Why Experience Matters Series - Part 3
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.
If the examiner is asserting that income was understated due to an omission of some income, an experienced representative needs to ascertain whether this additional income is in fact an error of the taxpayer or faulty information received by the IRS. For example, a few months ago, a taxpayer received a letter for a correspondence exam proposing additional income. The examiner proposed additional income because the IRS had received a report of a timber sale on a Form 1099-MISC. Thinking the taxpayer had not reported some non-employee income, the examiner proposed additional income of several thousand dollars. However, the taxpayer came to me, and after talking with the prospective client and reviewing the records, I determined that the timber purchaser had incorrectly reported the timber sale to the IRS on a Form 1099-MISC instead of correctly reporting the purchase on a Form 1099-S. As my client’s response, I explained the error to the examiner in a letter and included proof showing a timber sale in the same amount as the erroneous Form 1099-MISC. I made it easy for the examiner to see what happened without investing a lot of time in the case. That resulted in a no-change audit report and saved my client thousands of dollars.
A client also needs be honest with the representative so the representative can effectively represent the taxpayer. As a Revenue Agent, I often examined business income by looking at the bank account. Too many times I found unreported income because a taxpayer did not tell the accountant about all the business’ income. In one case, the taxpayer did not tell the CPA/representative that he had been selling accounts receivable and using the proceeds to pay on loans. The CPA totaled all the business deposits to compute income; however, the CPA did not know about the receivables sold. Consequently, the CPA was quite surprised when I pointed out the unreported income from the sale of receivables. Clients need to be honest with their CPAs.
Read Part 1 - Experience Intro
Read Part 2 - Examination Letters
Part 3 - Examinations of Income
Read Part 4 - Examinations of Expense
Read Part 5 - Collection Letters