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IRS AUDITS
The IRS audit process and procedures is not a deep dark secret. IRS rules are very strict, applying to you and them. Congress gave us a taxpayer Bill of Rights. The IRS sends a copy of your rights with each letter. Read and exercise them. The best advice I can give you is to hire a trained professional to represent you for an audit with the IRS. Review the following brief so that you can familiarize yourself with what you should know before you proceed. Contact us if you need assistance.
What you need to know:
CPA
EA
Michigan
PRIVILEDGE
DIF
ATG's (Audit Techhique Guides)
Substantiation
Prima Facie Evidence
C.P.A. (Certified Public Accountant)
In Michigan, to become a CPA, you must have approximately 5 years of college education in accounting, pass the Uniform CPA exam, work under the supervision of a practicing CPA at a licensed CPA firm for 2 years, and maintain minimum annual continuing professional education.
E.A. (Enrolled Agent)
An Enrolled Agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
Michigan Standards
Currently, in Michigan, anyone can hold themselves out as an "accountant" or "tax preparer" without being either a CPA or EA. Only Texas prohibits the use of the designations "accountant" and "auditor" by a person not certified as a Texas CPA.
PRIVILEDGE
The IRS Restructuring and Reform Act of 1998 allow federally authorized practitioners (those bound by the Department of Treasury’s Circular 230 regulations) a limited client privilege. This privilege allows confidentiality between the taxpayer and the Enrolled Agent under certain conditions. The privilege applies to situations in which the taxpayer is being represented in cases involving audits and collection matters. It is not applicable to the preparation and filing of a tax return. This privilege does not apply to state tax matters, although a number of states have an accountant-client privilege.
DIF
Your return may have been selected because of how it compares to other returns When your tax return is filed, IRS computers compare it against the national Discriminate Information Function (DIF) system average. The IRS calculates the DIF score by using a closely-guarded formula. Tax returns with the highest DIF scores are scrutinized by IRS tax audit experts who decide which tax returns provide the best chance for collecting additional taxes, interest, and tax penalties.
ATG's (Audit Techhique Guides)
The IRS has developed techniques for auditing returns called ATG's (Audit Techhique Guides) The Audit Techniques Guides (ATGs) focus on developing highly trained examiners for a particular market segment. These Guides contain examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations
Statute of Limitations
is a statute in a common law legal system that sets forth the maximum time after an event that legal proceedings based on that event may be initiated.
Substantiation
Substantiation Rules (IRS code sec 62 pp. 3591)
Generally, a taxpayer must be able to substantiate claimed expenses by adequate records or sufficient evidence corroborating the taxpayer’s own written or oral statements as to 1) amount, 2) time and place, 3) business purpose, and 4) business relationship of the entertained person(s).
Adequate Records and Sufficient Evidence (IRS pp. 3593)
To prove expenses for entertainment, travel, gifts, and listed property by “adequate record”, a detailed record must be kept, such as a diary, an account book or some other statement of expense. A taxpayer, however, does not have to record information in an account book, etc. that duplicates information reflected on a receipt so long as the two forms of evidence complement each other. In addition to the diary or account book, the taxpayer must have documentary evidence (a receipt) for any lodging while traveling away from home and for any other expenditure over $75 or more.
Time of recording
Expenses should be recorded at or near the time when paid, when the taxpayer has full present knowledge of each element of the expenditure.
Substantiation of business purpose
A written statement of business purpose should be included in the diary or expense account record. But, when the business purpose is obvious from the surrounding facts and circumstances, such as sales representative’s calling on customers on an established sales route, a written statement is not necessary.
Prima Facie Evidence
It is used in modern legal English to signify that on first examination, a matter appears to be self-evident from the facts. In common law jurisdictions, prima facie denotes evidence which – unless rebutted – would be sufficient to prove a particular proposition or fact.
The IRS letter will either have a date to meet the auditor or a phone number to call the auditor and set an appointment. The later is most common. If you have a business the auditor will need to view your business area or store at least once. Even if you have an accountant or tax attorney, the auditor has the right to speak with you initially. The auditor will exercise that right.
Hire a professional.
Your paperwork needs to be prepared properly prior to visiting the auditor. It is common for an audit to take place two years after the return is filed and you will need to become familiar with your documents from the year in question. It is also common for the tax year on either side of the audited return to face review.
Let a trained professional review your bank statements; compare deposits against reported income. Prepare an explanation if your deposits are greater than reported income. Loan proceeds and transfer of funds from one account to another are common explanations. A professional will guide you through the process of gathering supporting documents that will enable you to withstand an audit.
Contact us for additional information
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