Got Audit. Help Please!!!

[OldJack]

Old Jack

So when you ask about my OPINION it is not easy to reply. But, having said that, I will offer a few comments.
Frank Degen,EA,USTCP

Thank you for your opinions and it would be nice if you continued to provide the members of this board with your opinions, experience, and judgment.

Also, thanks to Jan and others, hopefully, that later might post.

[Uncle Sam]

Indirect Audit Methods

Read the various Market Segment Specialization Program audit guides, or read up on the economic reality audits where Cash T account analysis is made. That's where you learn about them.
I'm a former state sales tax auditor and I can tell you - these methods are NOT new. They've been used for years. Only within the last decade has IRS decided to use them in order to catch the real large scale tax cheats.

[Bees Knees]

I do disagree with Bees in some of his comments about attorney privilege. Once a client engages an attorney, any communication is privileged. Physical evidence & documents are not. If EH engages an attorney and "tells all" there is privilege. Clearly, the attorney could not subsequently prepare any incorrect returns but the attorney can not be compelled to divulge what the client has orally communicated. That's my OPINION.

My opinion came directly from information I received from the attorney who wrote the “privilege” information contained in Tab 16 of the Quickfinder. She, as an attorney, did extensive research in the area on just what the term “privilege” means for an EA and a CPA under Section 7525 of the code. It turns out, all three (EA, CPA, and Attorney) are equal in regards to the scope of that privilege, namely, the representation of a client before the IRS during a non-criminal civil audit, as mentioned in Circular 230 that I quoted from earlier.

Once the case is turned over to CI, you are correct that only an attorney has “privilege.” But until it turns criminal, an attorney has no more privilege in representing a client at audit than you or I do. And since this case has not yet turned criminal, it would be pre-mature to think that a tax attorney could do any better of a job of representing this client at the audit than a CPA or EA could. The IRS can demand every bit as much of information from an attorney representative than they can from a CPA or EA. It was interesting to me to learn that she, as an attorney, has less privilege in the area of civil tax audits, than in any other area of law. Something about the powers given to IRS and the fact that IRS audits start off as civil matters means you basically have zero rights and there is very little you can hide from IRS. If they want you to count the hairs on your head, they can make you do it.

The only kind of information the attorney would have privilege in during a civil audit is the same information a CPA and an EA would have privilege in under Section 7525. The Code basically makes no distinction for non-criminal matters. However, code Section 7525 does not apply for criminal matters, and so that is where the difference is. Once it turns criminal, then the attorney has the advantage. My comments concerning privilege were all made in the context of the initial IRS audit, which would obviously start off as a civil matter.

[jainen]

your deepest secrets

>>Something about the powers given to IRS and the fact that IRS audits start off as civil matters means you basically have zero rights and there is very little you can hide from IRS<<

The problem about priviledge is not that it is a civil matter. Even in a criminal case, there is NO privilege for information that was intended for a third party anyway. Since the fundamental idea of a tax return is that you are going to tell the government about it, there is no privilege concerning tax preparation matters. An EA or CPA has the same privilege as an attorney, which is NONE.

There is privilege for investment strategy and other advice. An EA or CPA has the same privilege as an attorney for that, but only at the administrative levels of the IRS. It's not just the IRS criminal division that presents a dilemma that way. Local prosecutors, divorce court, and other agencies like the SEC can compel you to divulge what you promised your client was your deepest secrets.

[dyne]

IRS indirect methods

Many tax preparers will never encounter IRS indirect methods especially if you weed out
clients who appear to not be reporting all of their income. However, to be prepared for
indiect methods , you may access information on the internet:

The IRS Manual is their bible and advises them about virtually everything. Access it at:

http://www.irs.gov/irm/part4/index.html

You will find it to be amazing.

For information about auditing advice for differant types of businesses access
Audit Techniques Guidelines at:

http://www.irs.gov/businesses/small/article/0,,id=108149,00.html

You may click upon either of the two url's underlined above and you will be taken to these
websites. I recommend that you bookmark these as Favorites.

You may wish to PRINT each of them out but it will consume quite a bit of paper.

The Cash T Account or Source and Application of Funds using RC ATL Aud 309 form are the most common. The net worth is the most difficult.