Federal tax
The taxpayer advocate
Issue 2
April 18, 2019
By Miranda L. Aavatsmark, CPA
Perseverance. Confidence. Heart. Guts. Willpower. Tenacity. Dedication.
The attributes above come to mind when I think of great fighters. Some of the legends include Muhammad Ali, Rocky Marciano, Sugar Ray Leonard, Anderson Silva, George Foreman and Ronda Rousey, among many others. What they all have in common is a determination to fight and not give up.
CPAs symbolically step into the ring to advocate on behalf of taxpayers to the Internal Revenue Service. With gloves drawn, they begin throwing punches at the sound of the bell. But they shouldn’t lose steam too quickly because going toe to toe for many rounds is what it usually takes. Occasionally, a quick knock out will ensue and you’ll do a victory dance. However, champions are not generally born out of quick take downs or by one swiftly laid punch. The best contenders are the ones who persevere with an unmatched tenacity and strong will to win.
Whether CPAs are dealing with full-fledged examinations or a slew of notices, they should be prepared to persevere for the sake of their client. With that in mind, let’s look at what is involved with each in more detail.
Field Audits
Although less common nowadays, the most formal examination is a field audit. This type of audit is performed by an IRS “field auditor” on the taxpayer’s premises or in the CPA’s office. The taxpayer has the right to represent himself or herself or can choose a representative to meet with the audit on his/her behalf. CPAs generally recommend that the taxpayer not represent themselves or communicate with the auditor directly. Many taxpayers have the misconception that the burden of proof is the job of the government, much like the rules in criminal law. On the contrary, when it comes tax laws, the burden of proof is on the taxpayer’s shoulders. The taxpayer must prove their expenses, for example, are not only ordinary and necessary, but also that they actually paid them.
When a taxpayer receives a letter from the IRS indicating they are being audited, they should immediately forward the letter to their CPA. Their CPA should execute a Form 2848, Power of Attorney, which allows them to speak to the IRS auditor on the taxpayer’s behalf. CPAs will then contact the auditor and find out more information regarding the audit. Even though there are random audits, many times a taxpayer’s return is selected because of a “red flag.” CPAs should ask the auditor what they are looking for, what may have caused the audit, and what information they need to perform the audit.
As the CPA is working with the taxpayer to gather documents, they should consider the following:
All information is well documented and supports the taxpayer’s position. The information should be laid out neatly and explicitly for the auditor. When the meeting with the auditor takes place, everything should be in perfect order so that the auditor does not spend excess time weeding through receipts, invoices, and bank statements. Doing so will enable the auditor to reach a conclusion much faster, thus saving the taxpayer time and fees. This may also satisfy the auditor so that the opening of other tax years is deemed unnecessary. Many times, if an auditor finds an issue in one year, they will open other tax years and audit those as well.
The CPA and taxpayer believe that a position taken by the taxpayer is correct, however documentation and substantiation is either missing or incomplete. In this case, it is best to try to reconstruct documentation as much as possible. For example, if the taxpayer claimed mileage expense but does not have a written log, they will need to try to recreate it or use some other form of proof, such as a calendar. Depending on the auditor, this approach may satisfy them enough to allow the entire deduction or they may allow only a partial deduction. Many times, auditors will allow a so called “reasonable” amount as a deduction. Either way, be prepared to argue your case and explain why the deduction is valid.
The documentation is such that the CPA and taxpayer conclude that certain expenses or positions are not valid or were taken erroneously. Coming clean to the auditor right off the bat is often the best approach. Many times, these mistakes or errors are inadvertent and not intentional or malicious. Most auditors are understanding and will work with the taxpayer to rectify the mistake and often will waive any penalties that would normally be assessed. The CPA should certainly request any penalties to be abated and explain if there is reasonable cause for the error. Additionally, it may be wise for the CPA and taxpayer to review whether the issue affected other tax years and if so, offer that information to the auditor. Doing so may save time and fees as the auditor would likely have opened those other years for audit anyway.
Before the audit concludes and the auditor heads back to their office, the CPA will want to verify what determination the auditor has made or intends to make. If their conclusion differs from that of the CPA and taxpayer, then this is the time to make any final arguments to try to shift the results. Once the auditor leaves and makes a determination, the battle to make any subsequent changes becomes increasingly much more difficult. If necessary, the CPA may need to contact the auditor’s supervisor or make their way up the chain of command to argue the case.
Correspondence audits
Correspondence audits are similar to field audits except that the auditor does not come to the taxpayer’s premises. Generally, a correspondence audit deals with one or more specific items on the taxpayer’s tax return. The auditor will request documentation and support for the items to be mailed or faxed back to them. As with field audits, the same techniques above can be used, however, since the auditor is not present in person, the CPA must be much more explicit when communicating the information and findings. A letter should be sent with the documentation explaining the information in detail and conclusions that the taxpayer and CPA believe should be made. If necessary, a phone call to the auditor may be effective in communicating the information. A follow up letter should still be sent outlining the phone conversation and information that was discussed. In addition, Form 2848, Power of Attorney should be signed by the taxpayer allowing the CPA to communicate with the IRS, even if over the phone or through the mail.
Letters and Notices
Finally, letters and notices from the IRS often deliver a sucker punch to taxpayer and CPAs. Sometimes out of nowhere, notices and letters are sent to taxpayers containing erroneous information, miscalculated taxes due, and penalties assessed for unfounded reasons. Battling this kind of correspondence is where the rubber meets the road and tests the wills of even the most seasoned CPA. The CPA can call the IRS, wait on hold for an extended amount of time, after which be transferred multiple times and then, hopefully, talk to a person who understands the issue, and can resolve it. Then cross their fingers that further correspondence agrees with the resolution.
The CPA can also write a letter explaining why the notice is incorrect, with documentation included. However, it will take the IRS weeks or months to process the letter and resolve the issue. In the meantime, the taxpayer will probably continue to receive letters, potentially threatening to levy their assets. This is very frustrating for the taxpayer and CPA alike. Even if the CPA is able to have a collection hold placed on the taxpayer’s account while the information is being processed, the hold may still lapse before the issue is resolved. Although this can be discouraging, CPAs should reassure their clients that the issues will eventually be worked out, just not very quickly.
Conclusion
Regardless of the situation or issues that taxpayers find themselves in with the IRS, hiring a professional to handle it for them is most often the best option. CPAs deal with similar issues frequently in their practice and know how to obtain the best outcome or bring resolution. Much like the fighters I mentioned above, and my personal favorite, Rocky Balboa, CPAs train all year, in all seasons, and in all climates. CPAs put in the hard work and fight on behalf of their client, because it’s their nature to advocate and win. “See, we’re born with this killer instinct that you can’t just turn off and on like some radio,” said Apollo Creed in Rocky IV, as he explained to Balboa why fighters welcome challenges. CPAs enjoy challenges too, and although they generally walk away physically unscathed, never underestimate how hard they will fight to win.
About the author: Miranda L. Aavatsmark, CPA, is a tax manager of Blue & Co., LLC in Lexington. She can be reached at maavatsmark@blueandco.com.