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Inside the IRS Audit Playbook: What To Know Before The IRS Comes Calling · Bennett Thrasher Presents: Beyond The Ledger

• 0:08
  SPEAKER_01: Welcome back to Beyond the Ledger, where we go beyond the numbers to explore the strategies, risks, and opportunities shaping today's business landscape.
• 0:17
  SPEAKER_01: I'm your host, Shard A Layfield.
• 0:19
  SPEAKER_01: In this episode, we're diving into one of the most stressful and misunderstood experiences businesses and individuals can face: an IRS audit.
• 0:29
  SPEAKER_01: As IRS enforcement activity continues to evolve, many organizations are finding themselves unprepared for the level of documentation, communication, and strategy required once an audit begins.
• 0:41
  SPEAKER_01: From understanding how audits are selected to knowing how to respond effectively, the process can quickly become overwhelming without the right guidance.
• 0:52
  SPEAKER_01: Joining us today is James Pickett, Director in Bennett Thrasher's Tax Controversy Practice, bringing over three decades of experience with the IRS, including extensive expertise in examinations, collections, and dispute resolution.
• 1:07
  SPEAKER_01: Alongside James, we also have Chris Stevens, senior manager also in Bennett Thrasher's tax controversy practice, specializing in helping businesses navigate federal and state controversies, audits and complex compliance matters.
• 1:22
  SPEAKER_01: Together we'll break down the realities of the IRS audit process, common mistakes taxpayers make, how businesses can better prepare before issues arise, and what companies should understand as IRS scrutiny continues to increase.
• 1:36
  SPEAKER_01: Thank you both for being here again.
• 1:41
  SPEAKER_01: Thank you.
• 1:45
  SPEAKER_01: All right.
• 1:46
  SPEAKER_01: So to kick things off, let's start with the big picture.
• 1:50
  SPEAKER_01: What types of IRS audits are businesses most commonly facing today, and how has the audit landscape changed in recent years?
• 1:58
  SPEAKER_00: Yeah, well, I'll uh since I worked at IRS for a number of years and I retired in 2017 and been representing clients since then.
• 2:06
  SPEAKER_00: I'll address that a little bit.
• 2:07
  SPEAKER_00: It's an interesting question because you would think that these things would change over the years, but honestly, I think the the you know the type of audits businesses are facing today are no different than they were when I started in the 1980s.
• 2:20
  SPEAKER_00: I mean, IRS has always had a presence in the mid-market with mid-market companies, large companies, and even small business self-employed taxpayers, smaller companies or self-employed taxpayers.
• 2:33
  SPEAKER_00: Uh and so it's the same basic type of audit questions and audit risk, you know, that's been out there for many, many years.
• 2:40
  SPEAKER_00: Uh and it's it's pretty simple stuff.
• 2:42
  SPEAKER_00: You know, the task code hasn't changed in a fundamental way since it was brought in in 1913.
• 2:47
  SPEAKER_00: So IRS is gonna come out and audit to make sure two things.
• 2:51
  SPEAKER_00: Number one, all the incomes reported, right?
• 2:53
  SPEAKER_00: And number two, the expenses aren't overstated.
• 2:56
  SPEAKER_00: I mean, it's it's just that simple.
• 2:58
  SPEAKER_03: Okay.
• 2:58
  SPEAKER_00: And and well, I haven't really seen, honestly, a lot of change um either o over the period of time I was with the IRS for 30 years or the almost nine years now that have been gone.
• 3:10
  SPEAKER_00: It's uh you know, they've just got a presence in the business community doing these kind of things.
• 3:16
  SPEAKER_00: And they always will.
• 3:17
  SPEAKER_00: Now they will sometimes shift and have a campaign, they call them, where they want to focus on certain type businesses because they think maybe a certain industry there's a tax issue that's systemic across the board to all the businesses or many of the businesses in that industry.
• 3:32
  SPEAKER_00: But you know, and and that'll shift a little bit back and forth, but the type of audits really are are the same as they were for many, you know, uh and have been for many years.
• 3:42
  SPEAKER_01: Not too much shifting, but they will be there.
• 3:44
  SPEAKER_02: They thought it would change when they had all the government layoffs in the fall.
• 3:48
  SPEAKER_02: Where they lost like was it like 25, 30 percent of their staff?
• 3:52
  SPEAKER_02: Yeah, a quarter of their staff.
• 3:53
  SPEAKER_02: Quarter of their staff.
