Tuesday, September 2, 2008

AUDITS

This post is the first in a periodic feature of compatible/complimentary posts on the same topic with Bruce, aka THE TAX GUY, of L and R Tax Preparation. Today’s post at THE TAX GUY is titled “Everybody Hates An Audit”. Check it out!

In my 35+ years in “the business” I expect I have prepared at least 10,000 sets of tax returns. During these 35+ years I can count on the fingers of my two hands the number of traditional IRS office audits I have had to deal with – none of which have been in the past 10 or so years.

I am not talking about “correspondence audits” – i.e. a CP-2000 notice. I have dealt with hundreds of these over the years. They generally involve simply writing to the IRS and explaining their error.

I never had to deal with the old nightmare TCMP (Taxpayer Compliance Measurement Program) audit (aka the Audit From Hell) – in which literally every line on the Form 1040 had to be documented – but I remember one of my mentor Jim Gill’s clients discussing his experience with TCMP some 20+ years ago. I seem to recall the client telling us that he even had to produce a marriage certificate to document his filing status!

I did, however, have one of my clients chosen for the recent less intrusive incarnation of the TCMP audit - the National Research Program (NRP) – which were conducted on 2001 and 2006 federal income tax returns. My experience was during the first wave of NRP audits. These audits were known as the Audit From Purgatory.

As I wrote in a 2007 TWTP post discussing the experience – “the IRS couldn’t have made a better choice if they had asked me which of my clients I would want to be selected. They chose a client whose entire life is well documented via computer and hard copy back-up. We didn’t even go to the audit. I prepared a huge mailing of copies of all the requested documentation and mailed it to the auditor. Needless to say there was ‘no change’. I think the volume of my mailing intimidated the auditor. In gathering the information for the review we discovered a $25.00 error which I disclosed in my cover letter – but this was not indicated in the final audit report.”

In one audit 20+ years ago it just happened that the client, the IRS auditor and I were all of German descent (the client was first-generation American – I seem to recall that his father came to the US after WWII to work on the Manhattan Project or something similar). The first thing the IRS auditor told us after introductions were made was that he had just returned to work after having undergone brain surgery. We spent about 20 minutes on the actual audit – “no change” I believe – and 40 minutes listening to the auditor’s thoughts on Nostradamus and Biblical prophesies involving Germany and the US!

At another audit – also 20+ years ago – I asked the auditor why the client had been chosen for review. I was told that it was the IRS policy to audit returns of persons in the medical professions who reported large gross income. I told him that it would be more productive if the IRS would audit medical professionals who report little income. I do believe that audit also resulted in “no change”.

It is funny that the IRS audited my doctor client with high gross and net income on the Schedule C, but never audited one particular client of my mentor, a waiter whose W-2 income barely exceeded the total of his real estate tax and mortgage interest. You would think the IRS would want to know how he fed his wife and two kids!

Here is some advice to follow if your return is one of the few that are chosen for review –

* If the return was prepared by a tax professional contact him/her immediately. Except in the simplest of cases you should not go an IRS office audit by yourself. Your preparer will either accompany you to the audit or attend the audit in your place as your legal representative under a Power of Attorney (I will go with the client if needed – but will not go without the client). Be aware that there will be additional charges for the his/her time to prepare for and attend the audit.

* Bring to the audit all the items requested by the IRS (i.e. documentation of the specific items of income, deduction or credit that the audit letter tells you are in question) – but nothing more! If the auditor wants to see additional items that were not identified in the initial letter tell him/her you will have to return with the appropriate documentation at a later date. The auditor, eager to close the review promptly, may decide that producing the additional information will not be necessary after all.

* Similarly, answer all questions posed by the auditor to the best of your ability - but do not “volunteer” any additional information. Don’t discuss aspects of your personal life with the auditor in an attempt to make small talk or become his/her “friend”. Just like the cops quote on tv – “anything you say can be used against you”. If you tell the auditor in passing that you like to go fishing on week-ends on your new boat you may be asked how you can afford a boat on your modest income!

* Never leave original documentation with the auditor. Bring the originals with you, but also bring copies for the auditor, or have the auditor make photocopies of what he wants while you wait and return the originals to you.

* If the auditor tells you something is so in the Tax Code ask him to show you exactly where it is in the Tax Code. In the past IRS auditors have quoted “tax law” to taxpayers that simply does not exist.

* If you do not agree with the initial finding of the auditor ask to see his/her supervisor. You can work your way up the IRS “chain of command”.

Any questions?

TTFN

1 comment:

Andy said...

Great post and enjoyed reading your guest post at Bruce's site (he did one for me at my blog as well). Good to get the information from experts such as yourselves. Added you to my reader as well.