It’s bound to happen.
Your client gets a letter from the IRS — they’re being audited.
As we said in a previous blog, most taxpayers don’t want to deal with the IRS. That’s where you swoop in to save the day, right?
But what if this is your first time? That’s what this blog post is for. Here are some tips we’ve learned over the years for dealing with an IRS audit on behalf of your client.
Coach all clients to maintain their records
Preparation for an audit should begin long before an audit occurs. If you want to be better prepared and ready for an audit, coach all clients on maintaining records such that they are always ready for an audit. This means the following:
- Keeping primary records of bills and receipts.
- Keeping secondary records such as mileage logs, spreadsheets, or other summary information.
- Keeping all tax returns.
- Keeping all backup information for the current and past three years.
- Ensuring that all business clients have a separate bank account for the business. They should only deposit income for the business and pay legitimate business expenses from the business account.
Records to Gather
If the examination is pertinent to a specific issue, have your client gather all relevant documentation on the issue being questioned. The letter your client receives from the IRS will list the items being questioned. If more time is needed to gather the required information, a request can be made well in advance of the examination date.
If the entire return is being examined, the documentation requirement will be more extensive. If the return being audited is a business return, the auditor will very likely perform a bank deposit analysis (one of the main reasons your clients need to keep separate bank accounts for their business).
Examinations of returns may be done via mail, at the examining representative’s office, in the taxpayer’s home or business, or the location of the taxpayer’s personal representative (your office).
Examinations that take place in a client’s home are particularly dangerous. This allows the revenue agent to obtain information on the relative standard of living of your client that might be inconsistent with the tax return that was filed. It also gives the examiner an opportunity to examine things like their “home office” where your client may be taking a deduction.
TIP: Non-business items located in the room or area designated as the home office certainly will not help your client’s case in defending a home office deduction.
Dealing with an IRS examiner is stressful. Before you go into the examination, put yourself in the auditor’s shoes. Anticipate items that the auditor will want to review and then thoroughly examine each item. Ensure there is documentation for all deductions – especially those that are questionable.
You should also ensure that you are thoroughly familiar with the entire tax return being examined, and be able to explain in detail the source of each item on the tax return.
TIP: For “gray area” items, you need to have a basis in tax law to explain your reasoning behind the handling of the items.
Organization is key
It is very important that the documents you are providing the auditor are presented in an organized manner. This includes receipts – do not present the auditor with a box of unorganized receipts – it will not bode well for you.
TIP: You should only provide documents needed to prove a deduction or income. Providing too much information could cause the examining agent to review areas that might not have been considered before.
It’s important to establish a good rapport with the auditor. If your auditor is uncooperative, abusive or unfair you can request another one.
A note about representing taxpayers
Unless you are an attorney, Certified Public Accountant, Certified Actuary, Enrolled Agent, have an Annual Filing Season Program Record of Completion, or are the person who prepared and signed the tax return, you cannot represent the taxpayer in an IRS audit.
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