• 3:54
  SPEAKER_02: And I remember the being the the big talk was let's gonna change audits.
• 3:57
  SPEAKER_02: And we're not gonna have audits anymore.
• 3:58
  SPEAKER_02: You know, they're gonna drop all these audits, they're not gonna work them the same way.
• 4:01
  SPEAKER_02: And there was maybe like a one or two week window where they dropped a couple of small ones, and then honestly, it hasn't changed.
• 4:07
  SPEAKER_02: It hasn't changed much since then.
• 4:08
  SPEAKER_02: It's stayed more or less the same.
• 4:09
  SPEAKER_02: I mean, if you're a big company or a high net worth individual, I mean your audit risk is still low overall as a percentage of all taxpayers, but I mean we've still had very, very steady we're handling 10, 12 audits.
• 4:19
  SPEAKER_02: I mean, it's still busy.
• 4:20
  SPEAKER_02: So yeah.
• 4:21
  SPEAKER_02: Still going.
• 4:22
  SPEAKER_02: Not a whole lot of change, yeah.
• 4:23
  SPEAKER_01: Okay, okay.
• 4:24
  SPEAKER_01: So many companies assume audits are random, but that's not always the case.
• 4:29
  SPEAKER_01: So what are some of the most common triggers that increase the likelihood of an IRS audit?
• 4:34
  SPEAKER_00: Well, when I was with IRS, one of the things they did, and they're still doing this, and they're trying to take this maybe to the next level, which would involve AI, but they're very good at gathering statistics.
• 4:45
  SPEAKER_00: And basically one of their favorite statistics is to look at the size of a company, look at its income, and then break down in that industry, break down what are the typical expenses by category in that industry based on that income level, that income range.
• 5:02
  SPEAKER_00: And so they gather statistics like that.
• 5:04
  SPEAKER_00: They actually have a way of doing studies where they go out and gather these statistics.
• 5:09
  SPEAKER_00: And so what they're looking for is if it's almost a statistical thing using standard deviation and that kind of analysis.
• 5:23
  SPEAKER_00: And they're out of line in s in a way that's you know favorable to the taxpayer, in other words, you're getting a whole lot of deduction, you know, percentage-wise on a certain in expense category more than you know what's typical in the industry, they're gonna be interested in that.
• 5:38
  SPEAKER_00: So you know, so they use a lot of these sort of filters like that to to choose them.
• 5:42
  SPEAKER_00: That's a pretty simple way to do it, and they've done that for years.
• 5:46
  SPEAKER_00: Uh I haven't been on the inside of the place in a while, but from what I understand, they're trying to leverage AI to do even more of that kind of thing.
• 5:54
  SPEAKER_00: But I think in the final analysis, it's just that simple.
• 5:56
  SPEAKER_03: Right.
• 5:57
  SPEAKER_00: And they do studies occasionally where they gather in an audit environment, they will audit every line on a return to gather those statistics, and they'll do that in in a way that's statistically valid.
• 6:08
  SPEAKER_00: You know, it that gives them a valid sample size and do a number of audits and audit every line on a return to gather that kind of information in a certain industry, for instance.
• 6:18
  SPEAKER_00: So they're pretty good at this kind of thing.
• 6:22
  SPEAKER_01: They've been around for so many so long in everybody's business.
• 6:25
  SPEAKER_01: So, yes.
• 6:27
  SPEAKER_01: So once a company receives that initial IRS notice, panic usually starts to set in pretty quickly.
• 6:34
  SPEAKER_01: So, what should businesses do first and what mistakes should they avoid in the early stages of an audit?
• 6:40
  SPEAKER_02: First of all, as a total aside, I just can't get inside of my head so I have to say it.
• 6:42
  SPEAKER_02: I feel the cards remind me of like old tonight show clips.
• 6:47
  SPEAKER_02: The Johnny Carson clip.
• 6:48
  SPEAKER_02: That's what it reminds me of.
• 6:50
  SPEAKER_02: And I like that.
• 6:50
  SPEAKER_02: It's very nice.
• 6:51
  SPEAKER_01: Thank you.
• 6:52
  SPEAKER_01: Very classic.
• 6:52
  SPEAKER_01: Branding.
• 6:54
  unknown: Yeah.
• 6:55
  SPEAKER_02: So uh but no, I mean the first thing, honestly, that we see is yeah, when they get the audit notice, people panic, but the worst thing you can do is ignore it.
• 7:02
  SPEAKER_02: That's like the number one mistake people make is you get an audit notice and you sit on it forever.
