The most important thing about representing a client is – know at least as much about them as the IRS does.
Don’t ever put yourself in the position of being embarrassed, after putting together your client’s financials or tax audit workpapers – only to learn that the IRS knows about income or assets your client has not disclosed to you.
How do you make sure this never happens?
1) Get a signed power of attorney from the client and/or spouse and/or partner
2) USE the POA to request every possible kind of transcript there is for the year(s) in question – third party reports of income and expenses, master file records, account records, etc. If you don’t know what to ask for – use the Form 4506T as a guide.
3) Do a complete proof of cash on all the bank accounts. Trace out all transfers between all accounts. And identify all non-income deposits – like loans, cash advances, bounced checks added back in, etc. If there are any unidentified deposits, track them down BEFORE the audit. Again, you want to know more than the IRS. And be smart – give copies of all the worksheets to the examiner for his/her own files. Save them the work.
When representing a client at audit, make them no promises. Experience shows that you will face surprises along the way.
For instance, there’s this one tax pro who had been doing the books for a doctor with a million-dollar practice, for many years. She had questioned him about his expenses and had been assured they were all business-related. When he was audited, we looked at the $50,000 worth of Costco charges. Not a single charge was business-related. Uh oh. We found other discrepancies in income, as a well. Suddenly, the audit stopped being about the numbers and turned into more of a – “let’s keep him from losing his medical license or going to jail” kind of thing. And – we were concerned about her facing disciplinary action from the Office of Professional Responsibility.
We really had to finesse this audit and provide disclosures and explanations to the examiner. In the end, he owed AND PAID, over $100,000. But, he was not hit with any accuracy penalties, willfulness or criminal penalties – actually – no penalties at all. She was not held responsible for the errors – so we protected her license, as well.
Generally, when working with audits, you may find it necessary to redo the books from scratch for small companies who do their own books. You will usually find errors on the tax return. But the good news is, if you understand their business and industry, you’re apt to find offsetting deductions or credits they didn’t use.
By doing your due diligence carefully, you will often be able to balance out the lost deductions or increased income, with offsetting deductions or credits.
Oh yes, one last thought. Always make sure you get paid before going in to the audit. If you are not paid in full, make sure you have the balance due secured – using a UCC3 filing.