A. The following items should be discussed with the Revenue Agent at the first meeting:
- Meet with the Revenue Agent to present the power of attorney form and to establish the ground rules for the audit.
- Place for the audit.
- Interview of the client.
- Submission of document request by the Revenue Agent for documents and records of the client.
- Make arrangements with the agent for the copying of documents, and who will bear the costs for copying.
- Establish a time limit for the audit.
- Ask the Revenue Agent to hold material questions preferably until the end of the audit.
- In smaller, less complicated examinations, be available to answer questions as they arise.
- In larger and more complex examinations, arrange with the client to have some procedure for being kept posted on the progress of the audit.
- Advise the client and others who may deal with the Revenue Agent to give the Revenue Agent what is requested without any explanation unless one is requested.
- Ask the Revenue Agent to provide a written list of the adjustments he intends to propose prior to meeting with the Revenue Agent to discuss the proposed adjustments.
B. Once the issues are determined, then the client should assemble all appropriate records and documents for the representative to review. What records and documents will be given to the Revenue Agent will be determined after receipt and review of a document request from the Revenue Agent.
C. Fully develop the facts and law after learning from the Revenue Agent what issues are being audited. Before negotiating with the IRS, consider doing at least the following:
- Look at all alternatives which will solve the client’s problems.
- Prepare a separate memo on each issue, setting forth the facts and the law. Start each memo on a separate page. You can then give those which are necessary to the Revenue Agent.
- The memo should include the following in this order with these titles:
- Issue.Set forth the issue in a short statement. For example: Is the Client Entitled to a Bad Debt Deduction for 1990?
- Summary. A paragraph should be at the beginning of each memo of the facts and law to briefly explain why the issue should be resolved in favor of the client. This paragraph should be short and give the Revenue Agent a quick summary of what is in the memo.
- Statement of Facts. Set forth a detailed statement of the facts upon which the client relies. Obtain copies of documents and all other items that might support the facts in the statement of facts. Attach these to your memo as exhibits. If it is necessary to go to appeals, then you will have a lot of the work done.
- Statement of Law. Set forth a detailed statement of the law that supports the client’s position.
- Be thorough in your research. Keep a list of those authorities that you consult. Make copies of relevant pages and cases. Attach copies to you memo. In most cases you will want to give these to the Revenue Agent.
- Do not forget to research the Internal Revenue Manual to determine if the Revenue Agent is following procedure and to see if it addresses the issues being raised by the Revenue Agent.
- Conclusion. Set forth a summary as to why the facts and/or law are in favor of the client.
- Stay away from attacking the IRS and telling them why they are wrong. The memo should be positive and tell why the facts and/or law are in favor of the client. If necessary to comment on the position of the IRS, do so at the end in a brief paragraph.
D. After accomplishing all of the above, the next step is making the presentation to the Revenue Agent.
- Presentation to the IRS is extremely important. In most cases this should be done at the end of the audit at a settlement conference. However, it may be necessary to present some information as the audit progresses.
- Even the most prepared representative can fail, if the facts and law are not presented in the proper manner. There is no easy answer as to how to prepare and present clients’ cases to the IRS. Each case is different, and good preparation and presentation comes only through experience in dealing with the IRS and knowledge of the tax laws and IRS procedures.
E. The goal of the IRS in auditing returns is to find unallowable deductions, and/or unreported income. The taxpayer’s goal is to minimize or eliminate any additional tax. Despite the opinion of the IRS and many taxpayers, the IRS is frequently WRONG in its determination. The following are some rules that should be followed for a successful audit:
- Reputation. The representative should establish a reputation with the IRS as:
- someone who is a competent tax professional, prepares returns in a professional manner, keeps up to date, has a good tax library, and has a solid basis for his positions; and
- someone who has information well organized for an IRS audit so the agent does not waste time looking for things.
