The Expert in Tax Education. How to Survive an Audit.
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Transcript of The Expert in Tax Education. How to Survive an Audit.
The ProcessRecognizing that there is an audit is the first stepThere are 3 basic types of audits:Field, Office and CorrespondenceThe letter the taxpayer receives tells you what type of audit you are facing Understanding the process is key to being successful
2205-A The Field AuditIssued by the Revenue Agent (RA) this is the more complex type of audit This audit will be held where the records areThe audit will take at least a couple of days and some RAs will want to schedule 2 consecutive days at once
3572 The Office AuditIssued by a Tax Compliance Officer (TCO)Audit is conducted in the IRS officeGenerally limited to a few itemsLetter will say what is being auditedAudit generally takes only a few hours to complete if well organized
CP 2000 Correspondence AuditLetter is generated at the service center The most common type of auditGenerally pertains to unreported income or deduction that is not on record at the IRS Letter will give 30 days to respondPractice tip; If the audit is for something that needs to be done in person request a change of venue.
Power of AttorneyIn order to speak on the taxpayers behalf while under audit a Power of Attorney needs to be filedForm 2848 is what you will need to fill out, have the taxpayers sign and fax it to the auditor
Contacting the AuditorReview the initial letter to be sure you understand what the audit is aboutCall the auditor and discuss the case as well as set up an appointment.Ask for an Information Document Request (IDR)Be sure to allow enough time for you and your client to organize the requested documents
Meeting the AuditorThe auditor will ask if the taxpayer is aware of their rights and did they receive Pub. 3498Next will be a series of questions about the taxpayerLast will be producing the documents to support the items on the return in question
Form 4549 The ReportAt the conclusion of the audit the report will be issued and the explanations of the changes will follow.Example:Schedule C Legal and Professional ServicesTax Period Per Return Per ExamAdjustment 2007 $15,500.00 $0.00$15,500.00
Since you did not establish that the business expense shown on your return was paid or incurred during the taxable year and that the expense was ordinary and necessary to your business, we have disallowed the amount shown per Internal Revenue Code 162.
Representation ToolboxNow that you understand the process lets discuss the things you need in your Toolbox in order to be comfortable with what you are doing.
Engagement LetterBe sure to spell out what it is that you will be doing and what the Taxpayer is responsible for
Clearly define the fee and payment method
Power Of AttorneyYou cannot speak for your client with out the POA on file with the IRSInclude all open years on the POA. It makes your ability to represent more effective if the audit expands to another year
Audit Interview SheetsThe first part of the audit is Q&A, be sure you know who you are representingAn income probe is always part of the process so be sure to get that informationNo matter how many questions I think to ask, the auditor will come up with moreBe sure to update your interview sheet regularly
Organized RecordsIf you want to get the audit closed fast then be well preparedOrganize the records in the same order as they appear on the IDRInclude a total page spreadsheet or calculator tape to each category
Acceptable BackupThe receipt and the form of paymentIf a credit card is used be sure to show the Taxpayer is the holder of the cardWhen a receipt is from a store such as Costco it will be needed.When no receipt is present it will be at the auditors discretion to allow Note; though they want original receipts the auditors understand that originals do not hold up well, and will accept copies in most cases
Mileage LogWhether claiming standard mileage rate or actual expenses a mileage log is neededThe more detail the better; who where and why The total mileage driven will also need to be supported, have repair receipts available to show the odometer reading
Let the Auditor Set the PaceThe auditor will let you know what they want and in what orderThey may not always ask for everything that you prepared so be patientThe more organized and complete the documents are the less likely that they will look at everything
Do Not Let the Auditor Control the AuditWe are playing in their ball park but we still are able to control the actionWhen dealing with an aggressive auditor be on your toesBe sure to let them know that you are both there to be sure that a properly filed return is the end result
Never Take it Personally Remember you are representing the returnIf you prepared it you did so using your expertise and their informationIf you did not prepare it then you have no reason to be defensive, you are simply using the information you have been providedThe auditor will generally leave the door open to look into other areas of the tax return that are not initially under audit. Do not provide that incentive.
Follow-up Information When more documentation is requested there is generally only 10-15 days to provide itGather and present the information timelyDo not be surprised to see at the bottom of the IDR Other information may be requested during the course of the auditTo help prevent this have everything the first time and be well organized
Handling a Disagreement Try to state your position with the auditorRequest a managers conferenceTake the case to Appeals Petition Tax Court
Note: if there is a balance due, it continues to accumulate interest until it is paid. To stop the interest from compounding, the taxpayer is entitled to post a cash bond by sending in the tax payment and requesting it be held as a bond. When the taxpayer prevails the bond will be fully refunded, unless taxpayer only partially prevails, in which case the refund will be adjusted accordingly. Prepayment is a consideration if the taxpayer plans on appealing an issue that might not win completely. With the lengthy appeals process, a lot of interest could accrue.
Finishing the CaseIf you and the taxpayer agree with the findings sign the 4549 and send it back to the auditorIf the taxpayer cannot pay the balance due in full be sure to send the report back anyway, and they will be billed for the balanceNote; even though the report will give the taxpayers options in making payments I recommend they wait for the bill and set it up through the collections unit
Finishing With the ClientReview the findings and be sure they understand what happenedInform the client that the IRS will notify the state when there is a change so they need to amend their state returns accordinglyReturn the taxpayers supporting documentsCollect the balance of your fee
3 Rules to Survive the AuditUnderstand the process and work within itBe well prepared and well organizedNever Ever take it personally
Presentation developed by Alan L. Pinck, EA Alan Pinck, EA is currently the NAEA Education Committee chair and has previously held board positions including president of the Mission Society of Enrolled Agents. He has taught at the CSEA Super Seminar and teaches a Part 2 SEE preparation class. His practice in the San Francisco Bay area specializes in personal and business tax return preparation as well as audit representation. Pinck serves as an instructor for Level 2 and the Graduate Level in Representation.
A. Pinck & Associates2021 The Alameda Suite 280San Jose, CA 95126(408) 298-7199www.apincktax.com
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