Audit Preparation – Field (On-Site) Audit

    Published: 06-16-2009
    Views: 9,789
    Laurence Lawler, National Director of the American Society of Tax Problem Solvers discusses the field (on-site) audit.

    Lawrence Lawler: Hi! I am Lawrence Lawler, National Director of the American Society of Tax Problem Solvers. This series is on how to prepare for an IRS audit. We are going to discuss the field audit recommendations at this time. By field audit, we mean that it's going to be on premises at either your home, your business, or perhaps and recommended at your representative's place of business.

    If you engage to a CPA, an attorney or an enrolled agent to represent you, you may very well want to schedule the audit at their place of business. There is a big difference in having the auditor on premises at your home or in your business as oppose to your representative's location.

    The field audit being the most invasive one because of the fact that the auditor can observe and question you as he goes along and things may pop up that they never would have thought of if they weren't on premises to ask you questions about your business or they can even just see your lifestyle in your home.

    Even though IRS is supposed to be prohibited from doing lifestyle type audits where they start examining what brand of shoes people wear and how they spend their money, that still doesn't mean that they won't notice how you live and what your living conditions are and see if it seems to them that it fits within the income that you are reporting in your tax return.

    They also, if you are in your place of business, can overhear employee conversations, they can ask employees questions. Your employees, if they are in that situation, should always be instructed not to discuss anything with them to refer the question to the representative or to the taxpayer themselves.

    Another area is that they could ask for related party context meaning that they could contact your customers, they could contact your suppliers, they could contact anyone that is related to your business in any way. That could be your professionals; your attorney, your accountant and so on.

    There's one, by the way, point that you should be well aware of. If the auditor is in fact asking for a lot of copies, you should first of all never let them have access to the copy or themselves. You have one of your staff people or yourself make the copies and always make two sets; one to keep and one to give to the auditor.

    That way you always know how much information they've taken with them and what they've made copies of and the reason I am cautioning you about the number of copies here is that if an auditor was trying to build perhaps a fraud case, they need a lot of documentation to do that.

    When a case goes to the level of being fraud, the burden of proof changes. Instead of the taxpayer having to prove what their deductions were and that they are legitimate, the burden of proof changes to where the IRS has got to prove that the taxpayer has done something wrong.

    That sounds very beneficial to you but remember that means they are looking at fraud which is a criminal case so it's a very serious matter. Another indication by the way might be the fact that they disappear for a long period of time and you have no idea where they went and why they haven't come back to complete the audit.

    It could be that they felt like they have discovered fraud, they have turned it into the Criminal Investigation Division and the Criminal Investigation Division has told them, don't go back, don't go back on premises, don't discuss anything with the taxpayer because we don't want you to step on our case if we are going to go and try to make a criminal case out of this.

    So those could be bad signs if you see those things happening. Now, you've got a pretty good idea as some of the cautions and the thoughts that you should have as far as your mindset goes when you are going into a field audit, there you have that situation foisted upon you if you will. You are going to have to deal with it; there is no way out of it.

    The only way you would ever get audit cancelled is if you've been audited for a few years consecutively with no audit changes. Other than that, when the IRS calls and they tell you they want to audit, they are going to be able to do the audit. They have the legal right to do it and they are going to stick with that right.

    So as I mentioned before, you really do want to have professional representation in many of these instances and that will be the subject of our next item.