Assisting with
Tax Audits
Editor:
Steven F. Holub, CPA
Aidman, Piser & Co.
Tampa, FL
Jeffrey A. Porter, CPA
Porter & Associates, CPAs
Huntington, WV
Author:
Edward Mendlowitz, CPA/PFS, ABV
Shareholder
WithumSmith+Brown
New Brunswick, NJ
Mr. Holub
is a former chair of the AICPA Tax Division’s Tax Practice Management
Committee. Mr. Porter is the chair of the AICPA Tax Division’s Tax Practice
Improvement
Committee. This column is adapted from Mendlowitz, Managing Your Tax Season (AICPA, 2006).
Tax audits
provide an opportunity for CPA firms to generate extra revenue. Some of the
various types of audits and related activities are:
1. Office
audits.
2. Field
examinations.
3. Audits
of pension plans and nonprofit organizations.
4. Preparation
of appeals and protests.
5. Tax
Court petitions. (CPAs can be admitted to practice before the U.S. Tax Court if
they show a need to be admitted and pass a biannual test. Being admitted to
practice will enable one to file Tax Court petitions, which offer at least two
more avenues for negotiating and settling a case. The tests are given once
every other year, usually in September, October or November, in Washington, DC.
There are fewer than 200 nonattorneys so admitted.
For information about the date and location of the next examination, visit
www.USTaxCourt.gov, and click on “Forms” and “Admission Information for
Non-Attorneys.” The Tax Court can also be reached at (202) 606-8736 or 400 2nd Street, NW, Washington, DC 20217. Tax
professionals can also purchase copies of previous examinations and the Tax
Court’s rules of procedure.)
6. Criminal
tax cases, including liaison with counsel.
7. State
tax audits and appeals, including sales, income and personal property taxes and
penalties.
8. Correspondence
audits.
Preparing for an Audit
A
CPA firm’s tax department usually handles audits, not the preparer or
engagement partner. Generally, a person specializing in tax audits handles
them. In assisting with a tax audit, a tax adviser must:
-
Prepare adequately for the audit.
The amount of preparation time is inversely proportional to the time spent with
the agent.
-
Be skilled in negotiating strategies.
-
Know when to be quiet and just listen.
The
tax adviser needs to be able to handle sensitive matters, including underreporting
of income and other acts, both civil and criminal, and to know when to insist
that something be reported, as well as how to walk away from the engagement.
CPAs must always be cognizant that they risk their licenses, livelihoods and
liberty when they engage in illegal actions or look away from a client so
engaged. They must always be aware of their legal, ethical and moral
responsibilities. CPAs should do nothing that they cannot clearly defend and
explain should they be on a witness stand; they should assume that they might
be in that position for everything they do.
There
are two ways to be engaged by clients to represent them during an audit. The
first method is when the client receives a notice and contacts the firm for
help. The exhibit below is a sample tax audit engagement letter that can be
used for a client’s tax examination. Although not discussed in this column,
some CPA firms are offering an “audit insurance or protection plan,” under
which their fee is covered by an initial payment made under the plan. This is
generally offered to low-risk clients for a nominal fee.
Summary
CPA
firms that can assist clients undergoing examinations can add to their bottom
line. They should offer such help if the opportunity arises.
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Exhibit:
Sample tax audit engagement letter
[Date]
[Client
name]
[Client
address]
Dear [Client
name]:
This letter will
confirm the arrangements for our representation with respect to the State of
New York’s examination of your New York State Resident Income Tax return for
the years 200X and 200Y.
Tax
Audit Services
We will represent you before the State of
New York during this examination, unless the arrangement is terminated in
writing by either party. Further, in the event we cannot resolve all of the
issues at the initial level, we will be available to appeal any proposed
deficiencies and/or penalties at the Appeals Division of the State of New York,
although that appeal is not part of this engagement.
We will not audit, or otherwise verify, any
information provided by you for presentation to the State of New York during
the course of the examination, unless we deem it necessary or you specifically
request us to do so in writing. However, we may ask you for further
clarification and expect you to provide that clarification promptly and
candidly.
Our communications are “confidential,” not
“privileged”; i.e., they may not be disclosed unless you approve under most circumstances. On the other hand,
privileged communications are not permitted to be disclosed, even in court.
Although there is now a limited CPA-client privilege in Federal matters, it
does not apply to matters prior to the passage of the Internal Revenue Service
Restructuring and Reform Act of 1998 and does not apply to state matters. Accordingly,
if we are served by a properly issued administrative summons compelling us to
testify in court proceedings, even our confidential communications could be
subject to disclosure.
The tax agencies have recently begun
emphasizing a number of procedures during examinations to ascertain that
taxpayers have complied with their tax filing responsibilities. These
procedures have led to a growing number of requests by examining agents to
interview the taxpayer directly. However, you do have a statutory right to be
represented, and not to meet with the
examining agent (unless you are served with an enforceable administrative
summons). It is in your best interest to refer any questions or other contact
from the agent to us without discussing the case with the agent. By signing
this engagement letter, you acknowledge that any direct contact by the State of
New York will be promptly referred to us as your authorized representative. It
is hereby acknowledged that if you choose to appear before or discuss this case
with the agent against our advice, you do so at your own risk.
Fees
Fees and expenses are due and payable on
presentation of our invoice to you. Our fee for representing you will be based
on our time, billed at our rate of $xxx per hour for partners and $xx to $xxx
per hour for staff, plus out-of-pocket expenses. We anticipate that most of the
services involved in the examination will be performed by a partner. In order
to proceed, we require a retainer in the amount of $x,xxx.
If we have not received payment in
accordance with the stated terms, we reserve the right to terminate this
engagement with no further notice.
Conclusion
If this letter reflects your understanding
of the terms of our engagement, please sign below and return one copy to us
with the retainer amount. We want to express our appreciation for this
opportunity to serve you.
Very truly
yours,
[Partner’s signature]
Accepted by:
__________________________ __________
Client’s signature
Date
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