Recently we helped a client survive an Internal Revenue Service (“IRS”) Audit. Ultimately, we got a very good outcome. The taxpayer owed $219. That’s as close to “No Change” as you can get!
This was particularly gratifying as the deck was stacked against us:
- We did not prepare the return that was being examined. The client had recently terminated their relationship with their prior CPA. This can certainly make the representation more challenging.
- The audit was part of the National Research Program (“NRP”) Audit. The IRS is in the process of updating their databases on how they audit taxpayers. They randomly select 5,000 returns and these taxpayers must prove everything “line-by-line” in their returns.
What were the lessons learned from this audit?
- Take care of the preliminary items up front. Seek Representation, be careful about representing yourself. In order for a taxpayer to have someone else (CPA, Attorney, Enrolled Agent) represent them, they must have a Power of Attorney, IRS Form 2848.
- The audit was scheduled to be at the taxpayers’ place of business. This was challenging as the taxpayer maintained a home office to run their business. It would have been very difficult for the taxpayer to operate their business while having the audit being done in their office. We requested a change of venue for the audit to be done in our office. This request was granted with the stipulation that the auditor would schedule a time to visit the taxpayers’ home office.
- Keep and maintain a good set of books and records. This goes without saying, which is why it needs to be said. While it is difficult for many small businesses to dedicate a lot of resources to their books and records, it is necessary.
- Be respectful and cooperative with the auditor. They have a job to do. Understandably, most taxpayers don’t like the fact that they are being audited. An audit takes time, incurs professional fees and likely causes stress.
- Reply promptly and completely to the auditors inquires. The auditor will make requests for additional information using IRS Form 4564, Information Document Request Form. Responding promptly and thoroughly to these requests will keep the audit moving forward.
- Stand your ground when you need to. While it’s important to be respectful and cooperative and reply promptly, there are times when you need to stand your ground.
ACTION ITEM: While it may not be fun, taxpayers need to be prepared for an audit. A good set of books and records is a great starting point.
Thomas F. Scanlon, CPA, CFP®
Photo From Creative Commons
Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.
