THERE are three basic types of audits: correspondence, office, and field examinations. Correspondence audits are the simplest ones – W2s, 1099s and other items that can be easily resolved by mail. Office audits are more complicated and involve small businesses and individuals with difficult issues. The exams are conducted at IRS offices (not your office). Let’s now discuss Field Audits—the most complex of the three.
Field audits are more problematical and are conducted at your place of business. The audits are done by Revenue Agents who have many years of experience and hold advanced degrees. Many are CPAs and attorneys. Revenue Agents are the elite of the crop. They undergo intensive audit training to act as detectives looking for clues.
Field audits are different from correspondence and office audits and should be monitored closer because this type of audit is done right at your home or place of business—office, store, shop, or warehouse. You have to be more careful because you have employees and possibly customers in your premises. It gives the agent a chance to see and feel how you operate your business. With this in mind, let me give you 10 tips on how to handle field audits.
1. Plan the engagement with your representative—CPA, Enrolled Agent, or Attorney (don’t attempt to handle field audits yourself). It is far too complicated for you. You are no match for a Revenue Agent.
2. Designate a contact person to act as a liaison between you, your rep, and the auditor to assemble and regulate the flow of information with the IRS. The contact person should review all information before it is turned over to the IRS and be present during tours and interviews of employees. This setup will increase the likelihood that the information provided to the IRS is organized, complete, and focused.
3. The agent should deal only with this one person. The agent should not be allowed to chat with employees or request any document from anybody. Everything should be coursed through this contact person.
4. The agent should not be allowed to conduct a tour of the facilities without your CPA, enrolled agent, or lawyer. This should be done at the beginning of the audit with your rep.
5. Designate a room for the agent. Clean up all files beforehand. Keep the door closed so the agent cannot overhear business discussions. This room therefore should be as far as possible from financial areas.
6. If no room is available, place the agent far from sensitive areas. Tell workers not to discuss business issues within hearing distance of the agent. Instruct workers to remind each other of the agent’s presence.
7. If you think of placing the agent with the contact person for convenience and monitoring, don’t. This will create an atmosphere for talking. And when they talk, you could have problemas mas grande.
8. Provide only data that are requested. Not more.
9. The contact person should notify your rep if additional issues arise.
10. Make sure that the contact person understands his/her role: a contact person with no authority to argue issues or settle things with the agent.
And most important, tell employees to treat the agent with the courtesy and respect. No IRS jokes, por favor.
Remember:
• Field audits are more rigorous than correspondence or office audits.
• About 15% of all audits are field audits and about 90% result in an assessment. This is high.
• Revenue agents encourage you to talk, especially about yourself, your vacations, your lifestyle, listening for clues of undeclared income. Don’t fall for it.
• The Internal Revenue Manual requires the officer to tour your place of business or home.
• They look for time cards (worker reclassification audit), calendars on walls (3rd party verifications), or vending machines (unreported income). I always conduct a trial run before the tour to remove expensive works of art such as paintings or photos of cruises and lavish parties. I also observe workplaces where a vengeful employee can utter a remark to spark a fire.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].