Handling an Audit for a Client

As Pennsylvania accountants and CPAs, you understand the audit process and you know what to expect in an audit. However, this is not the case for your clients. Individual taxpayers can feel overwhelmed or panicked when they get an audit notice in the mail from the IRS. Your small business clients may also be very concerned, as many of them will not have the staff to handle an audit. Whether your client is an individual or a company, they will need your help to navigate the audit process successfully.

The IRS occasionally chooses a taxpayer at random to audit, and that may be the case with your client. But most are triggered by a small discrepancy – a missing document or a computation error that the IRS was unable to resolve without additional information. Other reasons that might trigger an audit include:

• A major swing in income from one year to the next, or a history of volatile income

• Filing tax returns showing a financial loss multiple years in a row

• Having a business or a career that is significantly cash-based or heavily tipped

• Multiple errors in a return

• High income with multiple income streams, especially overseas

• Questionable or poorly supported deductions if itemizing 

Most audits are correspondence audits, handled entirely through the mail. Office audits can be held in your office or the IRS agent’s office, with or without the taxpayer present. Try to avoid field audits if at all possible. Some evidence suggests that auditors assess higher fees when they visit the home or business of the taxpayer. 

Train your client on what NOT to do. Your client must not be late in providing the requested information. Usually, they have 30 days from the date of the notice, unless you request an extension. Your client must provide only the information or documentation that is requested and no more. If interacting with the IRS agent (preferably at an office audit with you present), he or she should only answer the questions asked without elaborating or providing additional details. 

Instruct your client not to make small talk or try to make friends with the auditor; although the IRS agent may be a decent person when he (or she) is acting as an auditor, he is there to do a job, and if he hears anything that makes him suspect other tax issues, he could expand the audit. 

The average audit that goes smoothly can take three to six months from start to conclusion. It is best for your client to allow you to be the intermediary with the IRS, limiting their contact with the agent as much as possible. In most audits, the agent may never need to communicate directly with your client. 

Request a copy of the IRS notice and ensure that all of the information on it is correct. The notice will also list the primary reason for the audit and the documentation that the taxpayer needs to provide. Instruct your client to collect whatever information or supporting documentation is needed. If they do not have the documentation anymore, for instance, having discarded it or experienced a flood or fire that destroyed it, you may need to request an extension from the IRS and query the agent on what alternative documents or affidavits might fulfill the requirement. When you have the needed information, ensure that it is accurate, and submit it in an organized and clear manner. 

Allow a reasonable amount of time for the auditor to review the information you have submitted. If you do not hear back within 30 days, request an update. 

The IRS will issue its preliminary findings, which may include a proposed tax adjustment, penalties, or back taxes owed. If you consider them reasonable, discuss them with your client and help him or her arrange to make the necessary payments.

You have the right to appeal the decision if you think it is inaccurate or too harsh. You may ask for a reduction in fees if the cause of the audit was an honest mistake. You may also request to elevate the audit to the agent’s supervisor. If this does not satisfy you or your client, you may contact the Office of Appeals and provide documentation to dispute the adjustment.

The audit is considered closed when any taxes or fees are paid and/or the IRS office closes the case. Discuss with your client what business practices or financial decisions should be changed in the future to prevent another audit.

First, be clear on your fee structure. Make your client understand that you will need to receive the required documentation promptly. Explain that you will work to get everything to the IRS auditor in the required timeframe, but you need your client’s cooperation to do so. Delay would not only result in higher fees from you but possibly higher penalties from the IRS. 

Also be clear that, although you intend to provide professional and timely service, you also have other clients to serve and you will balance your work accordingly. Schedule regular communications with your client, such as a weekly email update, so your client will not be calling your office frequently, looking for updates and asking questions.

Through your PSTAP membership, you can network with other accountants who can share their experience working through audits with clients. PSTAP also offers courses and educational events throughout the year to fulfill your CPE credits and to help you strengthen your accounting skills in a wide variety of subject areas. Check out our list of courses.