One of the things that I tell my clients ever year is if you’re get audited contact me first. There are a number of different reasons for this.
1. People get stressed out over an audit. Let your CPA take the stress away by contacting the auditor with a designated power of attorney, and speak with them on your behalf. With a power of attorney your CPA can find out everything as if they were the taxpayer.
2. Auditors ask you questions to get you to say something you don’t want them to know. Your CPA knows what the auditor is looking for and is more likely able to answer the question in a more direct fashion. Also your CPA provides a layer of protection because they can find out the information the auditor requesting, and then ask the client for the information, and relay the information back to the auditor. People get scared in an audit and will say things that they would wish they had not said if they knew what it meant.
3. The penalties and interest can be between 20% to 40% of the tax owed. Not to scare you, but there is also the chance of a civil fraud penalty equal to 75% of the tax owed, as well as tax fraud which is punishable up to 5 years in prison. Here are some of the ways to commit tax fraud.
- Understatement of income
- Inadequate records
- Concealment of assets
- Failure to cooperate with tax authorities
- Attempting to conceal illegal activities
- Dealing in cash
- Failure to make estimated payments
4. Your CPA is aware of the due dates that the auditor gives you to respond. If you ever get a letter from a taxing authority you should respond promptly. Oftentimes if you do not respond in the time frame allowed you open yourself up to liability. The taxing authority may be able to automatically assess the tax, and you will be forced to appeal the case in tax court.
Your odds of randomly being audited are small in percentage, especially if you make less than $100,000. The IRS has been tasked with handling all the additional work stemming from the Affordable Care Act. This will likely even further decrease your chance of an audit.
Oftentimes, audits are easy to resolve if taken care of in an efficient manner. Auditors know that people that hire CPA’s are serious about reporting and paying tax accurately. Your CPA can negotiate with the tax authority by offering a different point of view to the way the tax amount is calculated.
Lance Hori, CPA