Preparing your clients for an IRS audit
April 4, 2019
For most of us, that means the end of worrying about taxes and IRS forms until next year. However, there will be a few unlucky chosen ones who unexpectedly find themselves with an IRS audit.
Maybe this year all of your clients will escape the dubious honor of being poked at by a compassionate IRS auditor or two. However, should the fates choose one or more of your clients for the unforgettable experience, here’s how you can help them through it.
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1. Get them to calm down
Sometimes the IRS chooses random taxpayers to audit. Getting picked up by the IRS doesn’t automatically mean your client did something wrong on their tax return. Sometimes it’s pure and simple bad luck.
Also, a simple, honest mistake on a tax return may trigger an IRS audit. Whatever the case, an audit is still an audit, but your client doesn’t have to envision an army of IRS agents descending on their business, picking apart every transaction they’ve ever made.
2. Explain what an IRS audit looks like
In all likelihood, many of your clients haven’t had much contact with the IRS apart from filing their tax return once a year. These clients draw their ideas about an IRS audit from Google searches, blockbuster movies, and plain gossip.
To avoid panic, tell them in detail what they can expect.
For starters, taxpayers don’t have to start dreading the phone. The IRS always announces its intention to audit by mail. That initial letter will contain all the information your client needs to comply with the IRS.
If they don’t have too many documents to supply, your client may be audited by mail (correspondence audit). This means that they simply have to send in missing or supporting documents to supplement their tax return.
In case of a face-to-face audit, they can expect it to happen either at the IRS (office audit), or at their own place of business (field audit) where the agent may want to take a stroll and look around the business. This interview usually takes a few hours.
The length of the audit depends on the complexity of the case. Typically, an audit can last from a few weeks to a few months. But in certain, more complicated cases, the process can take even years to resolve.
3. Have them prepare their documents
In most cases, the IRS will ask for documents your clients already used when preparing their tax returns. Income statements, bills, receipts, or any other document that proves your clients’ claims on their tax returns.
Should the audit occur via correspondence, make copies of the documents and send those to the IRS (make sure not to send original documents). Send exactly what the IRS asked for. Not more, not less.
If there’s an in-person audit, coach your clients to remain calm and courteous. It’s easy for your clients to become defensive when an auditor pokes at their documents and asks more questions than a curious toddler.
However, make sure your clients don’t assume the worst. If an auditor doesn’t immediately understand a transaction, a claim, or a deduction, it’s not necessarily because your clients made a mistake. The issue may be a simple misunderstanding. Answering all questions patiently and politely is the key to a successfully resolved audit.
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4. Explain the potential outcomes
Once the IRS is done auditing, there are three main outcomes your clients can expect.
Should the auditor be satisfied with the clarifications, they can accept the client’s initial tax return and propose no changes to it. Thus the matter is settled.
If your client committed an error, the auditor may propose changes like paying an additional amount of taxes. If your client understands and agrees with the changes, the audit is determined closed. Any outstanding amount should be paid by the deadline the IRS gives your client.
On the other hand, your client may disagree with the auditor’s conclusions. There are several options to resolve such a situation.
5. Resolving a disagreement
If your client wants to dispute the findings and conclusion of the auditor, they have several options at their disposal.
Conference with the auditor’s manager
An issue may be resolved through a talk with the auditor’s supervisor. If your client feels the auditor was unfair when declining their reasoning, a talk with their manager may resolve the issue either way.
The IRS offers mediation services. Mediators can help your client communicate with the IRS agent, identify barriers that block the process from being resolved, and propose potential settlement terms.
This service is voluntary and the advice of mediators is non-binding, which means that neither the IRS agent, nor your client is obligated to act accordingly.
Your client may file an appeal with the Office of Appeals. Although located within the IRS itself, the Office of Appeals is an independent administrative organization that helps resolve tax disputes between taxpayers and the IRS.
Finally, if all else fails, your client may turn to the Tax Court to resolve the issue. If you decide to go down this route, make sure to file your client’s case within 90 days after receiving the IRS Notice of Deficiency. If you miss the deadline, the IRS will finalize the results of the audit and your client loses their window for appeal.
Getting the dreaded envelope from the IRS is not the end of the world. Make sure your clients stay well informed and calm during the process to ensure a speedy audit with satisfactory results.