Compliance audits

[jainen]

Compliance audits are back.

http://www.irs.gov/newsroom/article/0,,id=171023,00.html

This time they are backed with some pretty heavy computer analysis. The "multi-year rolling methodology" means a much larger sample size that allows more subcategories and more credibility in general. Look for more targeted circumstances but hopefully we'll also get more "tolerance" for certain kinds of deductions.

Or maybe it will just be too complicated and they won't be able to figure out anything.

[OldJack]

I knew the IRS was looking at S-corps, but in the above link they tell how many they were checking.


quote=IRS
[ In addition to the NRP for individuals, the IRS is in the final stages of a compliance research project examining reporting compliance of S corporations. This research encompasses approximately 5,000 returns filed for tax years 2003 and 2004. Since the income and expense items for S corporations flow through to individual shareholders, this study will also help refine the tax gap estimates for individual income tax. ]

[sea-tax]

I have heard about these types of audits , however I have luckily never had any first hand experience.
I was at a seminar and the speaker said that he had had one of these types of audits and the first question from the auditor was" you say you are a CPA , let me see your license/card" then after the gentleman provided the card the auditor asked " how much did you charge to prepare this return?"

basically it was starting to get real personal and apparently the questions the auditor was asking got to be very ridiculous.
Anyhow hope I never see one of these and with only 13k being selected I think my odds are pretty good.

[JohnH]

If the question was "How much did you charge to prepare this return", seems to me the answer would be "Well, initially I only charged $400, but depending on how long you take to complete this audit the client's final bill may be $4,000. I'll be sure & fill them in on how we spent our time together. "

[jainen]

>>I'll be sure & fill them in on how we spent our time together.<<

It won't serve your client well to set up an adversarial position from the get-go. Most audits are triggered by something that doesn't look right. These are different--they are primarily to develop a statistical database.

Assuming you are aware of the return's weaknesses, minutiae can be your friend. Help the auditor fill out her checklist completely, moving on quickly to "all the rest of these issues we have to cover this morning."

Personally I would be proud to inform the client we used up all the time talking about ME and never got too far into his missing mileage mess.

[JohnH]

You are right, of course

I suppose I should put a smiley face on my off-the-cuff posts - I might inadvertently influence someone to do or say something they shouldn't.

[erchess]

Audit Changes

I think that in this electronic age all the supporting data could be copied and could go in with the return. Then we could reasonably impose a system where the taxing agencies cannot disturb anyone unless there truly is something wrong. This would have the added benefit that our clients would understand that they couldn't claim deductions or credits without proper documentation.

[George Boutwell]

Doubletalk

This is classic gobbledygook from IRS. They might win an award from the Better Bureacracy Bureau.

>>An advantage of using this method, which combines results over rolling three-year periods,<<

Translation: It doesn't sound as bad if we say 13,000 audits, instead of 39,000 audits over a three-year period.

>> is the IRS will be able to make annual updates to compliance estimates and develop more efficient workload plans on an annual basis, after the initial three annual studies.<<

Translation: What we do after three years doesn't depend on what we do for the first three years; it depends on what Congress will let us get away with. By spreading the audits over three years, we will be trying to take a snapshot of a moving target.

>>Previous studies started from scratch, drew tax returns from a single tax year and involved examinations of more than 45,000 taxpayers.<<

Translation: This study starts from scratch too, and involves examinations of 39,000 taxpayers. We're just going to take longer to do it.

[Luis Mopeo]

the auditor asked " how much did you charge to prepare this return?"

I'm certainly not an advocate for the IRS in the adversarial relationship between the IRS and taxpayers, but that question has validity if you understand what they're looking for.

Circular 230 talks about fees. Specifically, the regs say you can't charge a contingency fee for an original return. The question of "How much did you charge" (or probably more accurate, 'how did you arrive at your fee') would be the IRS looking for (1) violations of Circular 230, or (2) unusually high fees which might mean they should be on the watch for an abusive tax shelter.

[sea-tax]

I'm certainly not an advocate for the IRS in the adversarial relationship between the IRS and taxpayers, but that question has validity if you understand what they're looking for.

Circular 230 talks about fees. Specifically, the regs say you can't charge a contingency fee for an original return. The question of "How much did you charge" (or probably more accurate, 'how did you arrive at your fee') would be the IRS looking for (1) violations of Circular 230, or (2) unusually high fees which might mean they should be on the watch for an abusive tax shelter.

Thanks Luis for the insight but I was already thinking that was the reason. I did not share this story because I thought it was unjust or off base. I merely wanted to let everyone know what I had heard and if they get one of these audits to be prepared for the worst. These audits seemed to be encompassing every item on the return, line item by line item and simple answers will not always suffice.

[Zee]

I was audit

My 2002 personal return was randomly selected for a TCMP (compliance) audit, a couple of years ago. It was quite time consuming gathering information for the audit. The most difficult was documentation of all deposits made in each bank account (business & personal), and of course, all business expenditures. It was a true "soup to nuts" audit. They looked at everything. On the positive side, when I provided the auditor all of the documentation he asked almost no questions at a 15 minute meeting. I received a small refund. It took about four months. From what I could ascertain, the IRS auditor's are very overworked. I think when the get an easy case to close (like mine), they hold it on their desk so their supervisor won't just drop another case on top of their pile.

[Corduroy Frog]

Back to Normal...

Most of us in the tax business remember 1998, and the Congressional hearings about IRS abuses of power. At the center of this was a New Jersey businessman who had been through one of these total compliance audits. The hearings were on C-Span, and gave the congress a wonderful chance to grandstand in front of their constituencies.

Most of the congressmen appeared to be horrified at such treatment of ordinary citizens by the heavy hand of government. Leaping into action in front of the TV, their remedy was a congressional committee to oversee the IRS practices, as well as an appointee by President Clinton, to be ratified by the committee. All of this to assure a "kinder, gentler IRS."

Truth of the matter: Clinton never made the appointment, and Congress never formed the committee. And the New Jersey businessman? He was selected for audit again the following year. And IRS is reviving the TCMP -- I hope their victims are not chosen for reasons other than chance. If any of you have a client that goes through one of these, please keep us advised.

We definitely need to be politically sensitive to items which affect us such as the above. Notwithstanding, the thread by Paul Roberts earlier came to me as a welcome relief, as the depths to which we discuss politics can get ridiculously out of scope. Some of the comments make great discussion, but there are other boards and blogs for this.

[Roland Slugg]

Not as intrusive as the former TCMP audits

Thank you, jainen, for that link. Upon reading it I was pleased to see that although the new NRP audits will pick taxpayers more or less randomly, the areas to be examined and verified will be selectively targeted. Thus, these auduts should be far less intrusive than the TCMP (Taxpayer Compliance Measurement Program) audits were that the IRS conducted in the late-1960's and 1970's. Those were unbelievably detailed and burdensome. Under that program the IRS would examine and verify every line-item on the return, even asking for copies of birth certificates to prove claimed children were the taxpayers' and marriage licenses to prove marital status.

My recollection is that the IRS would conduct about 50,000 TCMP audits every few years, and that Congress finally ordered them stopped, citing their unreasonable burden on taxpayers ... and voters.