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Audits Don't Really Have to Be Bad or Do They?
Tax and Financial News
July 2001
Audits Don't Really Have to Be Bad or Do They?
Taxpayers think mostly think about paying their taxes and once that's done, it's done â at least for another few months. However, some taxpayers also think about audits. Many taxpayers have more trepidation about an audit than their tax return. While some are purposely evading taxes and afraid of getting caught (and they should worry), the taxpayers we see are honest citizens living with an unnecessary fear.
The IRS has been behind on its auditing and is still evaluating 1997, 1998 and 1999 returns. It will be a while before they get to the 2000 returns. However, there are big plans to increase the number of audits and the rate of review for audits. Most Americans do not cheat on their returns and errors are made, as humans are wont to do. But the economic reality is that the tax dollars lost every year due to tax evasion is a compelling enough reason to hold the US taxpayers accountable for their returns. Can you image what would happen if someone wasn't asking us to be accountable?
We suggest you accept the possibility of an audit as a fact of life. That will not change. So let's take a closer look at what we are really dealing with here.
First, we should understand exactly what the IRS means by an audit. Any time the IRS reaches out to you, they count that as an audit. Even that little notice the IRS sends to some of us is counted as an audit. So, there are different types of audits. Let's look into the different types and flavors of audits.
There is the "office audit" which consists of an invitation from your local IRS office to come in for a chat. This is usually reserved for smaller, less complicated returns. Not to worry. No one is going to throw handcuffs on you.
Now, there's the "field audit." This is where the IRS comes to you; to your home or place of business. This means they are serious and need to go into depth with a complicated return. If you're one of those that like to play Russian Roulette with the IRS, now would be the time to worry. And always remember the first rule for peace of mind: if you don't cheat, there's nothing to worry about.
In our experience, most people have nothing to fear from an audit and therefore, their fears are unjustified. We have some simple suggestions that can help you lead a more worry-free financial life.
Notices
Have you ever received a letter from the IRS that says, "We have changed your return because...?" If you have, just read it and see if you agree or disagree. Simple. Sometimes, the IRS computers kick notices out in error. It happens. If you feel the IRS is in error, you should notify them right away and always in writing. Unfortunately, some taxpayers choose to give in rather than contest what seems to be an error. We all make mistakes sometimes. If you have any questions at all, get in touch with us. If you feel the matter is clear to you, then contact the IRS yourself. The best way is in writing, for validation purposes, but we have had clients clear up misunderstandings right away on the IRS toll-free line. But, if you have any doubt at all, ask.
Office Audits
Sometimes, a return is simple enough to be audited in the local IRS office. When this is the case, you have the right to go to the audit by yourself or with a representative. You can even have your representative meet the IRS without you.
If you're the nervous type, it's probably better to send your CPA or attorney and stay at work or home. The reason is simple; one of the cardinal rules in dealing with the IRS is always tell the truth. Sometimes, when taxpayers get in front of an IRS agent, they get so nervous that they'll "embellish' a bit. No, it's not lying, but it can be very bit as damaging to your case. One attorney tells a story about a minister client that said yes to every question the IRS agent asked. The right answers were no. In a few short moments, the minister, who was otherwise innocent, became guilty of making false statements to a federal officer - a felony. True story.
Sometimes, it's definitely better to send a representative. At times, you may actually have forgotten to provide income information to your preparer. That ignorance may continue until the IRS agent asks you about the income. If there truly is a mistake, allowing your preparer to honestly say, "I don't know anything about a $1,000 payment my client received, but I will check it out," will give you both adequate time to put the best possible light on the error. This could be important when it comes to asking the IRS to waive a penalty.
Whichever route you chose, be certain to bring everything the agent wants, but no more. You might just open up a can of worms you didn't know you had. Some people believe that if they bring a mountain of paperwork, the agent will give up before even starting. In the past, that may have been true, but now the agent will simply go on about their business.
Field Audits
About the most disruptive audit you can have is the field audit. Typically, the IRS is looking for a good deal of information and sends you a list of what they want prior to your appointment. When this happens, you have one of two choices. You can either pull all the requested information from your files and put it on a table for the agent to review, or you can pull the requested information and send it to your preparer. In the second instance, we assume you plan on having the preparer represent you.
Each route has its advantages and disadvantages. The chief advantage you receive by having the IRS come to your home or place of business is you don't have to drive to your preparer's office lugging all your records. The chief disadvantage, particularly if you are a business, is the audit could cause a great deal of disruption to the daily routine (i.e. it could cost you money because employees are preoccupied by the auditor's presence).
Asking the auditor to meet your preparer at their office avoids, or minimizes, the business disruption an audit may cause, but you will have to lug all your records to your accountant's office. A further advantage to meeting at the preparer's office is they may have information in their files that will help you argue a particular point in your favor.
While many of our clients choose to have the audit meeting in their offices, we suggest the meeting be held at our office. Having the audit performed in our office allows us to control a great deal of the interaction with the agent on our terms, not theirs. It also minimizes any contact our clients or their personnel may have with the IRS and, as a result, the potential for misspoken words to cause harm is reduced.
Whichever route is taken, the same rules for providing information to the IRS apply in a field audit as well as in an office audit. Remember: always tell the truth and give the IRS agent only what they ask for.
