audit tips?

[OldJack]

Well to each his own. You want to waste time stapling a 10key role to your documents then I guess time well spent..

I try to prepare a detail schedule of the items the auditor will want so the auditor has a paper with the proper deduction total to put into her/his audit file. In many cases the auditor will accept the schedule without looking further at the original proof documents and head out the door a lot sooner. The schedule is only submitted when the auditor asks for proof of the deduction, otherwise it just remains in my file.

[sea-tax]

I try to prepare a detail schedule of the items the auditor will want so the auditor has a paper with the proper deduction total to put into her/his audit file. In many cases the auditor will accept the schedule without looking further at the original proof documents and head out the door a lot sooner. The schedule is only submitted when the auditor asks for proof of the deduction, otherwise it just remains in my file.

Thanks Old jack you put my thoughts into words. I feel like we as tax prep people often make audits to easy. Give them what they ask for but only if they ask not before.

[S T]

I would want to know the numbers

To be prepared for an audit, I would want to know that clients receipts matched what was on the return. Since I have to add them anyway, why not run the tape and provide it with the "grouped" receipts matched to the categories in question on the return. It takes no extra time. If the receipts are short say $20, you can always point out to the auditor that something might be missing in that group and usually they are fine with it. It is when you can not provide the receipts (and that means not necessarily a canceled check) that you will encounter scrunity each and every time.

Presentation to the auditor is everything!!! They are not looking for the small items, but patterns. They are not looking for $20 here and there but larger sums.

When preparing a clients return I do not ask to audit every receipt or even groups of receipts although I have clients that will bring them at the interview. I only watch for the higher amounts such as office supplies that could include printers, computers, phones, etc. And yes, the mileage log or repair bills to back into the mileage!

Key:: auditors are very often going to look at office expenses and supplies, to see if an item that should have been depreciated was included as an expense in that category. Basically remember that anything that is over approx $100 and has a useful life of more than a year should be on the depreciation schedule.

The other target is the mileage, and the auditor uses the vehicle repair receipts to back into the supposed mileage driven from the beginning of the year to the end of the year. They will always ask for this, so you might as well have it ready to give to them. It is the odometer check. From there they will always ask for the mileage logs to find the pattern of business miles. Quite often just a calendar or appointment book will do as long as you can establish the mileage and the business purpose.

While I have not had many audits, I have found the better prepared I am and able to show that to the auditor in a complete and concise manner, the less time at the audit and a more favorable outcome for the client.

If you feel you have spent to much time for preparing for the audit, it is another source of revenue for you. I give the client 2 hours of preparation time free, and charge for any time after that, as well as travel time, and audit time. Quite often the client will assist in organizing due to the additional fees that might be charged, they need to be as involved in the pre-audit process as you the tax preparer is.

So in closing on this subject I will relate a story of an audit on a business client. They were summoned for a field audited and we spent 3 days with the field auditor at the clients office pouring over boxes and boxes of receipts that had been organized to conform with the tax return. A result a "no change". Subsequent tax year, the business client received another notice of audit for the same identical issues. Auditor (which happened to be a seasoned veteran field auditor) arrived at the business. Once again the client and I had prepared for the audit, organizing boxes and boxes of receipts. All stacked neatly in the conference room. We invited the auditor in, started the preliminary interview. He noted that the prior year had been audited, and the outcome was a no change for that prior year! He saw the boxes and asked if that was material relating to his audit. We advised yes, and he promptly said at 10:30 AM, I am going to lunch and will return at 1PM at which time we will conclude the audit. Closing Agreement on the spot! Another no change!

So time and preparation does pay off, both for you as the tax preparer and the client!!

Sandy

[Bees Knees]

I'm with jainen on this one

Well to each his own. You want to waste time stapling a 10key role to your documents then I guess time well spent. I will on the other hand spend the time reviewing my return and coresponding documentation and then let the auditor add it up. If she finds something wrong guess what I have proof and then I will give her the blessed roll of my ten key.

It is my experience that the auditor is less likely to look when you have already done the work for them.

You might not agree, but that is my experience.

[jainen]

interview technique

>>You want to waste time stapling a 10key role to your documents then I guess time well spent. I will on the other hand spend the time reviewing my return and coresponding documentation and then let the auditor add it up. If she finds something wrong guess what I have proof <<

First of all, I'm not wasting time because I bill it to the client, who feels more confident about nice orderly packets than some vague "reviewing." I'm not even sure what "reviewing" would involve, if not looking at and documenting the exact numbers.

Secondly, it will certainly take me less time to add and record the numbers than it will to watch the auditor do the same thing.

