is the audit letter so mighty? That's where they first say they want documents that have nothing to do with verifying the information. I don't look at the audit letter as having any more authority than the auditor. It might look more official in writing, but that doesn't mean it's justified.

"I always give them what they want, after I ask them WHY."

No offense, but I see problems with that approach, in addition to the obvious horse-already-out-of-the-barn situation. I think you're putting much too much trust in the auditor and not enough in your abilities as an advocate for your client.

"Most times they ask for copies of tax returns because it takes to long to get it from their files."

That's right. If it's too much trouble to get the files through their channels, why should you produce the documents? How does this issue fit in when you consider advocacy for your client and an adversarial relationship?

[Armando Beaujolais]

Advocates?

If you were accused of a crime, and you were innocent, would you be comfortable with a lawyer who said "If we're nice to the prosecution and give them everything they want, maybe they'll be nice to you and find you not guilty."

You'd immediately set out to find a different attorney. The concept of advocacy for a client before the IRS is no different in principle.

Advocacy by a representative against the IRS is even worse because the burden is on the taxpayer to prove their innocence. Taxpayers need representatives who are willing to stand up to the IRS, not bow down to them.

Notice the scenario referred to "innocent." I'm not talking about helping someone commit tax fraud. I pay my taxes (too much in my opinion), and I'm not going to let any client dupe me into helping them commit tax fraud so they can get away scot free. But gol darnit, advocating for your client doesn't mean you jump every time an auditor says jump. I have the mental picture of a practitioner walking into an IRS reception area, the auditor whistles, and the obedient practitioner promptly sits.

You have to cooperate sometimes, much of IRS representation is in the same nature as a plea bargain. Not officially, but it goes on all the time. There's no right or wrong answer to some of this stuff. But I'd recommend every practitioner who is representing a taxpayer before the IRS say out loud 100 times before entering the interview, "My job is to protect my client from the IRS, My job is to protect my client from the IRS..." Many would approach it from a completely different perspective.

[BOB W]

Audits

I feel that I represent my clients by not acting like he/she is guilty. I have been very successful over the years with this approach. I fight on the issues not on something that they are going to get anyway, if they really want it.