- Review the Return. Whether or not the return was prepared by the person handling the audit or someone else, the return should be thoroughly reviewed, and any questionable items should be reviewed with the taxpayer prior to meeting with the agent.
- Organize the Records. All the records which will be necessary for an examination of the return should be assembled in good order and reviewed prior to submitting them to the agent. There is always the possibility that the records will contain information not requested by the agent and which may be misleading or harmful to the taxpayer. Never give the agent your complete file; give only the specific items requested. Remove those specific items from the file before giving them to the agent.Consider organizing the files in the following manner:
- A file containing copies of the tax returns;
- a file containing tax workpapers; and
- a file containing copies of tax research notes, memos, correspondence, etc.
- Reputation. The representative should establish a reputation with the IRS as:
Having the files organized in this manner will help prevent inadvertently giving the agent something that he should not be provided.
- Be Prepared. The most successful audits in favor of the taxpayer are those in which the taxpayer and the representative are totally prepared. Preparation does not begin at the time the audit notice is received; rather, it begins on the first day of the taxpayer’s year and continues throughout the tax year. That is, a taxpayer who has maintained good books and records throughout the year is more likely to be successful in an audit than one who has not.
- Power of Attorney and Declaration of Representative.
- Power of Attorney(Form 2848) – authorizes the taxpayer’s representative “to perform any and all acts that the principal can perform with respect to the above specified tax matters…” See Treasury Regulations on Income Tax, Section 601.502(c).
Tax Information Authorization(Form 8821, which replaces Declaration of Representative, Form 2848-D) – allows the taxpayer’s representative to receive confidential information from the IRS. See Treasury Regulations on Income Tax, Section 601.502(c).
- Schedule Audit for Your Convenience. If at all possible, the audit should be scheduled at the convenience of the taxpayer and the taxpayer’s representative. In addition, it is helpful to attempt to schedule the audit at the representative’s office. The agent will attempt to meet at the taxpayer’s place of business, but in a number of instances this can be avoided.
- Location of Audit. There are no statutory rules for the place of the examination; however, Section 7605(a) of the Code states that the examination must be “reasonable under the circumstances.” The procedure of the IRS is to have the examination at the taxpayer’s place of business for the reason that supporting data is available there, even if the books of account may be kept at the accountant’s office. However, if the taxpayer’s place of business is not adequate to perform the audit, or the audit might disrupt the taxpayer’s business operations, the examination may be held away from the taxpayer’s place of business. The audit should never take place at the home of the taxpayer. The IRS office most near the taxpayer’s home is a reasonable place to have the audit. If it is necessary for the audit to be conducted at the taxpayer’s place of business, then the agent should be isolated and given comfortable but not lavish working quarters. The agent should be totally isolated from the other part of the business so that the examination may be completed as rapidly as possible without distractions.The best place for the agent to conduct the field examination is at the representative’s office instead of at the taxpayer’s home or office. Having the agent at the taxpayer’s office can cause interruptions of the business. Ideally, the agent should be placed in a room without any distractions so that he can complete the examination as rapidly as possible. If the examination is being held at the taxpayer’s office, the representative or one designated employee should handle inquiries of the agent. All other employees should be specifically instructed not to talk with the agent. The agent should not be permitted to wander around the taxpayer’s place of business with the opportunity to talk with employees and look at various papers on their desks. It is not a good idea to give the agent a tour of the place of business unless it is requested or unless it will clearly help the taxpayer’s position. When such tour is given, it should merely be limited to a very precise explanation without any elaboration on the part of the individual giving the tour. For example, “This is our warehouse”–period.
- Lay the Ground Rules With the Agent. Prior to the audit, the representative should meet with the agent to lay the necessary ground rules for the audit, such as document request, interviewing the taxpayer, the place of the examination and other items which will facilitate completing the audit as rapidly as possible. Always ask to see the agent’s identification. In the initial meeting with the agent in a field audit it should be determined what items the agent is examining and the issues that have been identified for the agent to examine. Also review with the agent the letter sent to the taxpayer informing the taxpayer of the audit and requesting certain information and documents. In many cases this letter is a form letter and the agent has not given much thought to it. It is important to keep control of the audit and not give the agent the right to conduct a fishing expedition by having records of the taxpayer that do not relate to the issues being examined. If the agent cannot establish a reason for the documents requested, then the agent should not be given the documents.
