jasdlm Posted July 20, 2009 Report Share Posted July 20, 2009 I have never had a client be audited, and now I have 2 clients being audited in the same week . . . both on returns I did not prepare. I want to make sure that I am qualified to help them. If not, I need to quickly refer them on. First Case: Client filed a small schedule C which resulted in a loss of about $14,000. IRS wants to disallow entire loss. The return was prepared by Jackson Hewitt. It is a piece of work. The client is pretty confused about the whole thing. From what I can tell from the paperwork (have not yet been able to get a copy of the workpapers from Jackson Hewitt), expenses client incurred as a member of an LLC (not a disregarded entity; several partners) was included by JH on Client's Spouse's schedule C. Client and Client's wife both do work for the LLC. (Basically, it is a small business started in the year being audited. My clients are the 'worker bees' and the other LLC members put up the capital.) K1 is in Taxpayer's name. Schedule C was in Spouse's name. Some examples of expenses taken on Schedule C: 1) 'Employee Expense' . . . upon investigation, this was a deduction for after-tax insurance premiums paid by taxpayer through his employer 2) It appears that money paid to the LLC by my clients to cover expenses was coded as 'professional expenses'. I am researching this; it appears to me that it was their initial capital contribution to the LLC, but I haven't determined that for absolute certain. 3) There was a number put in 'utilities'. There was no home/office deduction, and the best I can come up with is phone/internet expense. All numbers used were round numbers. There was a computer that was included as an 'other expense' along with some office furniture. The K1 for 2007 shows about a $5,000 loss, but this was not included in the 2007 1040. My question: The return is obviously not accurately prepared. I have my client working to try and pull together all documentation. It is not going particularly well. Would it be advisable to go into the first meeting with the agent with a spreadsheet documenting the way the return should have been prepared? I considered going in with just an amended return, but a local CPA advised me to prepare a spreadsheet rather than an actual return. Thanks for any input. Quote Link to comment Share on other sites More sharing options...
JohnH Posted July 20, 2009 Report Share Posted July 20, 2009 I had a similar experience recently in an audit of a corporation. In reviewing the supporting info, I found several large adjustments which needed to be made to the original return. I prepared an 1120 with the info as it should have been and attached a spreadsheet to detail the "other deductions" category. (Did not fill in the Balance Sheet portion because changes to the balance sheet would depend upon whether the auditor accepted my P&L changes). I marked the front of the 1120 "For Discussion Purposes Only". The auditor accepted all but one or two minor items and in her final report she stated "Preparer submitted proposed changes on an 1120 marked For Discussion Purposes Only, with supporting documentation" as her justification for the changes. She seemed to think that was OK. Others on this forum may have differing views, but in my case that approach worked just fine. My thinking was that the 1120 marked "For Discussion" was the best way to present the correct figures in a format which the auditor was already familiar with. Quote Link to comment Share on other sites More sharing options...
jasdlm Posted July 20, 2009 Author Report Share Posted July 20, 2009 Thanks, John. This sounds like a really good approach! Quote Link to comment Share on other sites More sharing options...
jainen Posted July 20, 2009 Report Share Posted July 20, 2009 >>The return is obviously not accurately prepared. I have my client working to try and pull together all documentation<< It sounds like the preparer didn't have accurate information to work with. Not only is there no P&L, the client doesn't even seem to know what he spent money on. The first part of your strategy is to determine what the audit goal is. You need to make sure the client understands that you can't guarantee success. In fact, if the rest of the return is as flakey it might be best to just take the hit and not let the IRS go asking any more questions. For one thing, this client can't handle the audit on his own and if you have to go for him it's probably going to cost at least a thousand dollars. I recommend an engagement letter to clarify exactly what the client should expect from you and what he must provide. Also, collect a non-refundable advance retainer for five or eight hours. Obviously you aren't going to be able to hang onto all those improper deductions, but maybe the auditor won't look too close if you just explain that they should have gone to Schedule E page 2 (unreimbursed partnership expenses) rather than Schedule C. Quote Link to comment Share on other sites More sharing options...
