Audit Angst

10 tips for surviving an audit

By David R. Evanson

"He who represents himself has a fool for a client."  With that adage, Peter Salvin begins his woeful tale of back-to-back IRS audits.  Salvin and his wife, Chris, who ran a catering business in West Amwell, New Jersey, submitted to an audit in February 1993.  Three months later, they received another notice.

Having lost the battle alone the first time, Salvin decided professional help was in order for round two and sought the assistance of CPA and tax attorney E. martin Davidoff of Dayton, New Jersey.  Davidoff claims you won't have to ask for a last cigarette when standing before the IRS firing squad if you heed the following 10 pearls of wisdom.

1.    Be a no-show.  Experts agree it's best if taxpayers don't go to audits at all.  As a matter of course, your tax professional is more experienced in what to say and how to phrase the facts to best support your position.  And the worst thing you can do is go to the audit by yourself.

    Salvin recalls going into his first audit like a babe in the woods, completely intimidated with his records in hand.  "There are no Miranda rights read to you at an audit," Salvin says.  "No one tells you which questions you don't have to answer.  And all the time I thought 'This is going to destroy my life.'  It was a one-way conversation, and I ended up caving in to everything they asked for."

    "If the [taxpayer] is there, it's indeterminable what will happen," says Ward M. Bukofsky, managing partner of accounting firm Braverman, Codron & Co. in Beverly Hills, California.  "Taxpayers often don't know what kinds of questions they are required to answer, whereas the representative will. In fact, not having the client there gives us the luxury of time to digest the questions and get back to the IRS agent with an appropriate answer."  Moreover, your attendance at an audit might prompt the agent to spontaneously ask you all kinds of lifestyle questions in an attempt to garner additional information -- questions a tax professional would be able to fend off.

2.     Be Prepared

With or without representation, you should follow the Boy Scout motto.  Gather all your records relevant to the items being audited and compare them to what was reported.  Try to remember the mind-set you were in when the return was prepared -- why sales and salaries were up, why margins were low, why you had bad debts.  Davidoff says that sometimes during preparation for an audit he discovers additional deductions that could have been taken.  "And I'm not shy about asking for the refunds," he says.  But timing is important.  Davidoff waits until the meeting is almost concluded and then adds in his best Detective Columbo manner, "Oh, by the way, one more thing..."

    It's also important, adds Bukofsky, not to stonewall your CPA.  NO one can properly represent you if they don't have all the necessary information. Your CPA should not be the person discovering information during the course of the audit.  Moreover, if someone represents you, before the audit he or she should give you an honest assessment of the issues, potential problems and the documentation you need to produce.  Before his audit, Salvin spent hours with Davidoff going over records and details in a pre-audit that provided Davidoff with all the information he needed.  (Remember, to make representations to the IRS on your behalf, your representative needs power of attorney).

3.    Never volunteer anything

    If you still insist on attending the audit despite hearty pleas from your accountant not to, by all means heed the following: "Never, never, never volunteer any information," Davidoff emphasizes.  "Answer only the question asked, nothing else."  Providing more information than requested often opens a Pandora's box.

    "People like to talk," says Bukofsky.  "But you don't need to impress the auditor with how smart of well-off you are.  For example, chatting it up with the auditor about how you just returned from a vacation at your condo in the Caribbean when you only reported $8,000 of income opens a huge can of worms."

    Keep in mind, too, that you can say you don't remember, which is much better than trying to recreate the facts on the spot.  Not only do you buy time to structure your answer appropriately, but you also avoid the temptation of revealing your hand tot the agent.

4.    Cover your assets

    Bukofsky says clients should be particularly careful when discussing their assets.  Limit your comments to the assets contained in teh audit.  Don't alert the agent to the fact that own assets that don't appear on your return.  This could prompt a series of additional questions.  "Even if you inherited $100 million from your great aunt last year and bought four houses, the auditors don't need to know this if it doesn't show up anywhere on this year's returns," Bukofsky says.

5.     Stay cool

    Davidoff and Bukofsky stress the importance of maintaining a calm demeanor during an audit.  "Always keep in mind that this is strictly business.  Don't get angry, don't threaten the agent and don't be a wise guy.  Save your powder for an appeal," says Davidoff.  Strive to be as cooperative as possible, and avoid angry outbursts. Hostile or uncooperative behavior will only sour the agent on a favorable resolution of your case. 

6.    Get help

    If, despite your studied calmness, you find yourself being drawn into the fray, don't panic.  "Don't be afraid to ask for a group supervisor or manager if you think the auditor is being unreasonable," says Davidoff.  He advises making a list of the items in question and then asking for a supervisor at the end of the interview.  "Those people are there to help you.  If you think you're right in a particular matter, be persistent."

7.    Avoid bidding wars

    Don't agree to any terms without discussing them privately with your CPA.  "You'd never buy a car without discussing the terms with the salesperson," says Bukofsky.  "Don't do it in an audit, either."  The reason is simple: Many times the terms offered are negotiable.  For instance, suppose an automobile you claim is used 80 percent for business is assigned a 50 percent status by the IRS.  Negotiating with the agent and reviewing your documentation could land you a 65 percent agreement.

    Even if you are by yourself, Bukofsky says, it's not necessary to give the agent an answer on the spot.  You have the option of going home, discussing the terms with your CPA and calling the agent the next day.

    Once you've reached an agreement, by all means keep it, says Davidoff.  This means sending any follow-up documentation promptly, sticking to payment deadlines  and getting back to the agent when you say you will.  You don't want to provide the IRS with any justification for keeping your case open.

    And finally, don't give the auditor the impression you're overjoyed with the proposed adjustment.  This might lead the agent to suspect he or she missed something on your return.  "If ever there were a time to use your best poker face, it's now," Bukofsky says.

8.    Do not pass go; do not go to jail

    One more thing to keep in mind when baring your files before the IRS: Intentional unreported income is a felony and counts as criminal activity.  And unless your CPA is also an attorney, he isn't endowed with the attorney-client privilege that prevents him from revealing what you said if subpoenaed.  IF you suspect your issue with the feds is a big one and could end up in litigation, make sure the person representing you is also an attorney.

9.    Begin at the beginning

    An essential word of advice and one on which Bukofsky and Davidoff concur wholeheartedly: The audit starts with the preparation of the return.  "The return should be prepared with the assumption that it will be audited," says Bukofsky.

    "As a business person, the best and most essential thing you can do is to keep good records," Bukofsky adds.  "You can also make sure you properly classify your expenses.  For instance, 'miscellaneous' categories invite all kinds of questions.  It's better to use several smaller categories that are more descriptive."

10.     Choose wisely

While the optimal situation is clearly to never be audited at all, the likelihood of getting through this event relatively unscathed increases with the skill of your tax professional.  Ergo the 10th pearl of wisdom: When you seek professional advice, make sue you select someone who has traveled this road before.

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Nancy Scarlato contributed to this article.