These two words can strike fear in the hearts of your tax and accounting clients: IRS audit.
Understanding how to manage client expectations and concerns and how to get through the process is an essential skill in the tax and accounting professions. That is true for both large accounting firms and small accounting firms, since any client could be the target of an audit. These steps will help when clients come under IRS scrutiny.
6 reasons your client’s tax returns could be flagged for an IRS audit
The Internal Revenue Service carries out tax laws created by Congress. That includes assessing taxes, collecting taxes, and enforcing tax laws with audits and criminal investigations when necessary.
Most IRS audits are not random, although that is possible. Rather, a return is flagged for audit based on several factors. Someone is at higher risk of audit if they:
- Have income over US$5 million a year
- Own a business that accepts a lot of cash (such as salons and laundromats)
- Have obvious errors on their return
- File a Schedule C for a sole proprietorship
- File tax returns showing they lost money multiple years in a row
- Have large income swings from year to year
7 steps to take when your tax and accounting client is audited
When clients receive a letter from the IRS about an upcoming audit, you can guide them through the process with these steps:
1. Offer representation and support to manage emotions and fears while being audited
Tax laws are confusing, even for professionals who work with them daily. Getting a letter from the IRS about an audit can be frightening. However, having representation from a tax and accounting professional can alleviate some of those fears.
2. Explain the IRS audit process in detail
Most people have never been through an IRS audit. Tax and accounting firms can help clients feel more in control of the situation by explaining:
- What is expected of them during the audit
- What documents the IRS is likely to request
- How long the audit might take
- Other logistics necessary for the IRS to complete the audit, such as where they will work and whom they should speak to for questions
Set expectations early on and prepare the client for the possibility of getting a bill for additional taxes and possible penalties should the IRS discover an error.
3. Set expectations for communication during the audit
Some clients want to know every detail, while others just want a summary during key stages of the audit. Find out how and when they wish to communicate about the process. Also, take advantage of audit technology and new online audit tools to make the entire process more efficient.
4. Help clients understand their rights during the audit process
Audits take time, so make sure you update your tax and accounting clients about what is going on and how to handle letters or requests from the IRS. For example, a client with an authorized representative cannot be forced to attend an in-person interview with the IRS without a summons. Additionally, many IRS auditors will ask if they can work at the taxpayer’s home or business, but as a representative, you can offer your office instead.
5. Assist in compiling and submitting tax records
Providing organized and complete tax and financial records moves the process forward smoothly. Help clients organize all the information requested by the IRS, as well as additional information you think they might request in the future. Then submit all of the materials through your office.
6. Request more time to manage the audit process, if needed
The IRS will set specific deadlines. Your client may also want to move through the process quickly. However, if you need more time to collect information and organize their documentation, then make sure to request additional time.
7. Explain how to appeal findings they believe are incorrect
When the IRS issues its final report, your tax or accounting clients may disagree with some of the findings. Explain how they can file an appeal with the IRS, along with the deadlines to file an appeal and what they can expect in that process.
The tax auditing process is changing rapidly as new technology in auditing and laws evolve. Discover more tips for helping clients through an IRS audit at Thomson Reuters.