This is Work Around #2: How to Deal with IRS Audits

I have been dealing with IRS Audits since 1966. It was George Peterson, CPA, of La Jolla, California who gave me my first lessons on how to handle IRS Audits.  George was the Senior Partner and founder of George A. Peterson & Co in San Diego’s La Jolla Beach Cove.

It was wonderful for an Accounting Major to land a position with the famous Navy Captain’s firm. I’ve worked with several excellent CPAs in my career which is still going after 53 years. It was George Peterson, James Smathers, and Dan Hendrickson who mentored me in San Diego.

Their continuing influence was to be PROFESSIONAL with the Internal Revenue Service. That meant, and still means, that a CPA must work and tell the truth and be careful when you deal with the most powerful and most secret agency of the U S Government.

Why do I say that the IRS is such a BIG DEAL?

First, they collect about 93% of the USA’s Income! That is Power.

Second, the IRS keeps all of their “Top Secrets” from other Americans so they can continue to bring in the loot. They get away with this crap because our Government needs the money and they think that secrecy is the best way to do it.

We should expect the CIA and the Pentagon to keep their work secret. It is their job to be stealthy. The IRS’s job is to fund America and Pay Off the National Debt. The secrecy and outdated methods doom the IRS to abject failure if we are to believe the IRS’s own estimated numbers.

The Service claims that they don’t collect 1.25 Billion Dollars EVERY DAY that they should collect! They call it the “TAX GAP”. If they had done the job as expected since 1965 we would have ZERO National Debt.

Sorry, I got off the main point. Yes, it is true that the IRS performance from 1965 to now is the greatest financial failure in World History! OOPS, OK, back to dealing with IRS Audits.

I have three Rules to use in dealing with an IRS Audit:

1. Be Professional.

2. Tell the Truth.

3. Be Careful.

To be Professional is to use the CPA’s method of Commercial Audits which are based on Generally Accepted Accounting Principles (GAAP). GAAP was and still is the criteria for CPAs to render a Clean Opinion on selected financial statements of CPA’s clients.

GAAP is more stringent and more honest than US Tax Law. GAAP is now the worldwide standard and it forms the basis of financial reporting that allows Worldwide Commerce and Financial Investing.

In my early career, until 1988, I was a fully qualified CPA Auditor and a Tax CPA as well. I am still aware of GAAP and other Auditing concepts but my main practice is now business consulting and Tax Work.

When a client is audited by the IRS it is not like a CPA’s audit of financial status that is designed to tell the true financial net worth of an operating company.

IRS Audits are not a search for Truth and Justice. The current IRS objectives are to generate the most FEAR and LOATHING in all Audit Targets and to extract the most money from the Audit Victims.

The current IRS Audit Techniques are “Chicken Sh*t” according to my 2018 EXPOSEˊ which is available on Amazon. My favorite work from 1975 to 1995, the first 21 years of my CPA practice, was IRS Audits. I still like them even though the type of audits has changed.

During the last century audits were much smaller than the Taxpayer Compliance Measurement Program (TCMP) audits, which covered every item on a return to gather data to use to select which returns to audit.

TCMP audits, then known as “The Audits From Hell”, were banned in 1998 because they were too intrusive, too nasty, too mean and very unfair to the unlucky taxpayers who were chosen by random draws.

I had 66 audits of my clients in the 21 years about 3 per year, which was about 1% of the total returns we prepared. There were 2 of the 66 that were TCMP audits and we received “No Change” reports on them.

The now very rare “No Change” reports are the very best “Report Card” that any taxpayer can receive from the IRS. It means that the tax return is accepted as filed with no tax or refund due. It is a perfect score.

From 1975 through 1995 we received 35 “No Change” reports on the 66 audits of my clients returns which we prepared. We also handled 13 audits of outside returns and we got 7 “No Change” reports on them.

I haven’t kept track of our audit results since 1995 but the results were similar until the IRS started using the “Infected Diseased Rats”, the IDRs now used to do SUPER TCMP AUDITS by Spokane Audit Department, (SAD) and, we think the rest of IRS in America.

We don’t understand how the IRS would go even farther with invasive Audits, even tougher and more time consuming than the 1998 banned audits except that no one is watching them do their abuse.

