Tips for Accounting Professionals Representing Clients Before the IRS

Establish the Ground Rules

You should meet with your client to explain the procedures behind an IRS audit. It is usually best to keep your client away from the IRS agent or auditor. The technique will help you control the communication and will not give the auditor easy access to ask the client questions about topics unrelated to the audit.

  1. Establish the location at which the IRS auditor will work.

    If the auditor is examining and individual return with no business location, the IRS will request the examination to be held at the IRS offices. The location for an office auditor is not negotiable. Sometimes you can just mail the information to the IRS auditor and forego a formal meeting.

    If the examination involves a business, the IRS Agent will most likely request the audit location to be at the place of business. The IRS will request to inspect the business location. However, the best location for the audit will be at the tax preparer’s business location. Holding the audit at the business location will put you in a better position to control the information provided during the audit.
  2. Establish who will speak for the taxpayer.

    It is best to not allow the taxpayer to have direct communication with the auditor. Avoiding direct communication prevents the casual conversation that an auditor may use against the taxpayer.
  3. Establish the with the Agent that all document requests will be in writing.

    You should have the IRS agent make all document requests in writing. This will allow you time to gather the necessary information to support the deductions claimed.
  4. Require that all material questions and discussion of proposed adjustments be deferred to the final conference.

    Deferring questions puts you in a better negotiating technique. You do not want to concede adjustments until you have an understanding on the scope of the IRS audit and how much information is needed. Also, if the IRS agent is asking questions at the end of the day, they might be more inclined to concede certain issues to beat the commute traffic.

Use the Statute of Limitations

  1. Refuse to agree to an extension

    The IRS agents are under pressure to close cases. You can refuse to agree to an extension when the IRS has not properly identified all potential issues and you want to close the case. Refusing the sign the extension, will force the IRS agent to issue a report. If you do not agree with the adjustment you can file a petition to the tax court, or pay the tax and then file a petition with the court of claims.
  2. Agree to an extension

    If you are not able to get all the information requested and you are fairly sure that you can do so, you will want to agree to an extension. There are two types of extensions: Form 872-a which allows the IRS to keep all issues open, or Form 872 which requires the IRS to limit the extension to the issues identified on the Form.

Request Technical Advice

  1. Use the National office for Technical advice if:

    a. The appeals officer has taken an uncompromising position, and

    If you feel that the appeals officer is taking a position contrary to the IRS National office opinions, you can make a request for technical advice from the National office. If national office notifies you that position is inconsistent, then the appeals officer will be asked to follow the national office. However, if the National office upholds the appeal officers position you can continue to the fight before the court system.

    b. The agent’s position is contrary to National office’s position.

    The IRS is required to follow Private Letter rulings issued to another individual. However, if you find a private letter ruling with similar facts this is a good indication on the national office position. You might, want to ask for technical advice from National office if the revenue agent’s position remains contrary to national office.

Negotiating Techniques

  1. Make a settlement offer that shows a good faith interest in resolving the case,
  2. Certain areas of the tax law remain subjective.
  3. In a multi-issue case, you might make a bottom line offer but leave open possibilities of reshaping parties concessions on particular issues.
  4. Consider filing an amended tax return or making a cash bond

If you are preparing tax returns the best way to comply is to be proactive with your client in trying to audit proof your tax return. Even with the increase compliance effort, tax audits will still be relatively rare. According to a recent IRS report, it audited 1,293,681 individual returns in 2006, a more than 6 percent increase over the previous year. The number of field audits, in which an agent requires a face-to-face meeting with a taxpayer, jumped 23 percent during that time.

New technology has helped the agency better match income reported by employers, banks and other institutions with individual returns. Also, more people are filing returns online, which reduces the amount of time that tax agents spend analyzing returns manually, freeing up time to conduct more individual audits.

Audit Flags

Audit flags do not necessarily lead to actual audits. They don’t even mean there’s something wrong with the return. They simply indicate that a tax return is more likely to be checked by an actual human being, and therefore more likely to get audited than another return. (And remember: the IRS always selects a certain number of people to audit completely at random.)

Most of these red flags aren’t an issue for the average wage-earner who is filing an honest return. Some — like the home office deduction — may trigger an audit even if legitimate. But if you’ve played fair with the government, you don’t need to worry. Put into practice the following tips:

Don’t hesitate to take deductions you can substantiate. CPAs emphasize that these precautions should not suggest that taxpayers avoid claiming legitimate deductions. On the contrary, you should take every deduction you are legally entitled to take, as long as you retain supporting documentation.

The best defense against an audit is to be honest. Report all of your income. Don’t try to fudge things. Use tax preparation software or an accountant if you’re nervous about getting things right. But even if you have a professional prepare your return, check it for obvious errors. Be sure the numbers make sense.