My First Audit

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  • #42537
    James Wade
    Participant

    Everyone,

    I just got on to a 2017 income tax audit. Most issues are relatively straightforward (exemptions, child tax credit, education credit and schedule C substantiation). The auditor has requested a phone interview with the client to go over internal controls/barter/cryptocurrency (per the auditor). I told her I would talk with my clients but I would be against that.

    Actually I said, as an attorney I am against an in-person interview but would be happy to get answers to her questions. She said, as a revenue agent she was against doing it that way. So any suggestions on how to frame a no without being a jerk (assuming that it is never a good idea to let clients be interviewed). Or should I ask for the questions in writing first so I can prepare the clients on how to answer the questions (and have them there with me so I can tell them to answer or don’t answer a question if it goes somewhere dangerous)?

    Again, thoughts and alternatives very much appreciated.

    Sincerely,

    Jim Wade

    #42538
    Eric Green
    Keymaster

    Jim, I would send a fax that the client is entitled to representation, you are her power of attorney and you will be able to either answer the questions or obtain the answers. If, however, there is a question that arises that you are unable to get an answer to then at that point you would consider allowing the taxpayer to be interviewed.

    #42546
    James Wade
    Participant

    Eric,

    Thank you. This is a big help. I also found in the IRM where it talks about allowing the representative to speak on the topic of internal controls so long as they understand the system (so I will make sure to throw in some citations as well).

    Sincerely,

    Jim Wade

    #42595
    James Wade
    Participant

    Everyone,

    So I have done the ground work to prepare for my first audit (I grilled the owner about how their business operates and their books and records). Self-prepared tax return, if that helps put this into perspective.

    Some items claimed on the return are estimates (though they appear to be estimates of actual amounts paid). In that year, father was ill and lived with couple; couple did not keep great records to begin with and turmoil of the year exacerbated the problem. Then tax time comes and so they put together a return as best they could.

    I am sure I am not the only one with audit clients like this. How do you respond to IRS questions about books and records without saying, yeah my clients just winged it. I am thinking of saying that the clients prepared the return using both information in their accounting software as well as estimates for some expenses on which they lost or misplaced those particular records. These estimates were based on prior amounts paid for such expenses.

    The difficult area is auto expense as I know they don’t have a mileage log and so we are going to have to see if it is possible to get other contemporaneous records to support something.

    Thank you in advance!

    Jim Wade

    #42596
    Eric Green
    Keymaster

    Jim I would try and reconstruct the missing documentation – bank records, credit card slips, calling vendors, etc. For mileage, do they have a calendar of where they needed to be? Mileage logs can be recreated from that and any auto records that document mileage, like oil changes or tires.

    As far as an explanation, I think that the clients were going through a tough time with dad so their record keeping wasn’t great but this is what they have or have been able to pull together should be sufficient, and its honest.

    #42599
    James Wade
    Participant

    Eric,

    Thanks for the advice. The first “interview” went off without a hitch. Now we have to see how the rest of this is going to be done as the agent said they cannot accept any mail for the time being and I think somewhat voluminous documentation will have to be produced. Otherwise I am going to be spending a lot of time at the fax.

    Jim

    #45881
    Jeremy Andries
    Participant

    Eric and Everyone,

    Thanks again for what you do and your service to this industry and to this group.

    I have my first examination phone interview for a 1065 client, tax year 2019. Fyi, we’re the preparer for the last 2 years and have a bookkeeping consulting arrangement with them (we do not do their books per se, just help with questions; they handle their books internally). I had an initial call with the revenue agent and provided my 2848, where she discussed the scope of the audit (an IDR had not yet been created or given) and we scheduled the official interview for 9/28/2021. Forgive me, but here are questions/comments/concerns; please weigh in as you can:
    1) After receiving the IDR, the scope is much broader than what was provided on the initial call. Is this normal?
    2) After receiving the IDR its been broadened to include 2018 and 2020 (to which they’re on ext; not yet filed but will be by 9/28). Is this normal? I assume they have the authority of course; but why didn’t she, the rev. agent, initially mention it. We’ve prepared 2019 and will prepare 2020, fyi.
    3) They’ve broadened it to include the returns of the 20%-or-greater partner. Although we didn’t opt out of CPAR, is this normal? I assume they have the authority of course; but why didn’t she, the rev. agent, initially mention it.
    4) The partners include a 1065 and an 1120; but I don’t have 2848s for them; wouldn’t they need an IDR or something to request these returns from the partners?
    5) I assume the individual partners’ returns of these partners to my clients are not to be included? Again, if so, wouldn’t they need an IDR for these returns?
    4) Some of the client’s docs and records were destroyed in the TX snowpacolypse and water damage; if we can’t get, do we reconstruct or gather invoices/receipts from vendors etc.?
    5) The IDR is requesting QB backup files in .qbb or equivalent. The client uses QB Online; what format should I gather for them or send a CSV export and explain in a letter that they do not have QBD, just QBO?

    All the other items on the IDR is straightforward; should be fairly easy to gather.
    Thanks in advance,

    Jeremy Andries, EA

    #45884
    Jeremy Andries
    Participant

    Correction: it appears there was an election out of CPAR; however, the IRS gives TP 30 days of the exam notice to revoke the election. Should we?
    Also, one more question – should we turn in docs asap or wait till right up to or day of examination interview?

    #45885
    Eric Green
    Keymaster

    Here are my responses:
    1) Yes, I always feel you should expect they will examine everything given they usually do
    2) 2020 before its filed is weird
    3) Some agents like to surprise, others didn’t think of it during the call, and some are told afterward by their supervisor to add it.
    4) You should get a 2848 from them
    5) They need to send an audit notice for those and unless you have a 2848 on file they wont send it to you but to the taxpayers directly
    6) Gather invoices/receipts from vendors if you can, reconstruct the rest
    7) I am not a quickbooks expert so I will defer to the group but they want the electronic back-up so they can see the adjusting entries and audit trail. Key is to not give them more info than that covered by the audit period

    #45886
    Jeremy Andries
    Participant

    Thanks Eric. Should we revoke the election out of CPAR; what’s the true benefit except for adjustments/taxes applied to the partnership, not the partners? Also, should we provide these docs before or at time of examination interview?

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