Finally, and most important -- in fact, the only important thing -- there isn't going to be any "if she finds something wrong guess what" because I'm going to control what she works with. This has nothing to do with "proof." Calculator tapes have zero value as evidence, but tremendous, almost absolute, value as an interview technique.

[Jiggers]

Audit Preparation

I always will have everything lined up for the auditor, in the sequence of his request letter. With tapes, 1099's, copies of bills, checks, whatever, to substantiate the item on the return.

Saves time and puts the auditor in a great mood.

I play devil's advocate in preparation for the audit. I want to know if there is a problem with the taxpayer's information before the auditor. Not that I point any problem or error to the auditor, I just want to have a response ready!

Never have the client present. However, you must be an EA, CPA, or Attorney to be able to do this.

Never refuse to let the auditor meet with the client or to visit his home/place of business. After agreeing to visit two clients at their business locations on two cases, the auditor later declined my offer! If I had refused or delayed the visit, I am sure that he would have followed through on his request.

I use the taxpayer's information for the return. I want my information to be able to pass muster to avoid a preparer penalty.

I never deduct 100% vehicle expenses unless I actually see a log. Very seldom will an auditor disallow the expenses if you take less than 100$, even without a log. There is no requirement for a log. You just have to able to prove business use. A doctor in a clinic is going to have a hard time justifying 100% business use of his vehicle, or anything over 50% for that matter. And I guarantee that there will not be a log!

[jimmcg]

It appears that everone has their own technique for dealing with an audit. Do what works best for you. My method has always been successful and that is appear organized and do as much of the auditor's work in advance as possible. In that manner you will be in control of the audit from the outset. Remember we have a fiduciary responsibility to act in the best interests of our client and that means audit findings in the client's favor. Remember when dealing with an auditor perception is more important than reality. Actually when you get right down to it perception is reality.

[Possi]

Black Bart,

You said you told her to bring her mileage log and a few posts later you mention that you told her "no mileage log--no deduction." Do you know for sure yet whether she does or does not have a log?

My client did not come in with a mileage log. She has a detailed planner and has been working on constructing a mileage log from that planner.
Another issue is that I took the number of rooms on the office in home expense instead of square footage. Auditor told client on the phone that # of rooms is only acceptable if all the rooms in the house are EXACTLY the same size.
I didn't reply to this right away b/c I have been in Texas caring for my 81 yr old mother for the last 2 weeks. The posts I am reading upon my return are making me nervous...

[S T]

Audit and More Info

Possi, do the best you can with the client supplying you with the "planner" and mileage. If the t/p can try to document as precise as possible on the "Planner", it might work. I have had auditors accept, day planners, calendars, etc, in place of an acutal mileage log, just have additonal repair bills that should indicate the odometer readings at various points during that particular tax year. The most recent audit in 2005 the auditor requested that the t/p provide monthly calendar of appts with mileage (all after the fact) and it was accepted. Of course the mileage on those documents was a lot less than claimed on the tax return, but the auditor did allow that mileage and even added about 20% for trips to bank, post office, etc.

The auditors do look to the vehicle repair receipts for establishing beginning and ending mileage for the tax year.

On the OIH calc here is some info I found

Figuring the Deduction
If you qualify for a home office deduction, then you will need to figure the percentage of your home used for business and the limit on the deduction.

Business Percentage
To find the business percentage, compare the size of the part of your home that you use for business to your whole house. Use the resulting percentage to figure the business part of the expenses for operating your entire home.

You can use any reasonable method to determine the business percentage. The following are two commonly used methods for figuring the percentage.

Divide the area (length multiplied by the width) used for business by the total area of your home.
If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
Example — Using Square Footage to Determine Deduction
Your office is 240 square feet (12 feet × 20 feet).
Your home is 1,200 square feet.
Your office is 20% (240 ÷ 1,200) of the total area of your home.
Your business percentage is 20%.


Example — Where All Rooms are about the Same Size
You use one room in your home for business.
Your home has 10 rooms, all about equal size.
Your office is 10% (1 ÷ 10) of the total area of your home.
Your business percentage is 10%.

So based on your post, it does not seem like the auditor is going to disallow the OIH, but maybe only the calculation of the %. So you need to establish the sq ftg % even tho what might have been placed on the return was incorrect. As I saw in another info site, take pictures of the OIH, and establish, obtain full sq ftg of home and sq ftg of the office area, property tax statements, insurance valuations, etc. This area might not be significant in the audit for a change of tax dollars. then of course have all of the receipts/statements available to establish the deductions taken on the form 8829.

