EIC & Schedule C Audits—Are Your Clients at Risk?

Andy Frye and Daren Gress discuss EIC and Schedule C Audits during Mentor Support Session at Pronto Tax School.

This Pronto Mentor Session Highlight delves into the world of tax audits, specifically focusing on the intricacies of Schedule C audits. This Mentor Session with Andy Frye and Daren Gress discuss the personal preferences of tax professionals when it comes to representing their clients in a tax audit. The dialogue sheds light on the practical aspects of audit representation, including the preparation, challenges, and strategies employed.

Andy Frye: I think it’s fairly rare at this point. So I guess that was the next question I had. Daren, is that sort of going the way of the dodo bird and not even happening anymore because we don’t really hear that much of people doing it.

Daren Gress: They’re more correspondents. The IRS knows that they make more money on those. I think even on these factors…

Andy Frye: Do you see how the statistical like let’s say I’m going to say I’m going to I’m heading into tax season which for the first Schedule C or business clients is kind of year round at this point. So I’m just like, I’m in my day right now. I want to see of the of the hundreds schedule C that I prepare from now until, you know, six months from now right. How many of those are going to have, whether the IRS calls it an audit therein or whether it’s categorized in some other way. And some other. [Yeah]. So when you that’s interesting as I also think that’s a little bit counterintuitive to the average point of view. If you mentioned audits at the time when you’re preparing someone’s taxes is that…

Daren Gress: I do it in a way to reassure them that I’m there for them and that it’s not realistic.

[Pronto Income Tax Introduction and titles]

Andy Frye: And so for for kind of the starting point of the factual because there’s a fear factor of this topic even at all. So I try to just generally like look at these acts first. Kind of get acquainted with the facts. And so if we look at these the data book stats, right. There’s two particular types of individual returns that if you look in the column percentage covered are substantially higher than the other types. Right. And so that’s income over 100 thousand and then and then returns with the Earned income credit. And even if you see the recommended additional tax figures like as look at look at that bottom number of returns with earned income tax credit, how much more tax it’s like the most one, right? So so I guess is kind of like the kinds of schedule C’s or the kinds of individual returns that get audited in the past at least are fairly well known, but they seem to kind of be broadcasting right there in that they want to stop doing that or something like that, right?

Daren Gress: Yeah, Yeah. Well, and I would say those numbers lead true is I mean, I see way more audit or inquiries on earned income credit and head of household then than on schedule C’s as a whole.

Andy Frye: Right. Okay. Interesting. So would you say that in-person audits particularly of schedule C are a good time?

Daren: Yeah, well, I enjoy I prefer them. I hate correspondence audit.

Andy Frye: You would rather get in front of them.

Daren Gress: I would. I would rather get in front of a person. I get, you know, what they want ahead of time. You prep it all with your client and then you show up ready for battle. And you’ve got that day with the auditor to show it. They accept it or they don’t. Or you need to get more info. It’s just very focused, you know, maybe a day or two with them and then you’re done. You know, there might be a couple little straggling things, but, you know, you can see the look on their face, everything else, correspondence audit, you ship it all off and then you wait in your client waiting and then getting them to, you know, when they finally do have a question on something, you know, then you’ve got to send it in and you got to wait another month for them to look at it. And so I just like the expediency of it. You know, you have a date and time. If there’s an issue on something, you can work it out with the auditor right there. Also, I find way more leniency in the in-person audit. You can get a lot more through as to like a correspondence audit. It’s just somebody going line by line. They’re either going to allow or disallow and then once they disallow a bunch of stuff, then you got to come back and fight it more. On why they should accept it as to where when you’re in an in-person audit, you can battle it out with the auditor right there. Or if you’re doing a good job, I mean, a lot of times in an in-person audit, I had an auditor, everything else was so organized and the it wasn’t even a return that I did. So I totally threw the old preparer under the bus and but I had disclosed several things that I had already found wrong. And so by the time we got to the depreciation schedules, it’s like, look, I already look good at this point. Like you disclosed all this, it’s easy. Everything else, she’s like, this thing’s a mess. I don’t even want to have to write it up like you’ve got everything else organized. So she let, like, 30 grand in depreciation that shouldn’t have been claimed go and just blew my mind.

