What Do I Do if I Get Audited?
By Tim Frye
The IRS audit can cause a copious amount of trepidation to the taxpayer, and also for you as a tax preparer. Many of you preparers who have been in the game long enough have surely seen the IRS turn a life upside down. It is your job to decrease the likelihood of your client being subjected to IRS “Examination.” However, in terms of random audits your accuracy bears no influence on the decreasing of these odds. It will just happen, as there is one type of audit that is just randomly selected by the IRS. So lets take a look at the process involved once your client is due to be audited and has been notified, and discuss ways for your client to get through the examination unscathed and unimpeded financially.
The audits that will cause the most anxiety to the taxpayer are the ones conducted to in person by an IRS agent, and are when they scrutinized line-by-line. This situation can drag out for months, even years, and as a tax preparer you may be seeing the agent sitting in your favorite office pretty often. They are going to want to configure their numbers based on your evaluations, and so you should expect to be a present member of the examination. The good news is that only 1% of all taxpayers are effectively audited, and it is estimated that 80% of these audits are conducted in their least frightening fashion, the correspondence audit. The correspondence audit is indeed a much gentler beast then the in person one, in that the correspondence method is conducted by mail and tends to target a more narrow and innocuous arena of scrutiny. The office and field audit can carry on for perpetuity and can cause your client to harass you daily until the problem finds a solution.
What Documents Do I need if I am Getting Audited?
The whole point of advising your client to keep good records is to prepare them to be ready if and when the storm hits. So, there are certain documents that need to be kept closely monitored then others, mainly due to their accessibility. Those items that are not immediately available from a third party are the ones your client should pay special attention to. For example, access to a few years of bank or brokerage statements are usually readily made for you on line, so there may not be a pressing need to keep monthly copies of these on paper. It will be much more difficult to gain access to copies of utility bills or receipts later if the need arises, so it would be wise to keep a close eye on those originals when they arrive in the mail and table them appropriately.
Do I need records to back up my Charitable Donations?
The IRS sincerely doubts your generosity when it comes to claims of charitable donations. It is truly projection it’s most clarified format. In other words, they are now placing a higher level of scrutiny on your larger charitable itemization claims, so advise your client to be diligent with these records. The IRS’ increasingly stringent standards now require the taxpayer who is claiming monetary charity deductions to have written proof of the transactions. The item can be in the form of a bank record, payroll deduction, or detailed in a written correspondence between the taxpayer and the charity that lists the date and amount of contribution. Those contributions in excess of $250 are required to be accompanied by written acknowledgment that displays the specific description of the property, the cash amount, and date of contribution. In terms of items given away to charitable organizations, the property must be in decent and usable condition or better to be considered deductible.
IRS’ Statute of Limitations
Generally, your client’s odds of audit decrease greatly after three years. Meaning, right now your odds of an examination of your 2008 tax return are highly unlikely. So for 2012 taxes, the taxpayer will at a significantly lower risk of audit for 2016. There are exceptions to this provision. If the Government suspects you have been consistently under reporting income by 25% or more, they are permitted to look back up to six years. Be sure to advise those clients of yours who have cash based businesses, accept tips, or who derive income from ambiguous or hard to prove sources.
When your client gets audited, their lives can possibly be thrown into a chaotic state. The nightmare may actually be pervasive enough to affect your life as well, because you prepared their taxes and they may hold you responsible, regardless of who is at fault. So be diligent in your efforts to avoid the pitfalls that could cause an audit. However, nobody is immune to this situation, so be sure to advise your client as to their preparedness and help them maintain accurate and veracious records if it happens.