• 7:07
  SPEAKER_02: Um usually when you get that initial audit notice, it's gonna tell you what they're asking for, what they need from you, and a deadline to respond by.
• 7:14
  SPEAKER_02: I can't tell you how many notices we get from clients or other firms sometimes, like smaller firms in particular, where a client of mine got this notice, we kind of looked into gathering stuff, and then, you know, by the way, it said it was due on the 19th.
• 7:26
  SPEAKER_02: Today's the 18th or the 20th, even.
• 7:29
  SPEAKER_02: Can you help us?
• 7:30
  SPEAKER_02: And you know, yes, we can, but it's really not a great practice to wait that long.
• 7:35
  SPEAKER_02: And so, yeah, that's the biggest thing is people, the biggest mistake I see when you get the notice is people think you put your head in the sand, it'll go away.
• 7:43
  SPEAKER_02: It'll, you know, like they always tell you, it only gets worse.
• 7:46
  SPEAKER_02: Um, so the best thing you can do is just be proactive, just reach out to somebody right away.
• 7:49
  SPEAKER_02: I would even say, too, a big mistake is trying to handle it yourself if you're not sure what you're doing.
• 7:54
  SPEAKER_02: If you're not sure what you're doing, um uh just don't guess.
• 7:56
  SPEAKER_02: I mean, there's plenty of people like us, or you know, plenty of other people too, who handle audits all the time, and it's not scary to us because we do it all the time.
• 8:03
  SPEAKER_02: Right.
• 8:03
  SPEAKER_02: And so you know exactly how to respond.
• 8:05
  SPEAKER_02: And also it's it seems scarier than it really is a lot of times.
• 8:08
  SPEAKER_02: Just don't make things worse by ignoring it or giving a bunch of information you're not sure what you're giving.
• 8:14
  SPEAKER_01: Why do you think people go the ignore route first?
• 8:18
  SPEAKER_02: I think it's just human nature.
• 8:19
  SPEAKER_02: You think you can ignore a problem and it'll go away.
• 8:22
  SPEAKER_02: Maybe they won't contact me again, maybe they'll forget about it, they'll lose track of me, you know.
• 8:26
  SPEAKER_02: I can stall them in some way and they won't, you know, they'll let it go or something like that.
• 8:30
  SPEAKER_02: Which it's just not gonna happen at all.
• 8:32
  SPEAKER_02: So you just make them mad.
• 8:34
  SPEAKER_02: Yeah, actually, yes.
• 8:35
  SPEAKER_02: Yeah, so I think it's just human nature, I guess.
• 8:38
  SPEAKER_02: Yeah.
• 8:38
  SPEAKER_00: Yeah, internally they have a very strong tracking system.
• 8:41
  SPEAKER_00: Once they open these things up, it's not closed.
• 8:44
  SPEAKER_00: It's not going away.
• 8:46
  SPEAKER_00: Right.
• 8:48
  SPEAKER_01: So don't ignore anything.
• 8:50
  SPEAKER_01: Just hey, just reach out to someone and don't do it on your own.
• 8:55
  SPEAKER_03: Exactly.
• 8:56
  SPEAKER_03: That's the biggest thing.
• 8:56
  SPEAKER_03: Right.
• 8:57
  SPEAKER_03: Exactly.
• 8:57
  SPEAKER_01: So documentation tends to become one of the biggest challenges during an audit.
• 9:02
  SPEAKER_01: So what records or supporting information does the IRS typically request, and where do businesses often fall short?
• 9:09
  SPEAKER_02: Well, on that first initial audit notice, you're usually gonna get sort of their standard initials, it's called an information document request.
• 9:16
  SPEAKER_02: Okay.
• 9:16
  SPEAKER_02: Or the IDR.
• 9:17
  SPEAKER_02: People talk about IDRs all the time.
• 9:18
  SPEAKER_03: Yeah.
• 9:19
  SPEAKER_02: That first initial one is usually pretty standardized, more or less, and it's gonna mostly be they're gonna say, send us a copy of your 2024 return, including all the statements and attachments and all that.
• 9:29
  SPEAKER_02: Because one thing that I was surprised by is you would think, well, they already have this.
• 9:32
  SPEAKER_02: Why am I sending this?
• 9:33
  SPEAKER_02: Um I found out from dealing with a lot of auditors that the auditors have access to the actual return, but not like the statements that are attached to it, um, and some of the schedules.
