Protect Your Clients From An IRS Audit

Informational Resources for Audit Guidance 

Here are three useful informational resources for audit guidance:

1. Tax Code
   In a case with IRS, rely on the tax code as the best authority. The practitioner can win the case by listing a statute as a back-up that accurately reflects the situation. However, if the case is in direct conflict with the tax code, try to avoid the dispute and settle for the lowest amount possible. Note that sometimes tax code verbiage is too common to fully support tax strategies and may require additional types of back-up authority.
2. IRS Documentation
   The IRS publishes instructions, forms, and other publications that are easily comprehendible. The guides are easy to read for clients, helpful in understanding important information, and not too technical. Since the documents are not substantial authority, the CPAs may need something more to advance a debate with the IRS. It might be a good starting point, as the IRS will likely follow its documentation. 
3. Treasury Regulations
   Following Congress's passing of a new statute, the U.S. Treasury Department will issue a temporary regulation valid for three years. Although statutes and regulations have the same authority, a law will prevail when the two conflict. The temporary and final regulations have more power than the proposed regulations. Professionals can rely on the proposed regulations as a statement of the IRS's official position on the case. They can try to persuade the IRS, but not the courts.

Official Pronouncements

The Internal Revenue Bulletin publishes official IRS pronouncements. They are called "the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures." 



They are technical and difficult to understand. So, consulting other resources to comprehend may be helpful. The four types of publications are:

1. Revenue Ruling: A summary of a case transcription explains how the IRS applied the tax law in a particular situation.
2. Revenue Procedure: Using specific revenue procedures to administer the law by explaining the processes for holding elections or filing forms and updating dollar amounts for inflation.
3. Notices & Announcements: Information issued by the IRS about their official position on current issues.
4. Approval & Disapproval by IRS: A statement published by the IRS implying its agreement or disagreement with a tax ruling.

Protect Clients and Avoid Audits

Here are a few things to protect the clients from being audited:



• Claim Earned Income Credit (EIC) for the clients.
• Keep expenditures consistent, especially for the self-employed and gig workers.
• Only list when receipts and paperwork are available for back-up.
• Support charitable contributions over $ 250 with receipts.
• Make sure to report all income, including stocks, trades, cryptocurrency transactions, 1099s, 1099-INTs, and W-2s.
• Note that the IRS will notice if a client's business reports a loss for several years in a row with no other income sources.
• Pay attention to the client's marital status. If they are divorced and both are filing for alimony with different numbers, they might hear from the IRS.

The Takeaway

Once the IRS audit results are in, it is important to keep the client calm and help them understand the next steps. In most cases, the client will owe IRS taxes and additional interest. They can often create a payment plan. If the client wants to object to the results, they can do so through the Alternative Dispute Resolution (ADR) escalation process. However, if the case goes to court, the best tax authority resources are regulations, statutes, and previous court cases.

Contact us today, at Cartier CPA's our goal is to provide clients with the highest level of respect and quality of service.