Tax season is coming to a close, you've just finished filing your clients' returns, and it's finally time to kick back and relax. Then, as if you haven't dealt with enough pressure over the last few months, the IRS selects one of your clients for an audit. All the stress and tension come flooding back as a range of new tasks get added to your workload.
However, though IRS audits can feel overwhelming, they are a regular part of tax practice and are often conducted randomly. In this article, we'll walk you through what you need to know and do to ensure the audit is successful, and that you get back to your regular tasks as soon as possible.
The IRS Audit Process
The IRS usually initiates audits within a year of a tax return filing, and they last from 3 to 6 months. Let's take a closer look at a prospective timeline so you can better understand what will be expected of you.
Weeks 0-2: Initial IRS Audit Notification
The audit process begins when your client receives an official IRS notice by mail. As an accountant, you might only learn about the audit when your client informs you. However, if you have a Power of Attorney (POA) for the client through Form 2848, you'll receive a copy of the audit notice directly from the IRS.
Your Role: As mentioned, being audited by the IRS can cause a lot of unnecessary worry, so it's important to remind your client that audits are often triggered randomly or by minor discrepancies in the return that require further review, rather than any serious wrongdoing.
Request a copy of the notice and ensure it lists their taxpayer/SS ID number, the form number, the issuing IRS employee's ID number, and any relevant contact information. The most important part of this notice will be the primary reason for the audit, and the CP75 or CP75A Notice that lists the documentation you'll need to send to the IRS.
Weeks 2-4: Gathering and Preparing Documentation
The IRS will request supporting documentation depending on the reason for and scope of the audit. These may include standard documents such as W-2 and 1099 forms or documents that are slightly harder to come by, such as receipts for deductibles and property appraisals. For a full list of potential requested documents, see this list provided by the IRS.
Your Role: This process will be much easier if your practice retains electronic copies of client documentation for a certain period after filing returns. However, if there are any documents you do not have to hand, you'll need to help your client gather them and ensure they are complete, organized, and directly relevant to the IRS's concerns. Now is a good time to double-check that the financial data aligns with what was filed on the return, and highlight any discrepancies early.
Weeks 4-8: Response to the IRS
The audit notice will provide a deadline, usually 30 days from issuance unless you request a 30-day extension, by which you must respond and hand over the requested documents. There are three ways the IRS will conduct the audit:
- Correspondence Audit - Documents and any responses or appeals are sent entirely through mail.
- Field Audit - An in-person meeting is conducted at your office or your client's home/business.
- Office Audit - An in-person meeting is conducted at the local IRS office.
Your Role: While only 21.6% of audits are conducted face-to-face, it’s important to prepare your client for all eventualities. If the audit is in person, you'll accompany your client to the meeting and may represent them during it. If the audit is conducted by mail, you'll be responsible for sending all requested information to the IRS, and ensuring it's presented clearly and accurately.
Weeks 8-14: Review by IRS Examiner
After submitting the documents, the IRS auditor or examiner will review the materials provided and determine whether the items in question are justified. This can take several weeks, so don't panic if you don't receive a response right away. However, you can request an update after a reasonable period, typically 30 days.
Your Role: During this phase, you'll be a middleman between the IRS and your client. For example, the IRS may request additional documentation, which you'll need to gather and submit as soon as possible. You'll also need to maintain open communication with your client just in case they have any concerns or questions about the review.
Weeks 14-18: Initial Findings and Client Response
Next, the IRS will issue its preliminary findings, which may include a proposed tax adjustment, penalties, or owed taxes with a Notice of Deficiency. Your client will have a chance to accept these findings or challenge them.
Your Role: Make sure to analyze the auditor's findings carefully. If the adjustments are fair, discuss with your client, and advise them of the next steps for paying any additional tax. While the IRS follows strict procedures and protocols, they do make mistakes. If you come across any discrepancies or errors in the IRS's findings, you'll need to help your client file a response, often in the form of an appeal to the Office of Appeals, and provide supporting documentation to dispute the adjustments.
Weeks 18-26: Resolution and Final Determination
If your client agrees with the IRS's proposed adjustments, the audit is closed when any owed tax is paid. If the client disputes the findings, it may result in further negotiations, mediation, litigation, and an extended timeline.
