What NOT to Do If You Get an IRS Audit Notice

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Let me start off by saying that we aren’t the right tax firm for everybody. We work best with business owners who want to grow their business or already have the success they want. If they want change, we work best with clients who are ready to take consistent action to get that change. That means both more income and less tax.

And for some people, they don’t like us telling them what they need to do. We also ask a lot of questions when we prepare your tax return. That’s because we’re looking for all the deductions we can and we want to make sure you understand what kind of record-keeping is required if you want to take a deduction. Plus, we want to discuss where the red flags are before we file the return.

We had a client leave us a couple of years ago. She said she’d never had a CPA ask her so many questions and she wanted us to just do the return, and not bother her. She left pleasantly and I thought that was the end. I think it was the best for all of us.

Then I got an email from her two weekends ago. It seemed there was a problem with her 2010 return – the last one we had prepared. She forwarded an IRS notice she had gotten at the beginning of February requesting more information and she sent us the final notice she’d gotten at the end of April, telling her she had 90 days to petition Tax Court.

There was no other information between the two notices. So, after a lot of back and forth, we got some preliminary answers:

(1) She had doubled up on the interest reported.
(2) She said the IRS was right and she was wrong.
(3) She wanted us to help her now. Penalties and interest on this totaled almost $2,000 and the tax due was $9,000.

It took a week of back and forth and some confusing information before we discovered that she claimed to have called the IRS, but they had no record and no back-up for the deductions. She had both Schedule A interest (mortgage on principal residence) and Schedule E interest (mortgage on a rental) reported. But the IRS couldn’t tell which was which. She said it was the principal residence that was overstated, but actually it was the rental property. She didn’t understand the significance of the difference and so that’s where it was at.

Finally, one of our accountants was able to decipher what really happened and realized we still had a very narrow window to amend the return. If we could do that before the case was finalized (which was close) we could get by with just an amendment and she wouldn’t have to hire a tax attorney for Tax Court.

The return is being amended right now, as I write this. It will mean she owes a little bit of tax, probably no penalty and tiny bit of interest.

I know that this was very stressful for her and it was definitely stressful for us for a week while we tried to find out what had happened. Unfortunately, she had to answer a lot of our questions and the IRS’s questions still, but thankfully it will pay off in a big reduction of tax.

There are a lot of lessons I took away from this incident:

(1) If you get an audit notice, don’t call the IRS, call your CPA.
(2) If you get an audit notice, don’t ignore it. It just gets worse as time goes on.
(3) If your CPA asks you a question, be happy they are paying attention to you. It really is in your best interest, even if it feels annoying at the time.
(4) For me: Make sure our clients understand how we work upfront. We need to know about you and your business. The more we know, the more we can help. If a client isn’t okay with that, it’s not a good fit.

If you want a proactive CPA, one who asks you more questions than you ask him or her, then please contact us at 888-592-4769. We’d love to work with you.

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