lbbwest Posted July 21, 2009 Report Share Posted July 21, 2009 >>The return is obviously not accurately prepared. I have my client working to try and pull together all documentation<< It sounds like the preparer didn't have accurate information to work with. Not only is there no P&L, the client doesn't even seem to know what he spent money on. The first part of your strategy is to determine what the audit goal is. You need to make sure the client understands that you can't guarantee success. In fact, if the rest of the return is as flakey it might be best to just take the hit and not let the IRS go asking any more questions. For one thing, this client can't handle the audit on his own and if you have to go for him it's probably going to cost at least a thousand dollars. I recommend an engagement letter to clarify exactly what the client should expect from you and what he must provide. Also, collect a non-refundable advance retainer for five or eight hours. Obviously you aren't going to be able to hang onto all those improper deductions, but maybe the auditor won't look too close if you just explain that they should have gone to Schedule E page 2 (unreimbursed partnership expenses) rather than Schedule C. I usually agree with anything tax related 100% with the ever prickly jainen; and I do agree with the retainer up front, but my strategy would differ somewhat. I would prepare the return myself based upon documentation available requesting additional time if necessary; (the most time I have ever had to request was thirty days, and I have never been denied; it takes them longer than that to answer.) However if what you looked at does not appear to be redeemable perhaps my learned collegue's advice is better. Not my first rodeo, but not an "expert" lbb Quote Link to comment Share on other sites More sharing options...
Lion EA Posted July 21, 2009 Report Share Posted July 21, 2009 If JH operates like HRB, they keep absolutely nothing except the electronic version of the return and return ALL client documents and lists and...to the client. HRB staples them into the client folder that contains the return. If you have the client folder from your client, you can see what documentation he gave his preparer. Everything else was given verbally by your client to his preparer. Or, if the preparer was trying to be helpful, maybe he filled in some blanks. If the client qualified for or purchased the JH version of Peace of Mind, he might be in line for free audit representation by an EA from JH plus JH reimbursement of his additional taxes as well as penalties and interest. If you're not trying to retain this client for future years (record-keeping is a mess, for instance) then you might return him to the nearest JH for help and representation. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted July 21, 2009 Report Share Posted July 21, 2009 PS: With the loss, round numbers, and apparent lack of books, you should also be on the look-out for hobby loss rules. Does anything in the IRS letter suggest they suspect this activity was not run like a business? Quote Link to comment Share on other sites More sharing options...
jainen Posted July 21, 2009 Report Share Posted July 21, 2009 >>if what you looked at does not appear to be redeemable<< My advice was only partly based on the possibility that you might lose anyway. If all the IRS wants to do is disallow expenses, that's better than having them look at bank accounts to see if all self-employment income was reported. And even that would be better than having them start snooping around the partnership, if you know what I mean. Good question, though. How about a new thread for your second client, jasdim? Quote Link to comment Share on other sites More sharing options...
jasdlm Posted July 21, 2009 Author Report Share Posted July 21, 2009 Thanks to all. I do realize 'garbage in/garbage out'. I'm trying to get some actual documentation. My client's father died last week, so there have been a few delays. Thanks for the advice, Jainen. I will start a new thread re: the 2nd audit. A question: The 'letter' is actually a spreadsheet (of the IRS sort) that says 'Income Tax Examination Changes' at the top. Under 'adjustments to income', line 1a says 'Sch C2 All Expenses', and then the expenses for schedule C are added back in. (Also $16,000 in 'Miscellaneous Deductions' on schedule A added back in, but I haven't begun to tackle that one yet.) Since this is my first experience with the process, I'm trying to understand . . . my client insists that this is the first correspondence received from the IRS. Is this likely accurate? It appears to me that, if that is the case, the IRS did an examination, disallowed expenses, and gave my client the option to agree and pay or be audited on the Schedule's C and A. Does this sound like the right procedure, or am I missing something that my client has not given me or doesn't recall getting? Thanks again for all the help. Quote Link to comment Share on other sites More sharing options...
