If you are going to be audited by the IRS, you might think it is simply a process of pulling some bank statements and invoices and it is a done deal. It does not quite work that way. While you can be applauded for trying to take matters into your own hands, do not get overly-confident.
Even the simplest IRS audits can get very complicated very quickly, and if you are not 100 percent certain of what you are doing, you could wind up in a more precarious situation than you already are. In other words, your business is going to get hit with a debt to the IRS that will include penalties and interest.
At my firm, Brotman Law, many of our small business clients come to us because they have tried to defend an IRS audit on their own and fell flat. A lot of people balk at the idea of paying for a tax professional, be it a tax attorney or CPA, but in the long run, it is a worthwhile investment.
Odds are likely that you could end up paying more to the IRS than you would to an attorney or accountant. We understand the tax nuances of small businesses and have helped many entrepreneurs out of difficult IRS situations.
In this chapter, we will discuss what can go wrong if you try to defend an audit on your own versus the benefits of working with a seasoned tax professional. We will also talk about the services Brotman Law offers in the area of audit defense and what you can expect to pay.
David vs. Goliath All Over Again
Should you represent yourself in an IRS audit? It depends, but not usually. First of all, the mistake that a lot of taxpayers make is they think that they can handle the audit because they think either, A) they are smarter than the auditor or B) the errors on the return are not really that severe.
The problem with that is, a taxpayer who goes into a situation with an auditor — unless that taxpayer is a tax attorney or a CPA — is probably not going to have the same level of knowledge about how audits work as the auditor.
Even if the taxpayer is familiar with the law, they are generally not familiar with the way that audits work. The risk is that even if the tax loss is minimal, the taxpayer could potentially put themselves into a damaging situation.
For example, if you are not really used to changing tires and you get a flat tire on the road, yes, you could change the tire yourself. There is the possibility that you will do a reasonably good job in changing the tire and then everything will be okay but there is also the propensity that you might make a mistake.
If you believe that there is a mistake on your return and if that mistake is significant, meaning you owe $5,000 or more in back taxes to the government, then you may want to consider hiring a representative to help you. Once you get into a situation where there is an audit and adjustments are being made, then the penalty conversation comes into play. The more adjustments that are made on the return, the more it increases the likelihood that the auditor is going to penalize the taxpayer.
Due to the circumstances in a lot of the audits, we are not able to make much of an adjustment in terms of the tax due, but where our firm makes a substantial difference is on the penalty portion. Even in situations where we have taxpayers who under-report millions of dollars in income, oftentimes, we have been able to explain that away or to negate criminal penalties or things.
That is a fairly extreme example but generally speaking in an audit, you are at a strategic advantage by hiring a representative who knows what they are doing because we know what to look for. We can help you through the audit process. We can help you minimize the pain that you are going to go through because we know what the auditor will and will not accept.
Save Time and Money
There are monetary savings to working with a representative. There are also time savings because we make the audit process much more efficient. We will move it along quickly because we know the auditors. We know how they think. We know how their interactions are with their manager. We know the process like the back of our hand because we do this all the time.
A tax attorney will look at this from a cost-benefit perspective. I will not have a taxpayer hire our firm as a representative unless we think that there is value to be provided.
There is no sense in giving us a retainer and us not being able to do anything for you. There needs to be clear value in what we are providing.
If the auditors are coming to your house or coming to your business, you definitely want a representative. A good representative is worth his or her salt in a variety of situations. I would discourage taxpayers generally from representing themselves in audits unless the issue is very simple and you think it can be resolved through a quick explanation.
Can I Just Use My CPA?
We do not recommend that you use the CPA who prepared your taxes to represent you in an audit. Why? Your CPA may be the best CPA in the world and this conversation is not to suggest anything negative about CPAs whom we work with all the time. CPAs generally are not good in audits because they do not defend a lot of them.
From a CPA perspective, the CPA is compliance-based and focused most of the time on preparing returns and preparing them accurately.
The reality of the situation is if there are errors on the tax return the CPA prepared, then there is a natural conflict of interest, because either the CPA either did not do their job right and the tax return was prepared incorrectly, or you did not give the CPA enough good information to begin with.
The problem is not having your CPA represent you; it is that there is a natural conflict of interest between the person who prepared the return and the taxpayer. When you are sending your CPA into a situation like an audit and there is an error on the return, the auditor is going to turn their questions to the CPA. Most people have a hard time throwing themselves under the bus in the middle of an audit.
In certain situations, if the CPA’s error is severe enough, there are actually preparer penalties that they can get hit with for preparing inaccurate returns. Because of that conflict of interest and because of the fact that CPAs do not really defend audits, I do not recommend sending your tax preparer in to represent you.
I think it is best always to have a neutral third-party representative who can save face, either with the taxpayer or the CPA and it makes the process a lot better. From a strategic perspective, it is much better to use an objective representative versus somebody who has an interest in the return in one way or the other.