• 9:43
  SPEAKER_02: And so a lot of times, like on a return, you'll say, for a line item, you might say, see schedule two or whatever, and it has all the breakout of everything.
• 9:49
  SPEAKER_02: Well, the auditor won't see that.
• 9:50
  SPEAKER_02: And so anyway, we provide that.
• 9:52
  SPEAKER_02: So and I actually had an audit for a high net worth individual not that long ago, where there was an action item where the auditors kept coming back to us and questioning a number, questioning a number.
• 9:59
  SPEAKER_02: We were like, why is he not getting this?
• 10:01
  SPEAKER_01: Why don't you have all of this?
• 10:02
  SPEAKER_01: Yeah, I just didn't understand.
• 10:03
  SPEAKER_02: He kept saying, Well, I don't see how you got to this number, and it just was very self-explanatory, and I didn't understand how he was not understanding.
• 10:09
  SPEAKER_02: And finally, when he was in the office one day, I talked to him and I just kind of I printed out the schedule and I showed it to him.
• 10:14
  SPEAKER_02: I was like, I mean, I don't basically I kind of asked him, like, how are you not getting to this number?
• 10:17
  SPEAKER_02: Show me where the breakdown is.
• 10:19
  SPEAKER_02: And he was like, Oh, I've never seen this schedule before.
• 10:21
  SPEAKER_02: It's not the right term.
• 10:22
  SPEAKER_02: I was like, Okay, well, there you go.
• 10:24
  SPEAKER_02: Now you got it.
• 10:24
  SPEAKER_02: Right.
• 10:25
  SPEAKER_01: At least he was asking the questions and you're able to provide the information.
• 10:27
  SPEAKER_01: So that's the biggest thing.
• 10:29
  SPEAKER_02: Exactly.
• 10:29
  SPEAKER_02: And then they'll ask for um trial balances, general ledgers, just sort of your basic books and records, just anything, essentially so they can tie out the numbers on the return and track everything down, board meeting notes, org charts, just that sort of thing.
• 10:43
  SPEAKER_02: If you have an aircraft in your business, they might go ahead and ask for the aircraft, the flight logs, and all that.
• 10:46
  SPEAKER_02: That might come on a later IDR, more issue-specific IDR, but sometimes I'll go ahead and ask for that.
• 10:51
  SPEAKER_02: Um, usually it's your standard books and records more or less, um, just to kind of get started.
• 10:57
  SPEAKER_03: Okay.
• 10:57
  SPEAKER_02: And then I think yes, where businesses fall short on that.
• 10:59
  SPEAKER_02: Uh a lot of times it's I mean, A, just bad record keeping, either not having the records at all, or just having very kind of sloppy records where the numbers we hear this a lot, where it's like, okay, here's my trial balance, but just so you know, the numbers don't tie to what's on the return, or we had to make all these adjustments, and over here you can kind of tie it out if you add this and remove this and that sort of stuff, and an auditor's never gonna tie all that out on their own.
• 11:25
  SPEAKER_02: Um, and then it's kind of hard, you can clean some of that up, but then it's not a great position to be in, to be able to change the records, and you can point the auditor to it.
• 11:33
  SPEAKER_02: There's nothing really wrong with that, but they're definitely gonna scrutinize it a little more closely.
• 11:37
  SPEAKER_02: So that's where they fall short, is either just not having the records at all or just having very shoddy record keeping, um, or just not being responsive to the timelines, uh, to us or to the auditor.
• 11:49
  SPEAKER_02: We have many audit clients, unfortunately, sometimes you know they're busy, they have day jobs, and it's just hard to pull all these records in the amount of time, but you sort of have to just prioritize it.
• 11:57
  SPEAKER_02: Gotta do it.
• 11:57
  SPEAKER_02: Um, yeah, and get it into the auditors on time.
• 12:00
  SPEAKER_02: Another little area where they fall short sometimes is it thinking you have to have everything and everything be perfect before you can respond.
• 12:08
  SPEAKER_02: A lot of times they might ask for 15 items, the auditor.
• 12:11
  SPEAKER_02: If you have 10, send 10.
• 12:12
  SPEAKER_03: Yeah.
• 12:13
  SPEAKER_02: You know, uh occasionally you run across people who don't send you anything, and then it turns out, well, they had 10, they were just waiting on everything.
• 12:18
  SPEAKER_02: Yeah, let me send 10 to the auditor, shows good faith.
• 12:21
  unknown: Right.