Your Role: Ensure your client fully complies with any IRS instructions on paying back taxes or penalties. For unresolved disputes, assist your client in negotiating or appealing and represent them in any additional hearings.
Weeks 26+: Post-Audit Actions
Once the audit is closed, you and your client can both breathe a sigh of relief. But, you may not be entirely out of the woods just yet. Depending on the outcome, many audits can have long-term implications like changes in tax practice.
Your Role: Advise your clients on future tax filings to prevent similar issues and help them implement better record-keeping practices. Offer post-audit support to ensure the client remains compliant with any payment agreements or legal requirements.
Potential Complications During the Audit Process
While many audits proceed smoothly, sometimes complications arise that extend the process or increase the stakes for you and your client. Here are some of the most significant challenges that can occur:
Failure to Produce Documentation
Sometimes, despite your advice, your client may have misplaced or disposed of certain documents. Open communication is a must here, ensuring you find out about which documents are missing as soon as possible. Then, you can work with your client to explain the situation to the IRS, and explore alternatives like secondary evidence or affidavits to support the audit.
Extended Audit Timeline
Like any major organization, the IRS is not immune to busy periods and backlogs. Coupled with additional document requests and complex cases, the initial 3 to 6-month audit timeline can easily become much more drawn out. Make sure to manage your client's expectations, and keep in regular contact with the IRS to check on the status of the audit.
Audit Expansion
Following the above, sometimes an audit's scope is expanded to cover additional tax years or other financial areas. Discuss the situation with your client and stay prepared to address any further inquiries or concerns the IRS may have. Again, long-term document retention policies will make this process much easier.
Revenue Agent Involvement
A Revenue Agent may be assigned to the case if an audit needs to assess a considerable amount of documentation or investigate an intricate financial issue. Keep the client informed and help them understand that this can be a positive step for ensuring the right expertise is involved in resolving their case. As always, be prepared to explain any transactions or business structures.
Tax Court Petitions
Your client will have 90 days from receiving a Notice of Deficiency to contest an audit's findings with the Office of Appeals. If this fails, litigation in tax court may be necessary. After you've discussed the pros and cons of this decision, if your client still wishes to file a petition, you may need to coordinate with a tax attorney to ensure everyone involved is adequately represented.
Criminal Investigations
If an audit's findings lead the IRS to suspect fraud or intentional tax evasion, the Criminal Investigation Division (CID) will take over the case. This is rare but serious and could lead to criminal charges, fines, or even imprisonment for your client. It's crucial to comply with all further requests for documentation or interviews and consult with a relevant attorney.
Additional Penalties and Interest
If the IRS determines that the client has underpaid taxes, they may impose penalties and interest. These can very quickly add up, resulting in an amount your client may not be able to afford reasonably. In these cases, your client can request a payment plan, known as an Installment Agreement, using Form 9465. Alternatively, an Offer in Compromise, requested via Form 656 and Form 433-A (for individuals) or Form 433-B (for businesses), will reduce the amount owed.
Accountant Error
On rare occasions, you may notice a mistake you made previously in your client's tax documentation. Determine the reason for the error and the necessary correction. Then, notify your client, management, and the IRS as quickly as possible, attaching updated versions of any inaccurate documents. Penalties will often be minimal if the error was unintentional and corrected promptly.
In Conclusion
Though your first IRS audit as an accountant can be a little (or very) daunting, see it as an opportunity for you to showcase and hone your skills while strengthening your relationships with colleagues, management, and your clients.
By staying organized, maintaining transparent communication, and keeping cool throughout the process, you'll ensure a smoother experience for everyone involved. Though they might not always be the most routine of tasks, the more audits you do, the easier they'll become.
Sources and Resources
- https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits
- https://www.goldenappleagencyinc.com/blog/tax-audit-process-explained
- https://www.aicpa-cima.com/resources/article/6-things-to-know-about-surviving-an-irs-audit
- https://www.bestaccountingschools.net/lists/5-tips-for-surviving-an-irs-audit/
- https://www.bench.co/blog/tax-tips/irs-audit
- https://www.sambrotman.com/the-complete-guide-to-irs-collections/irs-penalties/
- https://www.findlaw.com/tax/tax-problems-audits/tax-audit-penalties-and-consequences.html
- https://www.investopedia.com/articles/tax/09/appeal-your-audit.asp
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