The last few weeks I’ve been sharing questions that you can ask your tax preparer to determine whether or not your tax preparer is right for you.
Does reading this question make you wonder if your tax preparer is doing everything possible to reduce your audit risk?
Many people have a fear of being audited. Here are some common concerns I hear:
They are worried their tax return has errors They are concerned about being able to provide the required information They fear the cost. Most people focus on the cost of taxes, penalties and interest that could be owed, but what about the cost of hiring a tax professional to handle the audit? Professional fees incurred during an average audit are 10 to 15 times the fee to prepare your tax return!
The IRS Is Stepping Up Its Efforts Now, there are even more reasons to add to the list. The IRS is stepping up its efforts to increase overall compliance.
The IRS is performing 3 times as many audits as they did just a few years ago Plus, due to the current economy, the IRS is expected to continue to increase the number of audits performed.
The IRS recently announced its commitment to examine 6,000 business returns. The IRS will focus on payroll tax and employment issues, including worker classification (like independent contractors), officer’s compensation, fringe benefits and non-filers.
The IRS is also stepping up its efforts with respect to tax return preparer compliance. The IRS is sending letters and visiting thousands of tax return preparers to, among other things, discuss common errors.
By the way, one of the common errors being discussed is reviewing pertinent books and records of the taxpayer. If you read my report last week, this is one the questions I suggested a tax return preparer be asked!
With these increased efforts, audit risk is a must to discuss with your tax preparer.
Here are a few things to look for to determine if your tax preparer is taking the proper steps to minimize your audit risk.
Does your tax preparer ask you questions? Questions indicate that your tax preparer is trying to verify information and gain a proper understanding so your tax return is filed accurately. One of the reasons returns are audited is because information is wrong.
Does your tax preparer have the expertise you need? Having a tax preparer who knows the ins and outs of your industry makes a difference, especially when it comes to filing an accurate tax return.
For example, some industries must make certain tax elections in order to properly claim tax benefits. A tax preparer with expertise in this type of industry will know the rules, and will know the questions to ask you to make sure the election is properly filed.
Even the IRS is concerned about tax preparers knowing the rules. Starting this year, all tax return preparers must register with the IRS, and in some cases, some must even pass a test.
Does your tax preparer discuss filing strategies with you? Often times when I file a tax return, there are certain things that can be done to minimize audit risk.
For example, let’s say there is a larger than usual deduction to claim. There are some situations in which a large deduction can draw scrutiny from the IRS. This is an example of a situation where filing strategy can help minimize audit risk.
First, where the deduction is claimed on the tax return can impact audit risk. In this situation, I would ask the taxpayer questions about the deduction to get a better understanding so I could then determine which rules apply. In many cases, more than one set of rules applies and that can provide an opportunity to reduce audit risk.
Second, voluntarily attaching documentation to explain the larger than usual deduction can impact audit risk. If the return is flagged because of the large deduction, an agent will review it and the additional documentation may resolve the issue with no further action taken.
Does your tax preparer offer an audit defense plan? An audit defense plan covers professional fees incurred in connection with an income tax audit, examination, review, investigation or verification of any item(s) on your federal or state income tax forms.
While an audit defense plan does not insure you will not be audited, it does insure that the professional fees to handle a federal or state income tax audit of a tax return are covered. The audit defense plan also includes responding to federal or state notices received.
When a tax preparer offers an audit defense plan, it indicates the tax preparer is thinking about audit risk and has an incentive to minimize it.