- Set Time Table for Examination. At the first meeting with the agent it should be determined from the agent how long the examination will take.
- Postponing the Audit. In some situations, it may be to the advantage of the taxpayer to postpone the audit to a later time period. Certainly it can be to the advantage of the taxpayer to postpone an audit if the representative is not prepared to meet with the agent.
- Document Request. The taxpayer’s representative should require the agent to submit in writing requests for information about the taxpayer and for all records which the agent desires to review. The purpose of this is to maintain a record of the documents requested by the agent so the representative will be able to determine which records have or have not been examined by the agent. This becomes extremely helpful in the future if the audit develops into a fraud referral since the taxpayer will know what records have already been submitted to the agent. Just because the agent asks for certain documents does not necessarily mean that the agent is entitled to the documents. Review with the agent the purpose of the documents to determine if they are relevant to the examination. If the documents are not relevant to the examination, then the agent should not be given the documents. Once the agent has completed his use for any of the taxpayer’s records, they should be removed from his possession before any additional records are given to him. Further, the agent should not be given free access to copy all of the taxpayer’s books and records. The representative should make a record of all documents that the agent requests and also keep detailed notes concerning all verbal inquiries of the agent.
- Relevant Matters. Only those items which are relevant to the examination of the tax return should be produced for the agent’s review. If it is found that the agent is making a request for records which have no relevancy to the tax return or is asking questions which have no relevancy, then the representative should resist turning over such information and answering the agent’s questions in this regard.
- Interview of the Taxpayer.
- The representative should conduct an intensive interview with the taxpayer concerning the year(s) under audit to fully develop the facts for and against the taxpayer.
- The IRS has previously had a policy to interview the taxpayer at the beginning of the audit. However, pursuant to the Taxpayer’s Bill of Rights, the taxpayer is not required to appear for an interview without a summons being issued. However, the agent may insist on the interview. It appears that the agents have a number of standard questions that they are required to ask the taxpayer, such as “how much money do you have in your pocket,” “what is your net worth,” etc. Most of these questions seem to be totally irrelevant to any examination and a decision must be made based on the individual’s situation as to whether or not the agent will be permitted to interview the taxpayer. Since the IRS desires to interview the taxpayer prior to the audit, less harm may be done by allowing the taxpayer to be interviewed at this time with the representative controlling the interview. It appears that most of these interviews are lasting less than 30 minutes and since most of the questions become totally irrelevant to the audit, little harm may be done by allowing the interview. Allowing the agent to interview the taxpayer initially before the agent has fully developed the case may be a benefit to the taxpayer as the audit progresses since, should the agent request a second interview, the agent can be told that he has already had his chance to interview the taxpayer. Resisting the interview initially may cause difficulty with the agent and prolong the audit. In addition, the IRS has authority to summons the taxpayer should it so desire. In any event, if the taxpayer is allowed to be interviewed, the agent should not be allowed to ask the taxpayer questions which are irrelevant to the audit and the representative should instruct the taxpayer not to answer such questions. There are a number of reasons for the taxpayer not being present when the representative meets with the agent. First, most taxpayers have no perception of an IRS examination. To the detriment of the taxpayer, some have a tendency to talk too much and steer the agent to other issues in which the agent becomes entangled to the detriment of the taxpayer. If the agent has a question, it is better for the representative to be asked the question and have time to evaluate the answer and determine whether or not any documents requested do exist. If the representative andthe taxpayer are meeting with the agent, then the representative and the taxpayer are placed on the spot of immediately answering the question or producing the records requested by the agent. Also, the representative and the taxpayer’s employees should not engage in any social activities, including lunch, with the agent. Being too friendly and helpful to the agent almost always ends up hurting the taxpayer.