jainen Posted July 21, 2009 Report Share Posted July 21, 2009 >>Income Tax Examination Changes<< Last month your client received a special invitation, RSVP. Since he didn't call back, he was taken off the guest list. Now that the party is already over, it is probably too late to show up and ask if there are any leftovers to snack on. Having a designated driver might help a little, except that you don't seem to have chauffer's license. You can't help him. Unless he wants to hire very expensive muscle, his best hope is to stand in the lobby of Jackson Hewitt and yell at the office manager (please, leave the poor receptionist alone) until she agrees to cover penalty & interest. Quote Link to comment Share on other sites More sharing options...
jasdlm Posted July 21, 2009 Author Report Share Posted July 21, 2009 Thanks for the info, Jainen. If I understand correctly, you feel that it is probably not worth the money for my client to hire a CPA experienced in audits to help with this? The tax/penalties the IRS is asking for total just under $11,000. I assume the client should amend the State return, also . . . haven't even gone there. Also, if I'm interpreting correctly, the client would have received a 'notice of examination' letter and simply failed to respond? This makes much more sense to me than the first correspondence being the letter I have that I posted about previously, which my client insists is the first correspondence. Definitely don't have a chauffer's license, but logging hours toward the final exam and hopefully issuance of license! Quote Link to comment Share on other sites More sharing options...
jainen Posted July 21, 2009 Report Share Posted July 21, 2009 >>not worth the money for my client to hire a CPA<< I can't say that. It depends on how much money is at stake, and how good a case he can present. There is one thing you can still do for him--read that letter VERY carefully looking especially for the word "days" and see if he still has any time to respond. Even if he does not, the first approach is to get the audit re-opened, either by begging the auditor for mercy or by filing an appeal on the grounds that he did not have an opportunity to present his documents (assuming of course that he has documents to present). Potentially this could start the whole thing over again. My concern is what "the whole thing" might involve. His financial backers aren't going to be gracious to him if they get audited because he took his taxes to some idiot at the mall who screwed everything up. And when they find out you butted in after it was all settled, well, you know.... Quote Link to comment Share on other sites More sharing options...
jasdlm Posted July 21, 2009 Author Report Share Posted July 21, 2009 This is very good advice. Thanks very much. I talked with a CPA here and he is willing to work on both audit issues. He has a fair amount of experience, and actually has an audit with the same auditor a week later than my clients. I will participate every step of the way, but I will not bill my client . . . I will count this as hours toward my Chauffer's license! Now, I just have to convince my client to sign on to this plan. Quote Link to comment Share on other sites More sharing options...
jainen Posted July 21, 2009 Report Share Posted July 21, 2009 >>I just have to convince my client << In my experience, $11,000 will convince just about anyone of anything! Quote Link to comment Share on other sites More sharing options...
jasdlm Posted July 22, 2009 Author Report Share Posted July 22, 2009 I continue to get bits of information piece by piece, and it's discouraging. JH just faxed me 2008 (I assume by mistake, since Client asked for 2007). The same problem is repeated, except the loss is over $24,000. Also, huge 2106 deductions for both spouses (even though one doesn't have a W2). Includes things like uniform expense (no, they don't wear uniforms . . . ), 'grooming', etc. All round numbers, of course. I feel like I'm being engulfed by flames . . . clients meeting with IRS is tomorrow (just learned) and cannot be postponed because it was postponed back in June because of the death of client's father. I only found out about this the day I initially posted. Is it likely that the IRS will move on to 2008 after 2007 examination? Aaargh! Quote Link to comment Share on other sites More sharing options...
JohnH Posted July 22, 2009 Report Share Posted July 22, 2009 Based on what you've posted so far, I'd say it's virtually guaranteed that IRS will open 2008 once they see what's going on with 2007. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted July 22, 2009 Report Share Posted July 22, 2009 Hope your client bought JH's guarantee. Is it void if they have anyone other than JH represent them? Quote Link to comment Share on other sites More sharing options...
ed_accountant Posted July 25, 2009 Report Share Posted July 25, 2009 Interesting post, please keep us updated. Thanks Quote Link to comment Share on other sites More sharing options...
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