Things That Go Wrong in Audits

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This month, I settled a Tax Court case - with a no-change, naturally.  That's the good news.

We always love that feeling, don't we?

Finally, I'll be able to return the box (crate) of documents to my clients - that have been sitting in my office since late 2008.

Yup, the initial audit invitation was dated October 2008. The final Tax Court settlement will be dated October 2010.

The battle took two years.

It should not have taken more than a few months, including down time for sudden hospitalization (emergency gall bladder removal).

What took such a long time?

An examiner who simply could not communicate.

Oh, he could talk - a lot. And pontificate - at great length. And boast - that his determinations never got overturned.

But he could not communicate the simple facts behind his determination that there was over $40,000 of unreported income.

As I was discussing in my EA Exam class last night about Appeals, the wonderful thing about numbers is that they are definable. You have a number, it came from somewhere. In an audit, the big question always is -  What is the source of the number on the audit report?

The examiner never defined how he arrived at the number he listed on the Income Tax Examination Changes Report (Form 4549) . Even after a FOIA request, none of that information was in his workpapers. I devoted my energies to battling a big issue - a substantial amount of money deposited in the client's account as repayment of an officer loan.

Instead, it turned out that examiner had done a series of proofs of cash on half a dozen bank accounts and came up with unidentified deposits. Something that simple. Wow!

All he had to do was say so. Nothing could be easier than clearing up that issue.

OK, it did take quite a bit of extra time because the taxpayer had SO many bank accounts with transfers between them, to reconcile...but, this shouldn't be a Tax Court level issue. It's not a dispute in tax law. It's a pure accounting issue - just numbers and details. You just sit down and grind out the numbers and reconciliations.

I didn't learn the source of the problem from the examiner, or from the Freedom of Information documents. The Appeals Officer who received the case from Tax Court somehow managed to get the documents from the examiner - which clearly, were not in the case file when FOIA pulled the records.

In discussing this with some peers, they suggested I file a complaint with IRS about the way this case was handled. Interesting thought. I don't generally do that.

However, there is a better way to register this complaint. More effective, providing the client with even more satisfaction than a demerit in someone's file. Do you know what that is? 

I'll give you a week to post an answer - then I will tell you THE way to handle this.

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