Bonus: Get the 16-step checklist here.
By Michael Rozbruch
The IRS is aggressively going after taxpayers to recoup some of their lost revenue (lost revenue to the tune of $385 billion per year!) which means our clients are under scrutiny now more than ever.
The question is, how do we fight back and effectively represent our clients in a 1040 audit and CP2000 issues?
First, are you qualified to represent your client in an audit?
When you reach the audit level, 1040 or otherwise, you must have a valid Power of Attorney (Form 2848). Some practitioners are what we call Annual Filing Season (AFS) practitioners. Any AFS practitioner who is not an attorney, CPA, or EA, is allowed to sign the Power of Attorney. So even though you may have signed the Tax Information Authorization, Form 8821, that doesn’t mean you can represent the taxpayer before exams. You must have a valid Power of Attorney.
You must be a qualified practitioner if you’re not licensed (attorney, CPA, or EA).
So what qualifies you as a practitioner to represent a client in an audit if you’re not an attorney, CPA, or EA?
- You actually prepared the return
- You actually signed the return
- You are actually an Annual Filing Season practitioner
If you do not have these things, you are not qualified to sign as a Power of Attorney.
Right of Consultation and Power of Attorney
Right of Consultation is where the taxpayer is under audit, but you have not yet been retained or signed a Power of Attorney. The taxpayer, at this point, has a right to stop any type of interview by the IRS. All the client has to do is invoke their right to inform the IRS, by saying “I would like representation.” When the client says that, the agent is required by law to immediately stop that interview and allow the client sufficient time to obtain representation. It’s similar to your Miranda rights.
Power of Attorney is the step after Right of Consultation. This gives you the authority to represent that taxpayer before any branch of the IRS, without that client being present, whether it be exams, collections, appeals, or even the Chief Counsel’s office. There’s no need for you to have the client present if you’ve done a good job of interviewing them. Of course, that’s a judgment call you’ll have to make on your own, but a taxpayer with an authorized representative (Power of Attorney) cannot be compelled.
In fact, the law says the IRS cannot require a taxpayer to accompany the representative in the absence of a summons. If the IRS really wants the client there, they’re required by law to issue a summons. However, before that summons is enforced, the IRS has to make sure they have what we call “probable cause” or grounds to support that summons.
Types of Audits
Listed below are the five different types of audits:
- Correspondence Audits: These are audits conducted by mail. Nearly 80% of all IRS audits are now conducted this way. Generally, the IRS is examining one to several items on the taxpayer’s return.
- Office Audits: These audits are where you meet the IRS at their office. Correspondence and office audits are normally conducted by Tax Compliance Officers (TCO).
- Field Audits: On the other hand, field audits are conducted by Revenue Agents (RA) in your office or in the client’s place of business.
- Eggshell Audits: These are sensitive audits because they have overtones of a criminal act or fraud.
- CP2000 Audits: This type of audit is where the IRS sends your client a letter in the mail saying they’re over- or underreporting their income. Some people make the mistake of not realizing that CP2000s are audits. But they are. In fact, they’re so important, I’ll be devoting an entire section to them later on.
Regardless of the type of audit your client is involved in, the most important details you need to be aware of are these:
- Date and Time. The IRS is allowed to establish the date and time of the examination, but you’re allowed to modify it.
- Place. The IRS has some guidelines regarding the place of the exam. They will make an initial determination regarding the place of the exam, and that determination includes whether or not the IRS District Counsel will participate. Their participation may affect the meeting place.
If your client has a small business, the IRS will want to conduct their audit in that workplace. The Treasury Regulation actually states that if an examination is scheduled by the IRS at the taxpayer’s place of business and the taxpayer represents to the IRS, in writing, that conducting an exam there would essentially require the business to close or would disrupt its service, the IRS must change the place of the exam. Now normally, they don’t bother too much with that. All you have to do is say, “There’s an exception for small businesses. This audit will be conducted at my office.” Just make sure you’ve checked the right regulations when making a change to the exam location.
Another thing the IRS will do is try to get a site visit. The IRS is allowed, under the Tax Code, to visit the business premises. However, that still does not give them the authority to speak with your client. In fact, I highly recommend that your client not be in attendance during the visit. Some agents won’t like it, but it’s well within the client’s rights (as well as in their best interest) to not be at the site when the IRS is performing their visit.
During that site visit, the auditor will make observations, take notes, and try to get a general idea of the environment. They will likely have questions, which they should address to you, the representative. Again, your client should not be there.
Over the course of the site visit, the agent is not allowed to ask your client’s co-workers, customers, or staff members any questions.
While IRS agents are legally allowed to conduct site visits, that doesn’t mean you have to make it easy on them. Say your client is a doctor, and her patients and employees come in early in the morning. You can tell the auditor, “Sure, you’re welcome to come by, but it has to be before 7:30 a.m.” He might tell you he doesn’t work that early, and that’s fine. Later, when you try to find a time in the afternoon on a Friday, he might tell you that he only works half-days on Fridays, and after a while, he could just drop the request.
It’s possible that you may get a bulldog who says, “I’m coming in at this time, so be prepared.” In that case, it’s your job to step up and say, “That is very intrusive. My client is a doctor. You can come and visit the office while the office is closed, not while my client is conducting examinations. There may be a health issue, and the patients may become overly concerned. So instead of disrupting her business, we will schedule a time. The client will give me a key, and we’ll examine her office then.” No matter what, I never allow the site visit to take place when my client is there.