rs-irs-audits

Do I have to provide all the documents that the auditor is requesting? Yes and no. So, if the auditor wants to see the documents, they do have summons authority, and they can make your life quite difficult. Alternatively, if the auditor doesn’t get all the documents that they want, the auditor can make a note of it in their audit report and resort to guessing.

Chances are, if you get into a fight with them over documents and they have to resort to guessing, they’re not going to guess very much in your favor. The good news is that audits are negotiable, particularly when coming up with the audit plan. The CDTFA has, in its goals, a goal to be as efficient as possible because of the amount of time that sales tax audits take. So one of the biggest things for clients is negotiating with the auditor ahead of time to reduce the scope of the documentation that you’re being asked to provide. If the auditor samples a year of sales invoices, for example, out of a three-year audit, and that year of sales invoices comes out perfect, then you have a great argument to make that there’s no reason to dig up an entire two more years of records to go through the same exercise. Same thing with purchase invoices. These are the things that are often most cumbersome.

So, what I would do in the beginning is, again, create a plan for the audit, analyze and understand your risk going in, and then steer the auditor towards the direction of producing only the documents that you need for them to verify sales and to get through the audit as quickly and as cleanly as possible. This will avoid any conflict with the auditor and will move your audit through a lot more efficiently and much faster.

Unlike other forms of audits, serious errors on sales tax audits are usually pretty easily discoverable. One of the biggest mistakes that people make is they underreport their sales tax returns but their federal income tax returns show the true amount of sales. The auditors take what I call here big five data points: sales tax returns, your federal income tax returns, your internal accounting, your bank statements and your 1099Ks. They line up all that data together, that’s a pretty good indicator out the gate of whether or not there’s a discrepancy or whether or not your reported taxable sales are accurate. So anyway, this is a big problem because it’s very easy to see serious errors out of the gate. So the first thing you need to do is understand how serious

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The IRS audits people for many different reasons but generally speaking when the IRS audits an individual or business it’s expecting to yield additional tax due to owing on a return.

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The first steps you should take in the audit are to gather your documents and to understand your risk. The first thing that we look at when we have a prospective client come into the firm is why we think the returner got audited. Every return tells a story and it’s only a matter of time before we go through the return and learn what that story is. In speaking with taxpayers what we often find is that people either lack

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Generally the IRS audit process starts with an information document request. The auditor requests information surrounding their examination of whatever tax return is under audit . The taxpayer will then gather that information and will meet with the auditor to go over the results of that information. A lot of times by looking at the auditor’s document request you can tell why the return got audited. Most audits will focus either on the income side of things or on the deduction side of things. Occasionally they will focus on both. In any event the taxpayer will sit down, then will meet with the auditor or they’ll have the representative meet with the auditor and the auditor will go through the substantiation with the taxpayer and/or their representatives. At the end of the review of the substantiation, the auditor will make adjustments based on things that they feel are they are owing to the government and they will prepare a report and present it to the taxpayer. If the taxpayer agrees with the report then the audit is over. If the taxpayer or the representative disagree with the report they see may submit additional documentation and/or work to clarify things in the audit report. If the auditor and the taxpayer ultimately cannot agree, then the case goes to Appeals where the taxpayer can further challenge the audit. That’s how the IRS audit process works.

What are our s Auditors Looking for When they Auto to Return? IRS auditors essentially are looking for mistakes. The IRS is comparing the return that was filed versus the substantiation that you’re providing and matching it to see if there’s any additional tax due and owing specifically there are a few things that probably triggered the audit, so the auditor is going to be looking for specific issues on the return what issues those are is a hard thing to say but it depends on everybody’s individual facts and circumstances for example a taxpayer may have earned a certain level of income over two years and that has a significant reduction in income in the third year the IRS we may want to know “why the taxpayer had such a significant reduction in income” but essentially the auditor is going through and looking for errors and looking for adjustments that they can make in order to get additional tax to the government if those errors start to add up or the taxpayer is unable to substantiate the deductions and the income that they took on the return then the IRS auditor will is issue penalties in connection with that I’d like to believe that most auditors go into the process with good faith and my experience has been more positive than not in this arena there, but the IRS is like any other organization there are good people within that organization and there are bad people within that organization but ultimately the auditor is going to do their job good or bad they’re going to go through the audit they’re gonna find the mistakes and they’re gonna assess how much tax they think is due and the best thing that you can do to mitigate it is to build a plan to prepare for that and to make your presentation as mistake-free as possible so that you can get through the other.

Well that can be a difficult question to answer and it’s dependent on a lot to do with the taxpayer’s factual circumstances. Some taxpayers are bigger, some are more complicated and some have a lot more to go through. Generally speaking, the IRS audit process shouldn’t take all that long if you gather your information. If you could substantiate the items that are on the return in that meeting, the audit should be over with. Audits that take longer than a few months are a red flag for me and the reason for this is it’s a sign that the auditor is engaging in a fishing expedition. You should come in with a clear plan of the audit, you should present your material and if you do so clearly and cognizantly, there shouldn’t be any issue for the auditor. Here’s my return, here’s my substantiation, now go home. It really should be as easy as that. The problem is that most taxpayers that get audited have some sort of adjustment that the IRS is seeking to make. So the important thing is understanding where your particular pain point is, addressing that pain point as much as possible and then moving on quickly. The longer the audit remains open, the more documentation that’s provided to the auditor, the greater the risk. So audits that go longer than four or five months are generally a negative sign to the taxpayer and need to be dealt with quicker.

Do I have to provide all the documentation that the auditor is requesting? Yes and no. If the IRS wants to, the IRS auditor has broad authority to get whatever documentation they need in connection with the audit. If you refuse to provide the documentation, the auditor can issue a summons and you can end up in district court, which is the last place you want to be in an audit.

But the reality of the situation is, the IRS auditor has limited resources. You’re one of many cases that the IRS auditor has open, and the auditor has only a certain amount of hours in the day, just like we all do. So the auditor is forced to pick and choose where they want their fights to be. Now, the auditor is going to need all the documentation that they need to complete the audit. But in the course of the process, you can negotiate with the auditor in an effort to trim down the IDR or focus on the issues that are really important. The auditor wants to see receipts for $5 ,000 worth of expenses. Maybe you can talk them into thinking that that’s immaterial and requesting only larger expense categories as a method of verifying the expenses on the return.

The point is, is even with this backstop and even with the broad power that they’re given, IRS auditors are under some limitations. So if you’re strategic about it, you can limit the scope of their investigation, move them through the process quickly, and get the audit over with as soon as possible.

Yes you can! With the caveat stated that most people do not go to jail because of errors on the return, criminal prosecutions take willfulness. There has to be some deliberate action on your part to mess up the return or to conceal income or hide expenses in some way. If there’s no evidence of willfulness, prosecution is probably not likely but in the course of the investigation, the auditor is looking for things called badges of fraud. They’re looking for evidence that you manipulated the numbers on your return in order to lower your taxable liability. If the errors are serious enough, it’ll trigger a referral to the Criminal Investigation Division of the IRS. So while the chances of jail are not exactly likely, if you’ve got a serious error on the return and you suspect willfulness it can and will trigger a criminal referral which is something that you don’t want to deal with.

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