Helping Your Client through an Audit

Whether your accounting client is an individual or a company, your client will probably be very worried upon receiving a letter from the IRS. As a Pennsylvania accountant or CPA, you have the financial expertise to help your client through the audit process.

Receiving the initial IRS audit notification

You will probably get a worried call from your client when he or she receives an IRS audit notification letter in the mail. Assure your client that most audits are triggered randomly or by minor discrepancies that can be easily addressed.

Ask your client to send you a copy of the IRS letter right away. The letter should include the primary reason for the audit and the CP75 or CP75A Notice that lists the documentation that the IRS is requesting.

Discuss with your client what documentation you need and instruct him or her to allow you to engage in direct communication with the IRS. This will prevent any accidental mistakes in communication between the auditor and the client. Sometimes, people being audited get “chatty” and say more than they need to say, opening up other rabbit holes that the auditor will be required to go down. You know tax law, and you understand the finances; you know what to say and what not to say, so you should be the contact person for the IRS.

Explain the process to your client, setting expectations about the timeframe and possible outcomes. Be reassuring—if you’ve been handling the client’s taxes for a number of years, this will probably be easily resolved, since you’ve been providing high-quality service.

Preparing and responding

The IRS usually allows 30 days for the person or business to submit the necessary documents, but if the timeframe is too short, request an extension and provide a logical reason. The IRS is usually willing to comply.

If you’ve been handling the client’s taxes and you utilize a software system that keeps digital copies of all your client’s paperwork, providing the required documents should be a fairly easy process. Anything you don’t have, ask the client to provide.

What the IRS requires will depend on the primary reason for the audit, but usually it involves proof of expenses or income. For instance, if a business client has shown a loss for several years in a row, you will have to justify that loss with requested documentation and a thorough explanation of the conditions that justified or caused the series of losses.

The IRS may conduct the audit in three ways:

• Correspondence audit – all documents and responses are sent through the mail

• Field audit – an in-person meeting at your office or the client’s home

• Office audit – an in-person meeting at the local IRS office

Avoid meeting at the client’s home if at all possible. The average penalty is higher when a field interview takes place at the client’s residence. Only about 20% of audits are face-to-face, but if an in-person meeting is requested, make sure it takes place in your office or at the IRS office.

What if it’s your fault?

On rare occasions, the problem is an accountant’s error. If, upon reviewing the documents, you discover that you made a mistake, notify the client and the IRS as quickly as possible and include the updated versions of any inaccurate documentation. Penalties are usually minimal in cases of unintentional errors that are quickly corrected.

Resolution of the audit

Once you submit the documentation, the IRS will review what was submitted. You should continue to be the contact person with the IRS in the event that the agent has questions or requests other documentation. This review can take several weeks or more. After 30 days, you may request an update.

The IRS will then issue a ruling. This may include a tax adjustment, payment or even overpayment, or penalties. Your client can either accept the determination of the audit and comply with it or appeal the decision.

Be sure to review the IRS’s results. In rare instances, the IRS makes a mistake. If you notice a discrepancy or error, your client will need to file an appeal. Your client may also want to appeal if he or she thinks that the penalties or taxes are too burdensome or feels that the auditor was prejudiced or biased.

As a first step, you can contact the IRS auditor’s supervisor and request that the supervisor review your client’s file. You can also request a fast-track appeal, which mediates between the auditor and client and can negotiate lower penalties or taxes. You will need to list the findings that you disagree with, why you disagree, and provide evidence to support your position. If you still do not receive a favorable response, you can reach out to the IRS Office of Appeals.

Post-audit debrief

First, make sure your client complies with the final decision of the IRS. Then discuss with your client how to avoid future audits. The IRS usually watches closely those taxpayers who have been previously audited. So discuss with your client how to avoid in the future any of the “red flags” that may have brought him or her to the attention of the IRS. Your client will appreciate your guidance and support to avoid this hassle in the future.

If this is the first time you are walking a client through the audit process and you have questions, reach out to our PSTAP network. We have members who handle audits all the time and are happy to help other accounting professionals.