Federal and State Tax Examinations at an All-time High

Every time I turn around one of my clients is receiving an audit notice.  Federal and state audits seem to be at an all time high.  The crux of these audits is the Federal and state governments trying to increase revenues but there should be some threshold in selecting taxpayers to examine.   An interesting observation is that there seems to be no particular rhyme or reason to the selection.  I recently represented a client whose C corporation was audited.  They were a very small entity that actually went out of business in 2008.  The assessment was small but left me wondering why them.  State audits also seem to be coming out the woodworks.  I have quite a few clients that file in multiple states and they too are getting audited for immaterial amounts and issues.  The state audits seem to take a tremendous amount of time to wrap up because the states are short staffed and once they leave your office, it takes months to schedule a return visit.  The government agencies are hurting for money, the auditors case loads are astronomical and clients are strapped for cash, it’s a no win situation.  Currently I have clients being audited by the IRS, Illinois, New York, New Jersey, California and North Carolina and none of them are high exposure taxpayers.  Even though I understand the force driving the increased examination activity, I wish the selection process made more sense.  Having a client incur professional fees and spend tremendous amounts of time gathering documents in order to defend a frivolous audit seems to be a waste of resources for everyone involved.  Hopefully, once the economy rebounds, the selection process will be refined and these audits will be few and far between.  Until then, I will represent my clients to the best of my ability and try to keep costs at a minimum.