Andy Frye: Because that’s pretty counterintuitive, right? Like, if you if some of the average tax preparer said, would you prefer to have an in-person or correspondence audit. Probably the average viewpoint would be, oh my gosh, I’d rather get a root canal or several of them at the dentist and then do an in-person. So I wonder if we could we could get some audience input on. So who here has done a and let’s kind of like confine it if we can. You guys to schedule see. Since we’re kind of on this schedule C train. Who’s done like a full schedule C in-person audit. Where you represented either your client or maybe even another client. In person in front of the IRS. Who’s done that before. And maybe put like a thumbs up or some kind of indicator or a chat that you’ve done that before, or if you haven’t. I think it’s fairly rare at this point. So I guess that was the next question I had, Daren, is that sort of going the way of the dodo bird and not even happening anymore because we don’t really hear that much of people doing it.

Daren Gress: They’re more correspondents. The IRS knows that they make more money on those. Are they even on these factors? Probably them. I don’t know what the statistical rate is, but you know, a lot of people change addresses everything else or they get notice of proposed assessments. And the IRS knows a lot of people just pay it. They get they get a letter, they get scared, disappear. [Gotcha.] Okay. So so I would say in-person audits are, I’d say less since COVID, I used to average about one a year or two a year that neighborhood in their and and well, since COVID I’ve had three but they were all caught not correspondence but on the telephone yeah but I would still at least I had an auditor though so I would send him stuff and then we’d hop on the phone and go over all of it.

Andy Frye: Gotcha. Okay. And so far, even though it’s not happening a lot, just so we don’t want to go maybe spend too much time on it since it’s, you know, people aren’t experiencing that much. But like for charging. Just, just quickly, like again, with the eye towards the business side of it. On charging for in-person audit or actual live order representation. How do you how do you approach that or how do we think about that?

Daren Gress:: I charge 250 an hour. Okay.

Andy Frye: So you do hourly in that case.

Daren Gress: Yeah, yeah, yeah. On audit, it’s hourly.

Andy Frye: Okay. Interesting. Then then and you touched on this. This is definitely something that we, we see is so I’m not sure what these statistics they don’t seem to actually address this question, at least not in what I’ve seen. But it seems that the IRS defines audit as kind of more of the traditional where it’s a live person auditing. And there it correct me if I’m wrong or if you if you know if I’m wrong or right. I don’t think they’re including like CP 2000 verification of X, Y and Z letters. That kind of that the correspondence audit is not included in this rate. Not included. Or how does that…

Daren Gress: I don’t think it’s included, but I do know from various things I’ve read and heard in seminars is, you know, that their their focus was going more, more automated, more, you know, matching letters, correspondence, audits, things of that nature. Okay. It is not in-person audit. Well, it’s a waste of resources for them because they can send out one letter and make it a total a pain in the ass for the taxpayer with, you know, sending the info in and stuff like that and their back room handles it and everything else rather than, you know, one auditor getting through like, what, one or two audits a day? I mean, I would like to see I don’t know if they published that info anywhere, but like what the average correspond an auditor goes through a day, you know, they might wrap up like 7 to 8 audit today rather than in person is either you get a morning or an afternoon, they’re generally done in four hour blocks.

Andy Frye: But right. And you can do max two a day and you’re probably so exhausted from battling. Yeah, yeah, yeah. Well, and the auditors like dealing with tax professionals, but I won’t get into it because a lot of people here don’t get the you know, they’re not having in-person audits, but, you know, I’ve sat in the, the in an audit and, you know, I’m just conversing with the auditor and, you know, you don’t want to say too much. So I even keep a briefcase open on my lap and read a book like while they’re working just to keep my own mouth shut. But you hear the guy next to you, you know, actual taxpayer in the audit, like yelling at the auditor, like just going bananas. And it’s like, that’s not going well.

