Helping your clients survive the dreaded audit: Tips from the IRS
In March, a panel of IRS officials and Enrolled Agents answered common questions that tax practitioners have about helping their clients through the audit process. At the end is a link to TaxTalkToday where you can read the full transcript (registration required).
What if the type of audit the IRS has scheduled is not conducive to solving the problem?
Example: Your client gets a notice of a correspondence audit, but you as the practitioner feel the records are too numerous to provide them by mail. The IRS tries to be understanding of the circumstances. You can ask to be allowed to bring the records into the office.
What if the appointment for your client's office audit is difficult to keep, based on extreme circumstances? Can you request a new appointment?
The goal of the IRS is to conclude an examination as expeditiously as possible, so the change of date should be slight, like the day before or after the original date. Or, if most but not all of the records required are available, it might be acceptable to go ahead and start the audit with what you have.
If the appointment falls during tax season, you may request to extend the audit till after April 15th, though that could add significant time to the audit period. Compliance officers and revenue agents will try to work with you and your client to minimize the impact on your day-to-day operations. If it helps, they may try to schedule the appointment very early in the morning or after the end of business. In rescheduling, the agents will be mindful of two desirable results: It's considered best for the initial appointment to be held within 14 days of the original work on the case file, and, if the initial appointment extends beyond 45 days, the IRS may have group managers get involved to complete the work on a timely basis.
Who should come to the office audit?
For business returns the IRS may ask the practitioner to have the taxpayer in attendance to explain things. His or her presence may shorten the audit period significantly.
Suppose your client is being audited for the same issues, year after year? Can you do anything about it?
The IRS may continue to audit the same return areas several years in a row until they are satisfied that the returns are correct. If your client's returns are audited, then corrected, and still your client receives notices of audit for the same information, you can contact the examiner. You may be asked to show audit letters that state there were no additional adjustments required.
Suppose a taxpayer is audited and found to have taxes due. Do the normal procedures for taxpayers who can't pay their full bill still apply?
The mission of the IRS includes assisting taxpayers in meeting their obligations. Examiners are reminded that they have flexibility in setting up collection procedures, based on the facts and circumstances of the case.
At the beginning of the audit process, the examiner will determine collectability. Based on the individual case, the decision might be made to not audit the return at all, or to limit the scope of the audit. If the conclusion of the examination is that taxes are due, the examiner will ask the taxpayer to pay. If the taxpayer cannot pay, there are several avenues to pursue, including:
- A monthly installment agreement
- An offer in compromise. The IRS may settle for less
- Working with a collections program
What is the typical time frame of an audit from the tax practitioner's point of view?
For the tax practitioner, the time frame can be very short. This is because often the taxpayer gets a notice of an impending audit but puts off calling the practitioner. By the time he or she contacts you there may be very little time to prepare.
Once there is a mutual commitment date for the audit, the process starts with a conversation between the taxpayer and the practitioner, along with the examiner. This conversation covers the rules and responsibilities of all parties to the audit. Then a tentative date is set for the completion of the audit and a date the final report will be issued. From the IRS standpoint, the optimum situation is mutual agreement so that cooperation is enhanced. Agreement is key because interest and penalties continue to accrue on a balance due throughout the audit process. The IRS seeks a speedy resolution.
What can the practitioner do if he or she gets the audit report and doesn't understand the adjustments or has questions? After understanding is achieved, what if there is disagreement?
Contact the examiner. A discussion will usually provide clarity, but if not, ask for a three-way conversation with the group manager and the examiner. Once the practitioner understands the adjustments or why the adjustments are being made, if there is no agreement, there are a few avenues to pursue:
- An informal conference with group managers
- The practitioner may want to file a protest with the appeals division.
If the deficiency is small the protest is simple. It states that you don't agree with the adjustments and want the case transferred to the appeals office.
If the deficiency is larger, the protest is more complex. The practitioner will need to provide more background about the tax law and adjustment and why you think the decision should be different.
- There may be a notice of deficiency issued. This is not usually the outcome at the exam level. This is a commissioner's determination of an income tax liability and the beginning of the litigation process. The practitioner may respond by filing a petition with the U.S. Tax Court. After counsel responds to the petition, it goes to the appeals process to try to reach a resolution. The practitioner needs to be mindful of the time involved. If you are near the end of the audit period and there is still no resolution, you could be placing the client in jeopardy by failing to file a protest. Be sure to meet all deadlines and keep communication flowing. As long as the practitioner and the taxpayer stay on top of all related matters in the case, there should be few surprises.
Does it matter if the audit is held in the IRS office or your client's place of business?
According to the IRS representative, the location of the audit has no bearing on the outcome.
Clients often ask, "Why me?" Behind that question is another, possibly unspoken question, which is, "What did you - the practitioner - do wrong?"
Clients may assume that you as the practitioner are infallible... until the audit letter comes. But the IRS says that an audit letter could be generated by something as simple as a legitimate but out-of-average range deduction that draws attention.
What is the fast-track settlement program and when will it be available throughout the country?
The Fast-Track Settlement program is a pilot program at this time. It was launched in 2006 and will run through 2010, in two cities in California (Riverside and Laguna Niguel), central New Jersey, Philadelphia, Chicago, Houston, and St. Paul, Minnesota. This plan provides the opportunity to resolve issues of disagreement at the group level and avoids traditional appeals. Usually at the conclusion of an audit, the taxpayer may request a Fast-Track Settlement. Once this arrangement is made, a trained agent will meet with the tax practitioner and the taxpayer to resolve issues. The process is much quicker and reduces the time burden on all parties and shortens the time during which interest and penalties accrue.
During the next two years, the success of the program is being studied to determine if modifications are needed, and whether or not it will be rolled out nationally.
If an audit begins with the examination of itemized deductions, can the scope be changed to include other areas?
The scope can be expanded or contracted during the audit. If the examiner looks at Schedule A and finds other areas of concern, the audit may then expand. If the taxpayer is present at the audit, he or she may make statements that raise questions, which could also expand the scope of the audit.
Absolutely. The person preparing the tax can say, "I made these mistakes, I want to amend the return," and this will save time in the long run.
You can read the full transcript at Tax Talk Today (registration is required and is free).