• 12:21
  SPEAKER_02: And honestly, it gives the auditor plenty to review in the short run and then send them the others later.
• 12:26
  SPEAKER_02: That's a great tip.
• 12:27
  SPEAKER_02: Yeah, it's not really a big deal.
• 12:28
  SPEAKER_02: Just yeah, send what you can, you know.
• 12:30
  SPEAKER_02: So don't let was the expression bullet perfectly be the enemy of progress or something like that.
• 12:36
  SPEAKER_01: There's often confusion about how much information companies should provide.
• 12:40
  SPEAKER_01: How should businesses approach communication with the IRS to avoid unintentionally expanding the scope of the audit?
• 12:47
  SPEAKER_02: This one I do have a strong opinion on, which is I give it.
• 12:51
  SPEAKER_02: I personally think the best practice is if you're a client and the auditor reaches out to you, a state or federal auditor, I've had many experiences with this.
• 12:59
  SPEAKER_02: My big recommendation would be say, if it were me, well, Chris Stevens is representing me, reach out to him and he'll talk you through all this.
• 13:06
  SPEAKER_02: And don't talk to him.
• 13:07
  SPEAKER_02: Because I've had many cases where I'll give you a quick example.
• 13:11
  SPEAKER_02: On a Tennessee audit, it was a state audit instead of IRS, but it illustrates the example very well.
• 13:16
  SPEAKER_02: On a sales and use tax audit, basically the auditor was trying to say that these modular structures they build were not permanently affixed and therefore they were subject to sales and use tax, as opposed to being personal of like real property.
• 13:30
  SPEAKER_03: Yeah.
• 13:30
  SPEAKER_02: And so the way they're built, we think that we thought they were real property.
• 13:34
  SPEAKER_02: Well, apparently the auditor called up just the office and taught whoever answered the phone said, Hey, these little structures that you build, could they be moved?
• 13:41
  SPEAKER_02: And I think the employee just said something like, Yeah, I mean, I guess if you wanted to move, I guess you could.
• 13:47
  SPEAKER_02: Just thinking like kind of logically, I guess anything could be moved if you want.
• 13:50
  SPEAKER_03: Yeah.
• 13:51
  SPEAKER_02: You know, and so the auditor literally wrote it up that these are movable and therefore subject to sales tax.
• 13:55
  SPEAKER_02: Oh, yeah.
• 13:56
  SPEAKER_02: And then when I talked to the auditor about it, I was like, no, we talked about this.
• 13:58
  SPEAKER_02: These are, you know, whatever, these are real property.
• 14:00
  SPEAKER_02: Well, somebody at the company said they were movable and that's it.
• 14:03
  SPEAKER_02: And he would not change his opinion.
• 14:04
  SPEAKER_02: He basically, it was kind of like one of those things where you know, like kids say, Well, you said that first, you can't take it back.
• 14:09
  SPEAKER_02: That's basically what he did.
• 14:10
  SPEAKER_02: And so we actually had to go to appeals in Tennessee to overturn that.
• 14:13
  SPEAKER_02: It did get overturned in appeals.
• 14:15
  SPEAKER_02: We did end up winning.
• 14:16
  SPEAKER_02: Okay.
• 14:16
  SPEAKER_02: Um, but we had but yeah, the client had to incur additional fees, all that kind of stuff.
• 14:19
  SPEAKER_02: We never found out which employee they talked to.
• 14:21
  SPEAKER_02: I think the the CFO was very curious which employee they talked to, we never found out.
• 14:25
  SPEAKER_02: But I didn't really inquire.
• 14:26
  SPEAKER_02: I wasn't gonna get anybody in trouble, obviously.
• 14:28
  SPEAKER_02: But um that was a very interesting, but that happens with IRS, happens all the time where you know you because they and I always tell my clients this it's not like you aren't qualified to talk about your business.
• 14:36
  SPEAKER_02: Of course you are, and of course you're educated and all this kind of stuff.
• 14:39
  SPEAKER_02: It's just that things have a different meaning to the IRS or to a State Department of Revenue than they do in your business sometimes.
• 14:44
  SPEAKER_02: And you may use a term or say something in a certain way that's applicable in your business, right?
• 14:48
  SPEAKER_02: But it maybe has a different meaning for tax purposes or a very specific legal definition that could be misinterpreted.
• 14:54
  SPEAKER_02: And so just be, you know, they could talk about factual things, uh, you know, that's okay a lot of times.
