“The IRS conducts examinations or audits in several ways. These include the correspondence audit, the office audit, and the field examination. This article includes tips on representing a client under audit by the IRS.” By Larry Jones, Tax Attorney
The Correspondence Audit
Correspondence audits are done pursuant to specific programs undertaken at the Campus level. If the audit identifies issues which cannot be effectively handled at the Campus, then the return is transferred to the field for the audit. While correspondence audits are generally less significant than the major audits because of the small and routine matters typically handled in these audits, if they are not handled correctly, significant consequences may ensue. Within the correspondence audit program are a number of ongoing programs which the Campuses undertake.
The Office Audit
When a tax return has been selected for office examination, generally the examination of the return will be conducted at the office of the IRS. Normally a taxpayer will find an office examination has begun when he has received a letter or telephone call from the IRS informing him of such examination and that the IRS wants further records and information. Returns selected for office examination present issues which require some analysis and judgment in addition to verification of records. The office audit is conducted by a Tax Compliance Officer (TCO) at the office of the IRS.
The Field Examination
Field examinations involve returns with more complex issues, thereby requiring examination by someone more knowledgeable in the field of accounting and the Internal Revenue laws. Field examinations are conducted by Revenue Agents and are normally performed at the taxpayer’s place of business where the Revenue Agent can examine the taxpayer’s books and records to make a determination of the taxpayer’s correct taxable income and correct tax liability. The Revenue Agent is supposed to make an appointment with the taxpayer at a time and place that will be convenient for the taxpayer. The arrangement of the time and place can be done by telephone; however, the telephone contact cannot be used to verify items appearing on the income tax return.
Tips for a Successful Audit
The goal of the IRS in auditing returns is to find unallowable deductions, and/or unreported income. This will cause a taxpayer to pay more tax to the IRS. The taxpayer’s goal is to minimize or eliminate any additional tax. Whenever the Revenue Agent determines income has been unreported or improper deductions have been taken, the taxpayer should never admit anything until a full evaluation of the Revenue Agent’s position can be made. Things to remember.
1. Common Sense – Always use common sense when dealing with the IRS.
2. Communication – Communicate with the client and the IRS. Ask the client and the IRS many questions. If you do not understand something, then continue asking questions. Prepare the client for the audit before the audit:
● Educate clients as to type of records they need to keep.
● Help clients set up good procedures and systems–a good source of new business.
● Have periodic meetings with clients to review procedures and questionable items. Include other advisors in these meetings.
3. Preparation – When the client is notified about the audit, meet with the client and discuss the following:
● What is involved in the representation.
● The chances the client has for success.
● Fee that you will charge the client.
● Need for power of attorney.
● Documents needed for the audit.
● What documents might be available.
● Contact between the client and the IRS.
● Engagement letter with the client.
● The possibility of settlement.
● The possibility of retaining an expert to assist in the audit.
● Designation of someone at the client’s place of business to be the contact with the Revenue Agent.
Once the client is notified about the audit, meet with the Revenue Agent. This first meeting with the Revenue Agent may be the most important meeting of the entire audit. Consider the following:
● Be prompt, courteous, and friendly. Many Revenue Agents are treated with a hostile attitude. Try and treat the Revenue Agent the same way you expect to be treated.
● Be confident, positive, and establish your credibility with the Revenue Agent. Be honest and do not mislead the Revenue Agent. It is important to let the Revenue Agent know that you are a competent tax professional.
● Let the Revenue Agent know that you will be cooperative, but that you will also represent your client to the fullest.
● You need to be in control from the beginning.
● Examine the statute of limitations.
The Revenue Agent in a field audit is supposed to know the issues when the audit begins. Of course, the Revenue Agent may add issues as the audit progresses. If the Revenue Agent does not know the issues when the audit begins, then you should request that the Revenue Agent follow the Internal Revenue Manual, and the meeting should be rescheduled after the Revenue Agent has done his homework.
4. Presentation – After preparation, determining how to present the information is extremely important. Many different factors must be considered in determining how to present the client’s information.
5. Persistence – Do not give up easily when representing a client before the IRS. Exhaust all avenues before giving up.
6. Fully develop the facts and law after learning from the Revenue Agent what issues are being audited. Before negotiating with the IRS, consider doing at least the following:
● Look at all alternatives which will solve the client’s problems.
● Prepare a separate memo on each issue, setting forth the facts and the law. Start each memo on a separate page. You can then give those which are necessary to the Revenue Agent.
● Stay away from attacking the IRS and telling them why they are wrong. The memo should be positive and explain why the facts and/or law are in favor of the client. If necessary to comment on the position of the IRS, do so at the end in a brief paragraph.
7. After accomplishing all of the above, the next step is making the presentation to the Revenue Agent.
● Presentation to the IRS is extremely important. In most cases this should be done at the end of the audit at a settlement conference. However, it may be necessary to present some information as the audit progresses.
● Even the most prepared representative can fail, if the facts and law are not presented in the proper manner. There is no easy answer as to how to prepare and present clients’ cases to the IRS. Each case is different, and good preparation and presentation comes only through experience in dealing with the IRS and knowledge of the tax laws and IRS procedures.
Remember, the goal of the IRS in auditing returns is to find unallowable deductions, and/or unreported income. The taxpayer’s goal is to minimize or eliminate any additional tax.
The Tax Alliance Conference planning committee is preparing to bring excellent speakers to the conference in 2019. Be sure to check our website for updates and plan to attend the conference June 4-7, 2019.