Audit

[peggysioux]

Received a call from a client who is being audited for 2005 tax return for his schedule C business. Client did not contact me when he received letter, but after he had already met with auditor and now he wants me to get involved. Auditor came to his business and client left auditor in business office alone to go through files. Unsure if I should get involved at this point because I am unsure of what information client has already given auditor. What would other tax professionals recommend?? She left a list of additional information and what ever information client provided as far as income and COGS does not match what was provided to me on P&L when I completed the return. Client must have made adjustments in their QB after year-end. Thoughts would be appreciated.

[ChEAr$]

Are you

Received a call from a client who is being audited for 2005 tax return for his schedule C business. Client did not contact me when he received letter, but after he had already met with auditor and now he wants me to get involved. Auditor came to his business and client left auditor in business office alone to go through files. Unsure if I should get involved at this point because I am unsure of what information client has already given auditor. What would other tax professionals recommend?? She left a list of additional information and what ever information client provided as far as income and COGS does not match what was provided to me on P&L when I completed the return. Client must have made adjustments in their QB after year-end. Thoughts would be appreciated.

Either an EA or CPA? (I wouldn't insult you by asking if you're a lawyer! grin)

If not, better check to see to what extent you may represent client. At most you can
at least help client formulate answers to the questions; however.... if you then see
there might be a material problem, and depending on possible increase in tax, you
might want to recommend client to employ an EA for actual rep work.

Of course this isn't THE answer maybe to your situation, but something to consider.

[peggysioux]

Audit

I am an EA so I may represent client, but just wanted other thoughts to client's situation.

[BHoffman]

I'd first figure out whether the client fudged numbers to me. If so, he's out.

Check to make sure the QB financial statements he gave the auditor were on the same basis as the ones you used to prepare the tax return - cash vs. accrual. Seen that before

Then, I'd reconcile the difference to see where he violated the closing period and document exactly what happened.

If he made honest errors, I'd help him out and represent him.

Good luck and please keep us informed.

[DaveO]

Request copies of what the auditor took

They should provide you with copies of whatever documents they are basing their opinions on. Then you can attempt to reconcile with your numbers. Then you can decide if you want to represent your client any further. If you do then adjust your fee accordingly. I'm sure your engagement letter contains language about contacting in event of an IRS notice. I always look at a notice. If it's correct I don't charge. If it's wrong, which most are, I charge to fix it as long as it wasn't my error that caused the notice.

[Davc]

I'd first figure out whether the client fudged numbers to me. If so, he's out.

With a referral to one of the above mentioned shysters.

[BHoffman]

You betcha

[peggysioux]

Audit

I met with taxpayer and determined that there are errors in his P&L, but errors were not purposely done - he started Quickbooks in that year and input data incorrectly which threw his books out-of-whack. After taxpayer met with auditor in taxpayer's office and auditor interviewed him, taxpayer left auditor alone in office to go over general ledger. Auditor left notes advising client of what receipts and documents she would like to see. Taxpayer has asked me to represent him and this is my first audit so I want to make sure I am prepared and not caught off guard so any help you seasoned tax professionals can give me would be greatly appreciated. I have a few questions:

1. Being auditor has already been to client's office and auditor's preference is to make second appt. in same office, should I press the issue to have appt. in my office?

2. Auditor took a portion of the general ledger with her at first appt. Another tax professional told me that auditors were not suppose to take taxpayer documents from premises. Is that correct?

3. Taxpayer's COGS is overstated due to a journal entry made by taxpayer to move inventory assets over to COGS because he no longer had the inventory, but due to the incorrect way he was invoicing, inventory did not correctly flow to COGS. However, a portion of the inventory should not have been moved to COGS because although he had used the inventory, he did not pay for the inventory until the next year and he is a cash basis taxpayer. Auditor questioned the journal entry and I can explain why the journal entry was made. But with the new ethic regulations, is it my responsibility to inform auditor of the overstatement of COGS without her asking additional questions? Or am I just being naive to think she might not ask????

