Why Experience Matters Series - Part 4
The examination process is basically two-fold. First, you want a representative who understands that if the issue is income, the IRS needs to provide substantiation that income should be changed. Second, if the issue is an expense, the taxpayer’s burden is to substantiate any expense. Whether an exam letter concerns income or expense, I can help.
When an examiner is examining an expense, an experienced representative needs to be able to communicate to a taxpayer the issue the examiner is questioning and what records the taxpayer needs to provide to substantiate the expense at issue. Then the representative needs to provide the taxpayer records with an explanation directly addressing the point the examiner is questioning.
Sometimes the context can be more important than records. Early in my career as a Revenue Agent, when I asked questions about certain expenses for one business, the representative provided several large boxes with loose records and nothing else. I looked at the boxes and found all kinds of records mixed together. The representative told me whatever I needed should be in the boxes. That representative made my job easy. Since it was the taxpayer’s job to substantiate expenses and it was unclear to me as an examiner what the records represented, I disallowed each item at issue in that exam for lack of substantiation. The taxpayer and representative ultimately organized and provided the records requested; however, the business paid higher fees than necessary to its representative.
An experienced preparer uses good records and context to communicate with an examiner for expenses at issue. In one instance for a client under audit whose return I did not prepare, an examiner examined travel expenses among the return items at issue. The examiner pointed out that per diem for travel expenses had been computed incorrectly and disallowed the entire amount claimed. In reviewing the records, I noted that the preparer in fact did use an incorrect method of computing per diem for travel expenses. Per diem for travel expenses is based on the computation of travel expenses for federal employees, and being a retired Revenue Agent, I was quite familiar with the computations. Therefore, I prepared a spreadsheet of per diem for travel by the taxpayer based on actual locations and keyed to the travel log and travel dates. The corrected, recomputed travel expense turned out to be more accurate and a larger amount than what had been reported initially on the return by the preparer.
When I was a Revenue Agent for the IRS, I simply wanted a taxpayer and representative to communicate with me, make it easy to see what had happened with whatever was being audited, and let me finish without investing a lot of time. When people get unnecessarily adversarial and time on a case gets high, that is when examiners can dig in their heels and cause representation fees to increase. This reaction is human nature and can be avoided with an experienced representative.
Read Part 1 - Experience Intro
Read Part 2 - Examination Letters
Read Part 3 - Examinations of Income
Part 4 - Examinations of Expense
Read Part 5 - Collection Letters