Despite your best efforts as a tax planner, your client may still end up facing an audit. Since some audits are randomly chosen, this is an unavoidable reality for those of us in the tax field. The question is: what is our role when it comes to supporting our clients through an audit? Where do our responsibilities begin and end? And how can we best prepare for this possibility so we can guide our clients toward the best attainable outcome?
Start by following these three best practices for supporting your client through an audit:
1) Be Crystal Clear on What Level of Audit Protection You Offer
In our last article, we covered the benefits of implementing a warranty in your tax practice. However, if your warranty only covers the first 60 or 90 days after the tax plan is submitted to your client, an audit is not going to occur within that timeframe. So what happens if your client receives a notice from the IRS?
That depends—on what type of audit protection you may choose to offer along with your tax plans. You may choose to include audit services in one of your service packages or it may be an add-on that costs additional money. In either case, you will want to clearly define the scope of that audit. Imagine the most dramatic scenario if you leave it open-ended: an audit could go all the way to the Supreme Court! Are you willing to represent the taxpayer over the course of years and absorb any out-of-pocket fees that might be involved?
What if instead you set up a simple equation: as part of your standard package, you will cover the first 10 hours of work involved in responding to an audit. Beyond that, the client will be billed at an hourly rate. Having this agreement in writing will provide much-needed clarity if you and your client do find yourselves facing the stress of an audit.
2) Know and Guard Your Taxpayer’s Rights
Throughout the examination, collection, and appeals process, your taxpayer has rights, and our job as a good representative is to help protect those rights. Unless you’re an attorney or an accepted U.S. tax court practitioner, you will face limits in how much you can do for your client. However, if we are simply aware of our client’s rights, we can secure a positive outcome because when the IRS does not respect the taxpayer’s right, the whole case can get thrown out. From the very beginning of the process, we want to look out for these problems—in how someone is notified of an audit, when someone is notified, how much time the taxpayer has to respond to notifications, and how they respond to those notifications. We’re here to play the role of referee and to blow the whistle if we see a technical foul or if the IRS goes out of bounds. If any rules of the game are violated, we are ready to call them on it because it might stop the case from going any further because the IRS has not followed its own requirements.
You can function as a good referee by being very detailed with your record keeping, including calendars, upcoming due dates, notes on what has already been done in the process, and a log of what the required communication steps are. For example, if you have requested an extension to provide supporting documentation for a response you submitted to the IRS, you will want to document who you contacted and what was agreed upon, down to the name of the IRS employee you spoke to, their employee number, the phone number you called, and the day you made the call.
3) Make Sure the Audit is Accurate
Remember that IRS employees are often lay people. When you reach out to the IRS about an audit, you are typically not speaking to a tax attorney. In fact, the representative may not even have a tax or accounting background prior to coming to the IRS. Because of this, they may make an incorrect assessment, which provides us with an opportunity to protect our client by making sure the audit results are accurate. You can actually educate the IRS by having your documentation ready and helping them better understand what the law says. You can go about this in a way that is fact-based and winsome. Rather than saying, “Hey, this is wrong,” you can say, “I’m here because I’m not understanding what you’re saying. Can you give me a little more info? I would like to understand where you’re coming from. What are you basing this on?” Being confrontational or aggressive will usually backfire, but having a clear and thorough discussion can lead to a better resolution for your client. Staying focused on the taxpayer and the facts surrounding their case is key—at the end of the day, that’s what you’re here to do.
Here’s an example of how this might play out: I had a client who was under exam before the COVID-19 pandemic, and because of the pandemic, the IRS wanted my client to sign a release to extend the statute of limitations. My advice was, “No, don’t do that.” The taxpayer is fully within their rights to decline a request like this, even if the IRS tries to make them feel guilty for saying no. As a result, my client did not sign the release, and the auditor never actually audited them. We had prepared binders and binders of documentation for that audit, and the auditor had all that documentation in his possession, but months passed before he did anything with it.
When the IRS finally came back around to my client’s case, the auditor immediately issued a deficiency assessment. I asked for the grounds on which the deficiency was based so that I could ensure that the audit result is accurate. When I asked what specific documentation they disagreed with, the auditor informed me that he had not actually looked at any of the records, and he wasn’t going to have time to look at the records because the taxpayer refused to sign the extension of time. That’s a problem for the IRS, not for us—the taxpayer is fully within their rights not to sign, and our job is to protect our client’s rights. We are simply holding the IRS accountable for following the law and being accurate in their audits.
Summary
Throughout an audit and even if the IRS pursues collection, the taxpayer has rights during every step of the process. Our role as their tax advisor remains the same: to help protect the taxpayer’s rights.
An audit does not have to be an intimidating prospect if you are prepared. In fact, if you have done your job well in crafting the tax plan, you should expect to win the audit. The IRS is not out to get you as a tax planner. If you have done your due diligence and documented your positions well, you will most likely have set your client up for success.
To learn more about how to prepare well for an audit and how to guide your client through the process, sign up to become a Certified Tax Planner today.