Any direction would be appreciated.

[Skate1968]

Peggy,

One thing to consider is time. The IRS wants their agents to close cases. Agents are under some pressure. If you're going to pick this up it behooves you to get moving right away -- be proactive and start working with the auditor.

2. Auditor took a portion of the general ledger with her at first appt. Another tax professional told me that auditors were not suppose to take taxpayer documents from premises. Is that correct?

That is true, IRS agents are not supposed to take source documents. And i would be concerned with

1) establishing the fact that IRS did take a portion of the GL

2) getting it back.

(Generally speaking, i know that agents are not supposed to take source documents. I can not attest as to whether there are some who do so anyway.)

3. Taxpayer's COGS is overstated due to a journal entry made by taxpayer... Auditor questioned the journal entry and I can explain why the journal entry was made. But with the new ethic regulations, is it my responsibility to inform auditor of the overstatement of COGS without her asking additional questions? Or am I just being naive to think she might not ask????

I am not familiar with the new ethics laws. But i can not imagine how you could possibly be held responsible of a bookkeeping error which you did not make. You are not one audting the client.

You might however be much better off informing the auditor of a mistake and proposing an adjustment rather than letting the auditor find it.

There are other variables to consider when approaching this situation. I'm interested to hear what others have to say about this.

[DaveO]

In the event of a math error

Or other accounting error, I'm in favor of disclosing it only if that item is under audit. If you fail to disclose the obvious and then the auditor finds it you look dishonest or incompetent.

[Skate1968]

Or other accounting error, I'm in favor of disclosing it only if that item is under audit. If you fail to disclose the obvious and then the auditor finds it you look dishonest or incompetent.

I agree, well said. Assuming the books are in decent shape you need not be disclosing things that are not obvious.

I'm thinking of exceptions in which a CPA repped clients whose returns they did not prepare. The items under audit were soooo out of wack that the CPA disclosed several other errors and just redid the whole return. After disclosing errors and proposing adjustments the CPA was then in a good position argue that negligence penalties should be waived. (this situation is an extreme, and i don't think it applies to you, Peggy)

[Jiggers]

Erros on return

Before I meet with any auditor, I play "devil's advocate" with the taxpayer information. Verifying every item on the return.

If I find a mistake, and I have, I give that information to the auditor during the initial meeting.

I show how the client made the error (added wrong, transposed information, or just goofed up).

It will greatly improve your relationship with the auditor.

[AuditorTurnedGood]

If it is a 2005 return

doesn't the statue run on this audit in about 2 days? I remember when I was in the business, this was a crunch time for us, either getting an extension from the taxpayer or finishing out the case. Assuming it was timely filed and there is no substantial understatement or fraud, they have 3.5 years to wrap it up.

[Richcpaman]

Peggy:

Someone mentioned the SOL, Make sure your client hasn't signed an extension of the SOL. The IRS will ask early on for that. If they haven't then you may be able to wrap this up real quick.

Also, FIRST>>>>You need to have the auditor looking at the INFO that YOU used to prepare the return. If the client gave you INFO, then go back to that info. Do you have the origianal QB file with which you prepared the return?

The client may have done all sorts of things to prior data, including restarting the file and any of a number of things that can create differences in the QB's # and the tax return.

Have the auditor compare apples to apples, not oranges.

Did the client overstate CGS? Maybe. Maybe his file is screwy, but yours isn't.

And get a big retainer from the client. Tell him it would have been alot cheaper to come to you first. Now your playing defense, instead of offence. The auditor thinks that there is something up, but there may be a simple misunderstanding.

Rich

[peggysioux]

Audit

Auditor came to TP's office and we went through all the questions auditor had. The auditor had requested some backup documentation (copies of invoices, copies of checks, etc.,) when she originally met with TP that was given to auditor at second appointment. After going over her list of questions, she said she would take the backup with her to review and let me know outcome in three days. It has now been 10 days and have not heard from auditor. Should I contact her? I find it odd that I have not yet heard from her.