How to Handle Due Diligence Audits
Win IRS Audits, IRS Tax Attorney (Naperville, IL)
Tax return preparers, if you are facing an IRS due diligence audit, let me give you some guidance. You may have even heard stories, advice, or other information from YouTube, from other tax return preparers, or even tax resolution professionals.
A lot of this information won’t help you during an IRS due diligence audit. Under Tax Code Section 6695(g), the IRS is looking for three things included in your customer files to support your customers’ dependents, filing status, credits allowed, and Schedule C business net income.
- Supporting documentation for those items
- Reasonable questions and observations made to/with your customers.
- Their answers that supported your knowledge requirement
The Purpose: The government needs to know all the facts and circumstances related to your level of knowledge as described under Treasury Regulation Section 1.6695-2.
How does this help you?
When preparing for your audit, pay special attention to your handwritten notes from your interview with your customer, taken at the time you prepared the tax return.
As the IRS reviews a sample of 25 of your customers, the government wants to see that your handwritten notes and other notations within the client’s file support the positions taken on the tax return. In other words, are you able to demonstrate your knowledge that:
- The filing status was appropriate,
- The exemptions shown on the tax return were appropriate, and
- That any refundable credits were properly calculated based on your knowledge of that customer’s overall situation.
About Schedule C Income
One additional thing to know about Schedule C income or loss shown on the tax return. The IRS wants to see that you asked enough questions about your customer’s income and expenses, how they were calculated, and how they are supported.
It is not necessary for you to have audited your customer’s business profit and loss calculations. However, the government does want to know and wants to see that you asked the questions. Be prepared to show that you were knowledgeable of how the income, as well as the expenses on Schedule C, were calculated.
Remember, if your tax office processes lots of returns with refunds, then you are the gatekeepers of free governmental grants. Put another way. The IRS expects you to review the information submitted for these refundable credits (EIC, etc.) with scrutiny. The same care that a bank would apply to a loan application is nearly the amount of care you expect when filing these tax returns with large tax refunds.
SEE RELATED VIDEO: 7 Secrets About Tax Refunds
If you don’t agree with your audit result, then you have a small amount of time to Appeal the result. If you need more information, contact a tax defense attorney, like at Tax Law Offices.