Good Luck and keep us posted,

Sandy

[Black Bart]

I agree with Sandy

on these things.

I once had a client being audited who claimed several thousand miles of business travel and kept no mileage records whatever (they usually don't). The revenue agent said she was disallowing it all. I didn't have any good arguments and couldn't think of anything except to plead "the Cohan rule" which basically says that expenses will be allowed if the nature of the business is such that they must have been incurred even if records for them don't exist. He was a building contractor and had to drive his truck from site to site supervising and inspecting, so I figured that would qualify.

However, we never got to the point of arguing about it because his secretary came up with one of those Wal-Mart "pink" telephone receipt-type books in which you list the names and numbers of people that call -- basically taking a message and getting info for the boss to return calls later. These were daily calls all year from the guy's clients and she accepted this as proof that he actually drove around to take care of this business. So anyway, I think you'll be okay since your planner is probably a similar sort of thing and the log the client's extracting should help verify it.

Also, I think Sandy's right about the room sizes, etc. This isn't really anything to worry about. She'll probably cut it down, but that deduction usually isn't a substantial one and the money difference shouldn't be very much. If the client asks why you did it that way, just tell her it gives her a little more deduction by estimating it your way. Most people won't argue too much about bending the rules a little bit as long as it's in their favor.

[Unregistered]

Just one caution about the Cohan Rule. It CANNOT be used for any deductions that would fall under §274(d) - travel, entertainment, gifts, listed property (including vehicles). Cohan was decided in 1930. Subsequent to that Congress added §274(d) and the strict substantion rules under that subsection.

New York Enrolled Agent

[Possi]

I'm off to the appt

Thanks for all the information.
You may not know this, but possums do not "play dead." They actually FAINT out of fear. Their predators want live food, and fainting into a deathlike trance is their only defense.
Given that, I'm praying to "Stay Verticle" and not throw up.
I'll report when I get back.
Thanks again,
~p

[Black Bart]

Cohan

Just one caution about the Cohan Rule. It CANNOT be used for any deductions that would fall under §274(d) - travel, entertainment, gifts, listed property (including vehicles). Cohan was decided in 1930. Subsequent to that Congress added §274(d) and the strict substantion rules under that subsection.

New York Enrolled Agent

Hmmm...well, sorry to hear that, but thanks for the tip. Guess it's a good thing we never got to it after all. By the way, exactly how strict are those sustantiation rules?

You know, I might still have lucked out. Those office agents aren't always as sharp as you'd expect. I once went to audit with a client who'd originally claimed auto business use, but now said it was commuting. I told him to say as little as possible and not to mention commuting unless asked. Anyway, she said "I see you drive quite a bit for your business." He replied "Yes, I drive back and forth to work every day." And, of course, I figured we were sunk, but when she wrote up the RAR, it was not listed. I thought it was strange that she had never mentioned it again or asked any follow-up questions during the rest of the audit. Couldn't mention it of course, but I had to conclude that she simply did not know that commuting is non-deductible.

[Black Bart]

Possi

Any news from the front? Did you survive?

It is kind of like entering the lion's den (without the whip and chair), isn't it?

[Possi]

Whew!

Glad THAT'S overwith!
The agent was very talkative and I was tentative... you might say... It was right after his lunch and he was in a good mood. It wasn't toooo bad, but was long. He liked the sound of his voice if you know what I mean...
I questioned the agent about using home office percentage based on # of rooms or sq footage, and he said "we always use square footage." Since this was a point he told my client I was dead wrong on, prior to our meeting, I had to address it, so I asked, "do you 'always use it' or is that the absolute way to measure? I understand that as long as the rooms are 'about' the same size, we are allowed to use rooms."
I don't think I got a straight answer, but I also believe we will be able to use my percentage.
Also, regarding the mileage, he was telling my client that she should keep up with mileage and actual expenses and do a comparison each year, choosing the most advantageous. I VERY NICELY said that you can go from mileage to actual expenses, but not from actual exp to mileage... that once you use actual, you must stick with actual.
He sat back and raised his eyebrows, admitted that he would have to look that up, and seemed receptive to my words.
Lots of prayers were going out, and I did wear my turtleneck summer sweater, thus hiding my nervous rash that magically appears on my neck... I did not faint or throw up. Those were my sincere prayers...
The audit began at 1pm sharp and ended when I ended it at 4:45. I will be much better prepared next time, and the experience was a most valuable one.
Thanks again for all your help. I am SO NOT ALONE working my business with this message board at my fingertips.
blessings,
~possi