Audits used to be picked by Discriminate Information Function (DIF), an early version of “Big Data” which was developed by using the data gathered by the TCMP Program. DIF was good but it had a built in defect. DIF would pick the same taxpayer’s returns for multiple years.

We had some clients that were picked for DIF audits 4, 5, and even 6 times in the 21 years that we tracked them. Many of those audits were “No Changes” which was always fun, but they were hard work.

The IRS audit selection program was done by the Service Centers (SC) across America. The Western States SC is in Ogden, Utah. Ogden did the audit selection to eliminate any local bias. Still it was a good idea to avoid any friction between a CPA office and the local IRS.

Is the IRS still using DIF? It could be true since the IRS has the habit of using their tech methods over and over until they finally quit performing. That leads into the current terrible IRS performance.

The current IRS situation is awful for 2 reasons. First is that “Time marches on”. Things that worked in the 20th Century don’t always work now. Some are huge failures. An example is the “Tax Gap”.

The second problem is Congress and the Executive Branch. Congress has cut the IRS budget for eleven (11) years in a row. How can the IRS do the job with constant reductions of money and personnel?

The answer is they can’t.

What has this done to audits? There are more “Secret Audits” using Social Media and other hidden methods to target audit victims. Victims?  Yes, to be audited now is a stroke of BAD LUCK!

Maybe you can survive an Office Audit or an Audit by Mail with their limited items to be explained and proved. Plus those audits are low priority with the IRS since they produce less tax and penalty money.

When you draw a Field Audit by SAD or other IRS Field Audit Offices which use IDRs, what we playfully moniker “Infected Diseased Rats”, you are in painful trouble. See my blog about this.   

Another outcome of the IRS Budget Cuts is when Congress cuts the IRS Budgets the IRS cuts Customer Service and they make the Field Audits tougher to be sure that the word gets out about how terrible IRS audits are.

Even as I write this, and it is the TRUTH, I regret that I am helping the IRS to terrorize other Americans. There is more, if you want the IRS to leave you alone just pay them what they demand and shut up!

Oh, sorry. Let’s go back to how to handle an IRS Audit.

For a CPA to be Professional means “Do the Preparation Work.” We make up “Proof Sets” (PS), my term for batches of evidence, usually paper invoices, cancelled checks and other documents that are grouped by us to agree with specific items on tax returns.

When an audit is started SAD issues IDRs, officially titled “Information Document Requests” that spell out EVERYTHING that you MUST produce by a certain date. Sometimes the date is tomorrow or even in the past so you are always behind. Even if the date is next week it is so inclusive, so exacting and broad that it adds time pressure to the mix.

The time pressure actually goes both ways. The Service has  constant oversite from the Executive Branch’s Treasury Department. They must collect more money with less manpower and equipment than before.

Another thing to watch out for from IRS Auditors is that they do not tell the objective truth. They lie in spoken words and in writing but there is no requirement for them to swear to the truth when they issue their reports. Look at the bottom of tax returns that you sign. Taxpayers must swear that they are telling the truth.

The IRS does not have to swear or to tell the truth!

We need to tell the truth because that is how a taxpayer or her CPA wins audits; always tell the truth. The IRS version of the truth is proved when they force taxpayers to pay up.

The third Rule for IRS Audits is to be Careful.

IRS Auditors are smart, usually well trained and very intent on winning. They have every advantage including the Big One. The IRS is the most HATED team in America. With Hate comes Fear. They want you to fear and hate them. That is how they get most of their money!

Don’t HATE them. Tolerate them. Hate is a dish best served cold. Just beat them at their own game. Learn their rules and then HOLD THEM TO THOSE RULES.

Don’t take clients with you to any IRS Audit meetings (If you are a client don’t attend any IRS Audit meetings).

Don’t give them any extra information about clients, yourself or the weather. Just deliver the Proof Sets and wait. Answer their questions and wait. Leave without saying “Goodbye”.

Be ready to take the results of the Audit to Appeals and then to Tax Court. Tax Court is slanted in the Government’s favor at 60/40 but that is better than what you get in Appeals at 70/30 or audit at 90/10.

Most of all, when you have an IRS Audit be STRONG. Don’t snivel, don’t cry. It won’t help. When you are calm and organized you win no matter what the final score is. Be a Man! Be a Woman! You can do it.

That is how to DEAL with an IRS audit.

Anson Avery, CPA

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