Conclusion
Most people think the worst thing in the world that can happen to them is an IRS audit. However, if you have the proper documentation and no reason to worry, most of the time an IRS audit is nothing more than a minor inconvenience. As CPAs, we have a lot of experience dealing with the IRS on behalf of our clients. If you've received a notice or a letter informing you of an audit, don't worry. Give us a call and we can handle the details so you can live your life and sleep better at night. After all, your well being is our business and we take our business seriously.
The IRS has been behind on its auditing and is still evaluating 1997, 1998 and 1999 returns. It will be a while before they get to the 2000 returns. However, there are big plans to increase the number of audits and the rate of review for audits. Most Americans do not cheat on their returns and errors are made, as humans are wont to do. But the economic reality is that the tax dollars lost every year due to tax evasion is a compelling enough reason to hold the US taxpayers accountable for their returns. Can you image what would happen if someone wasn't asking us to be accountable?
We suggest you accept the possibility of an audit as a fact of life. That will not change. So let's take a closer look at what we are really dealing with here.
First, we should understand exactly what the IRS means by an audit. Any time the IRS reaches out to you, they count that as an audit. Even that little notice the IRS sends to some of us is counted as an audit. So, there are different types of audits. Let's look into the different types and flavors of audits.
There is the "office audit" which consists of an invitation from your local IRS office to come in for a chat. This is usually reserved for smaller, less complicated returns. Not to worry. No one is going to throw handcuffs on you.
Now, there's the "field audit." This is where the IRS comes to you; to your home or place of business. This means they are serious and need to go into depth with a complicated return. If you're one of those that like to play Russian Roulette with the IRS, now would be the time to worry. And always remember the first rule for peace of mind: if you don't cheat, there's nothing to worry about.
In our experience, most people have nothing to fear from an audit and therefore, their fears are unjustified. We have some simple suggestions that can help you lead a more worry-free financial life.
Notices
Have you ever received a letter from the IRS that says, "We have changed your return because...?" If you have, just read it and see if you agree or disagree. Simple. Sometimes, the IRS computers kick notices out in error. It happens. If you feel the IRS is in error, you should notify them right away and always in writing. Unfortunately, some taxpayers choose to give in rather than contest what seems to be an error. We all make mistakes sometimes. If you have any questions at all, get in touch with us. If you feel the matter is clear to you, then contact the IRS yourself. The best way is in writing, for validation purposes, but we have had clients clear up misunderstandings right away on the IRS toll-free line. But, if you have any doubt at all, ask.
Office Audits
Sometimes, a return is simple enough to be audited in the local IRS office. When this is the case, you have the right to go to the audit by yourself or with a representative. You can even have your representative meet the IRS without you.
If you're the nervous type, it's probably better to send your CPA or attorney and stay at work or home. The reason is simple; one of the cardinal rules in dealing with the IRS is always tell the truth. Sometimes, when taxpayers get in front of an IRS agent, they get so nervous that they'll "embellish' a bit. No, it's not lying, but it can be very bit as damaging to your case. One attorney tells a story about a minister client that said yes to every question the IRS agent asked. The right answers were no. In a few short moments, the minister, who was otherwise innocent, became guilty of making false statements to a federal officer - a felony. True story.
Sometimes, it's definitely better to send a representative. At times, you may actually have forgotten to provide income information to your preparer. That ignorance may continue until the IRS agent asks you about the income. If there truly is a mistake, allowing your preparer to honestly say, "I don't know anything about a $1,000 payment my client received, but I will check it out," will give you both adequate time to put the best possible light on the error. This could be important when it comes to asking the IRS to waive a penalty.
Whichever route you chose, be certain to bring everything the agent wants, but no more. You might just open up a can of worms you didn't know you had. Some people believe that if they bring a mountain of paperwork, the agent will give up before even starting. In the past, that may have been true, but now the agent will simply go on about their business.
Field Audits
About the most disruptive audit you can have is the field audit. Typically, the IRS is looking for a good deal of information and sends you a list of what they want prior to your appointment. When this happens, you have one of two choices. You can either pull all the requested information from your files and put it on a table for the agent to review, or you can pull the requested information and send it to your preparer. In the second instance, we assume you plan on having the preparer represent you.
Each route has its advantages and disadvantages. The chief advantage you receive by having the IRS come to your home or place of business is you don't have to drive to your preparer's office lugging all your records. The chief disadvantage, particularly if you are a business, is the audit could cause a great deal of disruption to the daily routine (i.e. it could cost you money because employees are preoccupied by the auditor's presence).
Asking the auditor to meet your preparer at their office avoids, or minimizes, the business disruption an audit may cause, but you will have to lug all your records to your accountant's office. A further advantage to meeting at the preparer's office is they may have information in their files that will help you argue a particular point in your favor.
While many of our clients choose to have the audit meeting in their offices, we suggest the meeting be held at our office. Having the audit performed in our office allows us to control a great deal of the interaction with the agent on our terms, not theirs. It also minimizes any contact our clients or their personnel may have with the IRS and, as a result, the potential for misspoken words to cause harm is reduced.
Whichever route is taken, the same rules for providing information to the IRS apply in a field audit as well as in an office audit. Remember: always tell the truth and give the IRS agent only what they ask for.
Conclusion
Most people think the worst thing in the world that can happen to them is an IRS audit. However, if you have the proper documentation and no reason to worry, most of the time an IRS audit is nothing more than a minor inconvenience. As CPAs, we have a lot of experience dealing with the IRS on behalf of our clients. If you've received a notice or a letter informing you of an audit, don't worry. Give us a call and we can handle the details so you can live your life and sleep better at night. After all, your well being is our business and we take our business seriously.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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