Volume 7 Issue 6
Surviving a Tax Audit: Part I
© by Tax & Business Professionals
A disgruntled taxpayer once described an IRS audit as "an
autopsy without the benefit of being dead." Certainly no one wants to be audited, but
audits do happen and are more likely to occur with wealth or unusual returns.
While an audit is serious, many will panic and envision the
worst. On the other hand, it is equally bad to dismiss an audit or take it too lightly.
Contrary to popular myth, IRS auditors are not super-human
sleuths who can easily ferret out any and all irregularities. Auditors sometimes fail to
catch all of the potential audit adjustments.
A sound approach to dealing with an audit depends upon the
consideration of many variables as well as the job and perspective of the IRS auditor.
This issue is the first of a two-part discussion of how to
handle a tax audit. While no guidance can guarantee a favorable outcome, following certain
basic guidelines can greatly minimize the problems and risks associated with an audit.
Where to Audit?
One of the first things to consider is where the audit will be
conducted. The best place is usually the accountant or attorneys office. Why?
Professional firms often have a conference room or some other
place where an auditor can work with some degree of comfort. Many taxpayers do not have a
place for the auditor to work away from customers and employees. Imagine the lack of
privacy in most smaller retail establishments.
While the books and records are usually at the principals
place of business, most audits focus on certain issues, and the needed records can be
brought to a professionals office.
Who Answers the Questions
Many believe that the taxpayer must submit to lengthy piercing
questions from a government auditor. In some instances, professionals have even sent their
clients to various IRS office audits alone.
In most cases, however, it is not a good idea to have the
taxpayer answer questions directly when a professional has been retained.
Most successful businesspeople are used to being in charge and
many times auditors ask basic and repeated questions about the simplest matters. The
combination of a successful business person and repeated basic audit questions often leads
to volatile situations.
For example, a taxpayer already under stress may
"explode" at the worst time. To avoid these potentially explosive encounters, it
is better to have the professional handle all or most of the questions from the auditor.
Many taxpayers suspect that the auditor will "think I have
something to hide" if they hire a representative. The truth is that the nervousness
of most taxpayers is well known, and hiring a representative will seldom lead to
overreactions and suspicions.
Another unfortunate tendency of many taxpayers is the belief
that "if the agent only understands how good I am, things will be less
severe." Such simplistic thinking, like cajoling the auditor or feigning friendship
with the auditor, can lead to darker suspicions on the part of the agent, not to mention
disappointments of the party being audited.
Most professionals are comfortable dealing with agents and have
no problems with information requests and exploring, if applicable, the need for certain
documents if its appears the IRS is asking for unnecessary substantiation.
The Agents Perspective
IRS Revenue Agents are often more comfortable dealing with
professionals. Professionals can provide the agents needed information, without the need
for the agent to spend time in a stress-filled work place.
One thing often overlooked is the perspective of the auditor.
Often the butt of jokes and endless suspicions, they are, after all, employees trying to
deal with job expectations, supervisors, and a wide variety of taxpayers.
Do IRS auditors have tremendous powers to gain access to
information? Clearly, yes! Auditors often know what they are looking for and have no
reluctance to ask for it.
In view of this power and the need to complete the audit task,
little will be gained by subterfuge or attempted cunning. Conversely, broad IRS powers do
not mean that everything, even if not requested, must be provided just to appease the
While there are many ways to approach tax audits, the role of
the practitioner is first of all to advise the client-taxpayer before the audit begins.
There should be a clear strategy about who will meet with the auditor and assist him or
her in the audit. Always to be considered should be the place the audit will be conducted
and where the records will be maintained during the audit.
Next time, well look at
some basic guidelines for dealing with an audit.
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