Make Audits Less Taxing

It would be strange indeed to hear a child proclaim, “When I grow up, I want to be just like Pontius Pilate, a tax collector.” Rather, tax collectors are generally quite unpopular, despite the fact that their duties help sustain a functioning government and implement equitable social policies. Frequently, auditors expect abuse and often respond in kind. Conversely, if an auditor is treated “respectfully,” the auditor may be more inclined to be flexible.

With the passage of the Inflation Reduction Act and its allocation of approximately $80 billion over 10 years to fortify the IRS, tax professionals anticipate an increase in the number of IRS auditors and audits. Similarly, many states project an increase in audits compared to the low, or even non-existent, number of audits carried out during the height of the pandemic. While some frustration in most audits may be unavoidable, you can read below to discover some relatively simple ways to make the experience with an auditor, seasoned or unseasoned, more efficient and productive—ensuring you are better able to focus on protecting your client's rights.

Keep it Organized

It’s always good practice to meet an auditor with a sincere intention to make the auditor’s job as easy as possible. Even new auditors are already frequently swamped with open cases. 

Even before the auditor arrives, begin gathering and preparing the necessary documents. Strive to provide the auditor with organized books and records. Ensure that the auditor can locate a summary that reflects the taxpayer’s perspective of their tax liability. This organizational step saves the auditor from sorting through and reviewing reams of paperwork and wasting time. If possible, further ease the auditor’s job by “simplifying” any open issues from the taxpayer’s perspective. More specifically, delineate open issues and concisely present proposed resolutions.  These efforts on your part will reflect the taxpayer's willingness to work with the auditor. And that’s the tone you want to maintain throughout the audit.

Patience and Diplomacy are Key

Even a seasoned auditor once said, “I’m auditing and learning at the same time.” Put yourself in the auditor’s position and imagine being a new attorney charged with managing significant litigation while simultaneously teaching yourself that area of law. 

Be patient and diplomatic. For instance, if the auditor is unfamiliar with, or misinterpreting the relevant law, be patient. Diplomatically educate the auditor and direct them to the applicable law, regulation, guidance, etc. Your efforts help ensure that the auditor will be better equipped in dealing with you and others in the future. If, despite your best diplomatic efforts, the matter is not resolved, simply and politely request to run the matter by the auditor’s supervisor. 

Control Environment and Communications

 Maintaining control over the audit environment is essential. The auditor needs a comfortable space to work, and you need to ensure that your client’s rights are protected during the audit process. Having the audit at the tax professional’s office is almost always preferable to having the audit at the taxpayer’s offices. Ideally, the auditor’s workspace will minimize auditor distractions and not prompt the auditor to consider if additional taxpayer actions/ transactions are subject to tax. 

While auditors can appear very friendly and empathetic when speaking to taxpayers. No matter how congenial an auditor may appear to be, the auditor is neither neutral nor is the auditor cheering for your client’s position—the auditor works for the taxing authority. Controlling communications protects clients’ rights. Thus, to the extent practicable, communications should be between the tax professional and the auditor, as opposed to the taxpayer and the auditor. Remember, anything a taxpayer states can be used against the taxpayer; however, a tax professional can “misunderstand” or not possess the necessary information.

Everything is Negotiable

To determine and assess tax liabilities, auditors are legally granted considerable power to inspect taxpayers’ books and records. However, just because an auditor schedules an audit for a particular time, place, and audit period, everything is negotiable. For example:

• Timing. Timely responses to an audit request are required but, if appropriate, a taxpayer may request an alternate audit time. For example, if the majority of the taxpayer’s sales occur at year-end, the taxpayer should request a January audit date as opposed to a December audit date. Similarly, if a “sample audit period” is used, the taxpayer should propose a sample period where the taxpayer has “complete” books and records that do not include “questionable” transactions. 
• Unreasonable Extensions. If the auditor unreasonably requests an audit period extension, the taxpayer may decline the extension request. 
• Scope. Diplomatic discussions are almost always warranted to clarify (and possibly limit) the proposed audit’s scope.

Conclusion

Currently, tax professionals expect to see an increase in both federal and state audits Taxpayer audits are never a welcome experience. However, as a tax professional, you can take reasonable steps to both protect your client’s rights as a taxpayer and make the audit more efficient and productive. 

If you face or anticipate a state or federal audit contact our team at (410) 497-5947 or schedule a confidential consultation with our form.