Everybody hates an Audit. . .

Posted by Bruce Mc on Sep 2, 2008 in Taxes | 0 comments

This piece is the first in what I hope becomes a continuous feature of well-matched/like-minded post with Robert D. Flach, aka THE WONDERING TAX PRO of TAXPRO SERVICES CORPORATION. Be sure to go see his post today titled “Audits”.

 Enjoy.

When it comes to the IRS, the biggest fear is an Audit.

If your return was prepared accurately then there should be no fear at all. Honesty and Accountability are keys to this. If you are honest in the preparation of your return, and you have records that will substantiate the numbers on the return (your accountability), then no worries. There have been several articles written on how to avoid an audit. I have even written a web page (not yet back up) on a plan I call audit insurance. I have written a guest post for Wide Open Wallet called “Audit Protection” that describes the basics of what I call audit insurance.

So what is an audit? An IRS audit is generally an impartial review of your tax return to determine its accuracy. It is not an accusation of wrongdoing. But it is important to know that you, the taxpayer, have the burden of proving that your return is accurate. The IRS does not have to disprove anything. And there are several types of audits. The most popular is a CP-2000 notice. Most who receive these don’t even realize it is a type of an audit.

Like many tax preparers I have dealt with hundreds of these over the years. The IRS sends these out to let taxpayers know that their records don’t match what the taxpayer sent in. Usually the best way to respond is to simply write the IRS and let them know where their mistake is. This is done by making copies of your records and sending them into the IRS (never send them the originals).

Less than 1 in 200 taxpayers were the target of an audit last year, continuing a downward trend that accelerated after Congressional hearings in 1997 and 1998 put a spotlight on alleged IRS abuses. The agency diverted enforcement personnel to customer service and backed away from some tough stands because of legislation that bolstered taxpayers’ rights. Property seizures fell, from 10,090 in 1997 to 174 in 2000, while levies and liens dropped 88%. Last year, about 1 in 6 people audited escaped without paying anything.

The audit rate shrinks to 1 in 400 if you exclude a special IRS effort to catch cheaters who claim the earned income tax credit intended for low-income workers. Upper-income taxpayers face a greater chance of being probed, but even so, barely 1 in 100 filers with $100,000 or more in income fell prey to an exam last year. More statistics about audits can be found on the IRS page “Fiscal Year 2007 Enforcement and Services Results”. Interesting reading on what they say has happened compared to other reports I have read.

I have on occasion had to go to audit with the client. I do this because of many reasons, but a big one is to make sure the taxpayer isn’t alone. You should never go to an audit alone. If you filed your return yourself, then seek out a professional to accompany you. The last one of these that I attended is still my favorite story to share.

The taxpayer was advised of his line by line audit on a return that was prepared by a national franchise. For his own reasons he sought professional guidance and found me. We went over everything and by the time of the audit the client was fully substantiated. Luckily he had kept his records, all of them. Anyway, we met and entered into the office waiting area. We talked a bit before a secretary guided us to the audit. When we stepped into the door (keep in mind we were in a very rural area so in this case the auditor was someone who was well known among practitioners) the IRS representative started his little spiel.  He wasn’t really looking and didn’t see me (at least I am assuming such).

When the auditor, David, finally did look up he gave me a cool stare as he tripped over a few words then stopped speaking altogether. He fussed around with his notes for a few minutes (once he composed himself), then closed all his files, looked directly at my client and asked why I was there, as my name wasn’t on the return as having prepared it. After the explanation he announced that he found no reason to continue with the review and apologized to my client for taking up his time. We never sat down.

I later found out that the IRS was actually after the preparer who had originally prepared the return, but the whole situation looked as if the IRS auditor didn’t want to go up against me. I learned this from David later in a conversation about what had happened.

Incidentally, I haven’t had to “go” to an audit since then. Yet I continue to deal regularly with the CP-2000 letters (usually because a client has forgotten some little thing), and I am content with that.

The key here is to make sure you are honest and have records to back it all up. How long to save your tax records is another guest post that will help you decide how long to keep your records. With that, fear of an audit should be gone.

Don’t forget, for more about Audits please visit “AUDITS” a great post from The Wondering Tax Pro.

 
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