IRS Audits

1. IRS Audits

2. Objectives Upon completion of this course, participants will be able to: • Understand the audit process utilized by the IRS and the different audit approaches taken by the agency • Respond properly and effectively to requests for information from the IRS without prejudicing your client’s case • Evaluate the Revenue Agent’s Report to achieve the most appropriate results

3. IRS Audits 3

4. Chapter 1 Types of IRS Audits

5. The Three Types of Audits

6. IRS Operations

7. Responding to Correspondence Audits • Include a copy of the response page • Provide a detailed explanation for each issue with supporting documents attached • Contact number for the taxpayer or representative • Use envelope provided if possible • Sign the notice and submit payment only if the taxpayer agrees with the notice

8. Common Correspondence Audit Issues • Earned Income Tax Credit (EITC) • Employee Business Expenses • Charitable Contributions • Emerging Issues and Refundable Credits (Adoption, First-Time Homebuyer Credits) • Schedule C Issues

9. IRS Goals in Tax-Exempt Audit • Goal 1: Determine qualification for exemption • Do activities further an exempt purpose? • Goal 2: Determine any tax liability • Review books, records • Compare with returns • Third party interviews

10. Office Audits vs. Field Audits • SB/SE does both • Office audit: Tax Compliance Officer • Field audit: Revenue Agent

11. Common SB/SE Audit Issues • Unreported income • Home office deduction • Car and truck expenses • Depreciation • Hobby losses • Unreimbursed employee expenses • Retirement plan deductions

12. Common Tax-Exempt Issues • Non-exempt activity (taxable or otherwise) • Excess compensation • Additional filing requirements • Employment or excise tax obligations • Name, address or EIN mis-matches • Sub-section or foundation status change

13. Methods of Return Selection

14. Audit Trends Source: TIGTA Report 2010-30-067, Small Business Corporate Returns, 06/11/10 (most recent as of 3/13)

15. Audit Trends Source: TIGTA Report 2010-30-067, Small Business Corporate Returns, 06/11/10 (most recent as of 3/13)

16. Audit Trends Source: TIGTA Report 2010-30-067, Small Business Corporate Returns, 06/11/10 (most recent as of 3/13)

17. Audit Trends

18. IRS 2012 Data Book Unagreed cases 47,075 (3%)* 38,915 (8%)* 8,160 (0.7%) Individual unagreed 37,858 (80%)** 29,724 (76%)** 8,134 (99%)** Corporate unagreed 2,751 2,748 3 * = Percentage of total audits ** = Percentage of unagreed cases

19. IRS 2012 Data Book

20. Audit Trends Source: Syracuse University TRAC Report April 10, 2012 (most recent as of 3/13)

21. Audit Trends Source: Syracuse University TRAC Report April 10, 2012 (most recent as of 3/13)

22. Non-Audit “Compliance Checks”

23. Chapter 2 The Information Document Request

24. Initiation of Office or Field Exam • Phone Call • Appointment date determined • Follow-up letter is sent confirming agreed appointment • If Initial Call Not Answered: • Letter sent with proposed exam date • Letter includes list of documents to be inspected (IDR)

25. Taxpayer Rights

26. Form 2848 Power of Attorney • Authorizes representation based on eligibility to practice • Representative must be an individual • Recorded on Centralized Authorization File (“CAF”) • Photocopies accepted • Multiple representatives allowed • Check box to receive copies of tax notices

27. Common Reasons Form 2848 is Rejected • Missing signature/signature date • Improper identification of Tax Periods/Tax Matters • Previous form not attached for retention of prior POA • Missing delegation code, jurisdiction, or enrollment number

28. Initial Response Regarding IDR • Review all requests for • Clarity • Relevance • Existence • Clarify issues • Establish timeframe to provide information • Establish appointment date • Set a tentative date for completion

29. Questions Regarding the IDR • Do I understand exactly what documents the examiner is seeking? • Do such documents exist? • How are the documents relevant to determining the taxpayer’s income and deductions for the year or years under audit?

30. Questions Regarding the IDR • How difficult will it be for the taxpayer to produce these documents? • How long will it take the taxpayer to produce these documents? • Is the information contained in the documents duplicative of that contained in other requested documents?

31. IRS Summons Authority • The investigation is being conducted pursuant to a legitimate purpose; • The inquiry is relevant to that purpose; • The information sought is not already in IRS’s possession; and • The administrative steps required by the Code have been followed by the IRS.

32. Reasons for Requesting a Voluntary Extension of SOL • The limitation period for the taxable year under examination will expire within 180 days and there is insufficient time to complete the examination and the administrative processing of the case.

33. Reasons for Requesting a Voluntary Extension of SOL • The examiner discovers firm indications that substantial additional tax is due for prior periods and the statute of limitations for any of the prior periods will expire within 180 days and there is insufficient time to complete the examination and administrative processing of the case.

34. Reasons for Requesting a Voluntary Extension of SOL • The limitation period for the taxable year under examination will expire within 180 days and the case is included in the Coordinated Industry Case (CIC) program of LB&I or is a TEFRA audit.

35. Reasons for Requesting a Voluntary Extension of SOL • The limitation period will expire within 210 days for a case that will be (or has been) placed in suspense.

36. Reasons for Requesting a Voluntary Extension of SOL • A joint investigation with the Criminal Investigation Division is in progress and there is the likelihood that the work cannot be completed before expiration of the statutory period for assessment.

37. Electronic Records

38. Tax Accrual Workpapers

39. Chapter 3 The Conduct of the Audit

40. Logistics • Control timing • Control scope • Control location • Control your client

41. IRS Audit Techniques • Analytical tests • Document examination • Inquiry • Inspection • Observation • Testing

42. Other IRS Audit Techniques • Interviews • Business tours • Income probes • T-account analysis • M-1 analysis

43. Involvement of Manager • Examiners should provide their manager’s name and telephone at the initial appointment • Elevate impasses, delays and significant concerns that cannot be resolved • Hold a meeting with the manager at the conclusion of an unagreed audit

44. Badges of Fraud • Multiple sets of books and records? • False or duplicate invoices? • Concealment • Check cashing • “Pattern” of errors

45. Chapter 4 The Revenue Agent Report

46. End of Audit Procedures • Closing conference • Negotiation • No change or exam report • Agreed or unagreed case

47. Contents of RAR As to each issue: • Facts • Law • Government’s Position • Taxpayer’s Position • Conclusion

48. Chapter 5 Post Audit Matters

49. Contents of a Protest • Taxpayer’s name and address • A statement that the taxpayer intends to appeal the IRS findings to the Appeals Office, • Attach a copy of the letter showing the proposed changes and unagreed findings (or the date and symbols from the letter), • The tax periods or years involved, • A list of the unagreed changes why there is no agreement together with a statement of supporting facts and law

50. Options • Meet with group manager • Protest to Appeals Office • Tax Court petition • Audit reconsideration