- Isolate the Agent. Whether the agent performs the audit at the taxpayer’s place of business or at the representative’s, the agent should be isolated from others in the office. If the audit takes place at the taxpayer’s place of business, one individual should be designated as the “go-between” between the agent and the taxpayer or the representative. The agent should not be given the freedom to roam the taxpayer’s place of business, talk to employees, and examine information at will.
- Set Time Table for Examination. At the first meeting with the agent it should be determined from the agent how long the examination will take. If the agent exceeds the time estimate, he should be reminded of the original time estimate and a determination should be made as to why the agent is spending more time on the audit that originally estimated. Most of the agents do a good job. They should not be rushed and they should not be permitted to rush the taxpayer and/or his representative; on the other hand, the agents should not be allowed to drag out the audit.
- Requests for Other Returns. In most audits, the agent will request returns for subsequent or prior years. The taxpayer has no obligation to give these returns to the agent, since the agent can obtain the returns from the Service Center. The main reason that the agent prefers not to obtain such records from the Service Center is because of the time-consuming procedure involved. If the representative determines that such returns should not be presented to the agent, then noncommittal answers may be appropriate, such as “we will consider that request” or “let’s come back to that later on.” Hopefully in these situations the agent will forget about the returns. If the agent only wants certain information, then only give the agent that information.
- Use of Copy Machine by Agent. The agent should not have unrestricted use of the copy machine. Someone should be designated to make copies for the agent. When the agent requests copies to be made, a copy should also be made for the taxpayer.
- Control the Examination. It is extremely important that the representative have control of the examination, from the scheduling to the submission of information and to the conclusion of the audit. Allowing the agent total freedom to request irrelevant and immaterial information can have the effect of the agent spending an extreme amount of time on the audit, which the agent will be required to justify by making unwarranted adjustments.
- Save Questions to the End. In most audits, the agent will have a number of questions as the audit progresses. Experience shows that most of these questions will be answered by the agent if the agent is allowed to examine the books without interruption. It seems best in most situations, unless the agent is totally off track, to request that the agent save all questions until the end and submit those questions to the representative at the conclusion of the audit. This will allow the agent to complete his audit as rapidly as possible and will avoid the problem of the agent going off on tangents by asking questions which he will eventually answer himself.
- Do Not Volunteer Information and Records. The representative should never volunteer information or records to the examining agent, but only furnish the agent with those records that are requested. Be candid and honest with the agent. The only instance in which information should be volunteered is whenever such would be favorable to the taxpayer.
- Confess to Nothing. Throughout the audit, the agent may request additional information from the taxpayer and the taxpayer’s representative. In addition, the agent will ask a number of questions, some of which cannot be given immediate answers. In these situations, the representative and the taxpayer should be careful to research the answer before making any statements or admissions.
- Cooperation. Having a good attitude during the examination is essential. Most audits are resolved when they are handled in a cooperative manner, with each side cooperating to the extent possible. However, there may be times during the audit when it is not in the best interest of the taxpayer to cooperate with the agent. In such situations, the representative must make the decision not to cooperate and stick by that decision.
- Transferring the Audit. There may be certain situations in which the examining agent is difficult, if not impossible, to work with. In such situations, where the representative finds the agent totally unreasonable, the agent’s supervisor should be contacted and made aware of the situation, and a request should be made that a new agent be assigned to the case.
- Courtesy and Consideration. You are entitled to courteous and considerate treatment from IRS employees at all times. If you ever feel that you are not being treated with fairness, courtesy, and consideration by an IRS employee, you should tell the employee’s supervisor.
- Extending the Statute of Limitations. Use Form 872 and limit extensions to six-month intervals. If Form 872-A is used, make sure that a Form 872-T is filed at the end of the audit or appeals process to terminate the Form 872-A.