Andy Frye: You do you see how the statistical like let’s say I’m going to say I’m going to I’m heading into tax season. Which for the first Schedule C or business clients is kind of year round. At this point. So I’m just like, I’m in my day right now. I want to see of the of the hundreds schedule C’s that I prepare from now until, you know, six months from now right. How many of those are going to have, whether the IRS calls it an audit therein or whether it’s categorized in some other way. And some other. Yeah, right. For the client point of view, it’s kind of similar. Right. Is that I’m having an issue related to the work that you did and, and from the IRS, I’m having some kind of an inquiry. Right. So if I’m that’s only happening .44 percent of the time. Versus this happening 10% of the time is kind of a different calculation, right?

Daren Gress: Correct. And that’s why from a client perspective, they all they think anything is an audit. And if they get a letter, they think it’s an audit from the client perspective.

Andy Frye: Yeah. Which is isn’t that somewhat of a perception is reality. It’s pretty much you got to you got to handle them with kid gloves and, you know, calm them down and everything. But that’s kind of a practice point, too, is that, you know, don’t ever I talk about audit when I’m doing people’s taxes. So, you know, they’re like, why do you talk about audit? I get clients. They’re like, my old accountant never brought up audit or he said that like, they don’t happen very often. I’m like, I wouldn’t trust an accountant. That doesn’t bring up the reality. They happen, you know, and it doesn’t even mean anything’s wrong. They still do random audits. I mean, they happen. You can just be the unluckiest person ever and you get pulled for a random audit. It no red flags, no anything you just fell into. You know, when they’re writing a new manual, things of that nature, they’ll pull different segments, different occupations and they’ll audit a group of people to write a new audit manual specifically for that. And also, if you want to get better at doing taxes, they’re all available online. As far as the IRS audit manuals on how to audit certain things like real estate flipping, real estate, professional, self-employed. I got a winery as a client. There’s an audit manual for wineries and I mean, it goes over there, you know, hundreds of pages long. And it it goes through every question that the auditor is instructed to ask. And based on the answer, it tells what the auditor like, what the follow up questions are like, how to uncover things, and specifically what to look at. So so you have full access to all the different IRS audit manuals.

Andy Frye: So when when you that’s interesting as I also think that’s a little bit counterintuitive. To the average point of view. If you mention audits at the time when you’re preparing someone’s taxes. Is that…

Daren Gress: I do it in a way to reassure them that I’m there for them and that it’s not realistic for, you know, for a tax preparer to look at somebody and say you won’t get audited or to not mention it. I mean, my job is preparing your taxes and also let you know what may be expected of you, because that’s not fair to you is two years down the road. They ask for an, you know, a mileage log. And I never brought it up. [Gotcha] at all. You know, or to say that like, oh, you won’t get audited and then you do. That’s not that’s not fair. You know. So so in that regard, I bring it up because I’m like, it’s not you know, you don’t want to get a false sense of security because it can happen. It can happen randomly. And so somebody that doesn’t talk about it at all with their clients, you know, and I just say like, you know, audits happen, but but we’re here for you. You know, we’re open year round. I’ll return your call when you call if when happens, you know that that seems to relieve them a little bit that if something does happen, you know, I’m I’m on their side. They’re not left hanging out in the wind. I think that’s better than saying you won’t get audited. [End]

If you are interested in this type of discussion and would like to join our Mentor Sessions, check out our Dream Team Membership here. We offer regular year round Mentor Sessions discussing the issues that tax professionals work with everyday, and sometimes not so common issues. We bring together knowledgeable tax professionals to answer your questions and bring information that can help you become a better tax professional and grow your business with confidence.

Let's Make Sure We Direct You to the Right
Training for Your Needs!

Please click the button below for your primary tax credential.

Not sure which credential applies to your situation?  Click here to reach our support team and we'll help you decide.

Let's Make Sure We Direct You to the Right
Training for Your Needs!

Please click the button below for your primary tax credential.

Not sure which credential applies to your situation?  Click here to reach our support team and we'll help you decide.