business lunch

IRS Agents Never Rely on the Kindness of Strangers

Nov 30th 2017
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My articles usually dispense advice on how to avoid audits from the IRS. But in this article I respond to an inquiry from a couple that was served with an audit because of the complexity of filing returns, and I offer some advice on how to act in the presence of IRS agents who need to avoid any conflict of interest.

Question: Several years ago, the IRS audited the write-offs my wife and I claimed for theft losses and charitable contributions. We had a brief discussion with an auditor at the local IRS office about the deductions.

As it happened, there wasn’t much else for the auditor to ask about. Most of our incomes were on W-2s that listed salaries, mainly mine from when I worked with Engulf & Devour for several decades, until the conglomerate decided that I and many of my co-workers deserved to be fired for our unwillingness to deviate from ethical standards.

My wife now runs her own business, as do I. Both of our ventures are successful enough to go head-on-head with my former employer.

Our businesses generate sizeable profits and incur many kinds of expenses that are red flags for IRS audits. Which is why we weren’t gobsmacked that today’s mail included an IRS notice telling us that we’re again among the chosen. 

This time around, we won’t be going to an IRS office. Perhaps because the IRS wants to delve deeply into our businesses, the notice says that we’re scheduled for a field audit of our 1040s for the past three years. What does that involve?

Answer: The IRS conducts these kinds of examinations at your home or place of business or at the office of your accountant or other representative. They can involve extensive examinations of your entire returns and are usually reserved for persons like you who file more complex returns that show earnings from businesses or professions.

The IRS admonishes its agents not to rely on the kindness of strangers. I’m going to supplement my answer with an etiquette tutorial on what to do and what not to do when an agent conducts an audit at your place of business.

Don't think the civil servant uncivil just because he or she turns down your offer to pick up the tab for lunch. The agent is merely following instructions spelled out in the official IRS Manual for its employees, a multivolume work with thousands of pages of indecipherable and ever-changing bureaucratese that is sometimes described by IRS staffers themselves as "the world's most confusing publication."

Tucked away in the manual are some tough guidelines that admonish agents to decline an invitation from John or Jane Q. Taxpayer for a free lunch. Predictably, because the IRS is responsible for the enforcement of legislation that, depending on one's view, is riddled with countless loopholes or contains some appropriate distinctions, the publication makes a few cautious exceptions to the flat prohibition on breaking bread with a taxpayer unless it's Dutch treat.

The manual allows agents to ignore the guidelines and dine for free when "the invitation occurs during the course of an on-site official assignment; the lunch takes place at a company facility where checks are not issued; and there are no public dining facilities in the area where the agent could go for lunch and return within the time normally allotted for lunch periods."

Nevertheless, presumably to keep things kosher, an agent who foregoes brown bagging and accepts lunch under these circumstances must explain the purpose and need for accepting the invitation to the powers that be.

As part of this uncharacteristic concession, IRS pooh-bahs also decree that where circumstances would otherwise make it uncomfortable to refuse, employees may occasionally accept a soft drink, a cup of coffee, or equivalent nonalcoholic beverage. 

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting). 

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