Volume 7 Issue 6

Nov/Dec 1995

© 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 attorney’s 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 principal’s place of business, most audits focus on certain issues, and the needed records can be brought to a professional’s 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 Agent’s 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 auditor.

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, we’ll look at some basic guidelines for dealing with an audit.

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Published jointly by The Tax & Business Professionals, Inc. and the law firm of Newland & Associates as a service to their clients.

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