Workshop: Communication, Organization Are Keys to Surviving an IRS Audit

May 19, 2009

Speakers:
Sarah H. Plowman, Senior Policy Analyst on Employment Tax, IRS   
Larry White, CPP, Director of Payroll Training for the American Payroll Association

Taking the Stress Out of IRS Audits

An IRS audit is not personal; it’s business.
   
And surviving an audit can be less stressful if you know what is expected.
   
“Returns are selected for examination via filters, random samples, or by a document-matching program,” said Sarah H. Plowman, a senior policy analyst on employment tax for the Internal Revenue Service. “It’s nothing personal when yours is selected."
   
Plowman and Larry White, CPP, director of payroll training for the American Payroll Association, led the workshop, “Dealing With an IRS Audit,” at Tuesday’s pre-congress workshop at the Long Beach Convention Center  in Long Beach, Calif.
   
If an employer is selected for an audit, it does not mean that IRS suspects cheating, Plowman said. “An audit determines reporting accuracy,” she said.
   
Typically, IRS notifies an employer by letter that an audit is scheduled. The letter also includes a request for certain documents and a copy of Publication 1, detailing taxpayer’s rights. While an employer cannot refuse an audit, IRS works to minimize the burden on the business in conducting an audit, Plowman said. Having the documents available and organized speeds the process. “We’ll tell you what we want to see,” Plowman said. “If all the documents are thrown in a shoebox, it’s not good for the examiner or you.”

White agreed, adding that employers can get through the audit process much faster if all access is provided.

Among the records IRS looks for are proper tax withholding, timely deposits, worker classification, accurate treatment of fringe benefits, and expense reimbursement. Other documents include general ledgers, disbursement journals, and canceled checks. Even information that was not initially requested, such as de minimus amounts and cellphone use, can arise during an audit and trigger further questions.

There is no limit to the number of documents IRS can ask to see, but Plowman said there must be a business reason for the request. IRS respects the confidentiality of the information and it is not shared with anyone outside IRS or in other areas of the agency. “The information is shared only on a need-to-know basis,” she said. 

IRS determines where the audit takes place, but the agency is open to other locations, such as the office of a certified public accountant or a tax preparer. An audit also can be done remotely or at an IRS office, but Plowman said the agency prefers the business location. “This gives us a better idea of how the business works,” she said.

At the end of an audit, the results are discussed with the employer. If there is agreement on the changes, the employer can sign the agreement, which includes a waiver of the right to appeal. If the audit uncovered no changes, the employer is given a statement confirming the assessment.

If, however, the employer does not agree with the results, its representative should not sign the agreement, Plowman said. Instead, an appeal can be filed, or the employer can request a meeting with the auditor’s manager, a hearing with an appeals officer, or fast-track mediation.

If the audit uncovered worker misclassification issues, the employer may be offered the chance to enroll in the Classification Settlement Program. The CPS is an agreement between IRS and the taxpayer that the employer promises future compliance in exchange for a reduction in the audit assessment. “We’re interested in future compliance,” Plowman said. “This is not a bargaining chip. This also means a future audit to ensure compliance. We do follow up.”

White said that the best advice is to keep “your house in order at all times.”

“Make sure all your reconciliations are done,” he said. “If there is an imbalance, take care of it as quickly as you can. Don’t wait until the end of the year. It’s really a matter of keeping everything updated and in order from a payroll standpoint.”

And if your company is selected for an audit, Plowman said, do not ignore the notification letter.

“Contact the person who sent the letter and keep the lines of communication open,” she said. “You can’t pretend it’s not happening.”