• 14:59
  SPEAKER_02: Even that, sometimes you should kind of talk through with us first, but basically stick to the facts and then other types of things.
• 15:04
  SPEAKER_02: Um, I would say leave to us.
• 15:06
  SPEAKER_02: And honestly, you're probably safer just to let us talk to them in general.
• 15:08
  SPEAKER_02: Just in general, just not worry about it.
• 15:10
  SPEAKER_02: It's just a safe bet, you know.
• 15:11
  SPEAKER_02: So yeah.
• 15:12
  SPEAKER_01: So audits can become especially complex for growing or multi-state companies.
• 15:18
  SPEAKER_01: So, what unique challenges do larger organizations or businesses operating across multiple jurisdictions tend to face during an IRS examination?
• 15:28
  SPEAKER_00: Well, I I'll handle that because I actually work my last 10 years with IRS in the large businesses international, where we actually did the audits of the you know the biggest companies in America.
• 15:38
  SPEAKER_00: Oh, there's two big things going with these large audits as far as jurisdictions.
• 15:43
  SPEAKER_00: Number one, is it a domestic entity only?
• 15:46
  SPEAKER_00: Okay.
• 15:46
  SPEAKER_00: Or does it have tentacles into you know foreign countries, you know, with foreign affiliates or foreign subsidiaries, what have you.
• 15:53
  SPEAKER_00: In which case you've got, you know, issues regarding international tax, and I want to get into a whole bunch of them, but there's some international tax complexities if the company operates in multiple nations.
• 16:06
  SPEAKER_00: But within the U.S., what can happen is, and it's more of a multiple state thing, each state has its own taxing authority.
• 16:13
  SPEAKER_00: You know, 43 states have an income tax.
• 16:16
  SPEAKER_00: You know, every state's got a way of raising money off the business community.
• 16:20
  SPEAKER_00: Right, right.
• 16:20
  SPEAKER_00: So even the ones without an income tax are taxing that business somehow.
• 16:24
  SPEAKER_00: Uh so what can happen with a large company is that they're operating in a number of states.
• 16:29
  SPEAKER_00: Now, the federal tax, if it's you know, uh just domestic, for instance, okay, that doesn't really matter.
• 16:34
  SPEAKER_00: It's a federal computation wherever you earn those dollars.
• 16:37
  SPEAKER_00: You know, it's a federal deduction wherever you spend those dollars.
• 16:40
  SPEAKER_00: You know, I'm just speaking about a domestic company that doesn't have any international aspects to it.
• 16:45
  SPEAKER_00: But if it's operating in a number of states, suddenly it's got a number of state filings it has to do, and and that's a challenge in itself.
• 16:53
  SPEAKER_00: And that isn't necessarily an IRS challenge, but that's a compliance challenge.
• 16:57
  SPEAKER_03: Yeah.
• 16:57
  SPEAKER_00: And sometimes it can become a little bit of an IRS issue because IRS might start questioning some of the deductions for state taxes, which are deductible on a federal return.
• 17:07
  SPEAKER_00: So it can have sort of a secondary effect on a federal return.
• 17:11
  SPEAKER_01: So technology and digital records are becoming a much bigger part of the audit process.
• 17:17
  SPEAKER_01: How is the IRS using data analytics and technology differently today compared to previous years?
• 17:23
  SPEAKER_00: Well, years ago, I mean, and I mentioned this earlier when we first started talking, IRS would gather statistics based on an you know a type of industry a business is in.
• 17:33
  SPEAKER_00: And I'm going to just speak about business taxpayers.
• 17:36
  SPEAKER_00: They do the same thing with wealthy individuals.
• 17:38
  SPEAKER_00: They look at, you know, income levels that are reported, what's the average charitable contribution for that, you know, what's the average expense, housing interest deduction, you know, that kind of thing for that individual.
• 17:49
  SPEAKER_00: But they do the same kind of thing with businesses I talked to, as I spoke about earlier.
• 17:54
  SPEAKER_00: They're trying to go more and more and use AI to do that.
• 17:57
  SPEAKER_00: I think ultimately that's all AI is going to do, right?
• 18:00
  SPEAKER_00: I mean, AI can, I mean, if you boil it down to its basics, it's just ones and zeros, it's digital stuff.
• 18:07
  SPEAKER_00: So what do you tell it to do?
• 18:08
  SPEAKER_00: You're telling it to look for those outliers, those things that don't fit the pattern.
• 18:12
  SPEAKER_00: And probably AI will let them maybe do a little better job of identifying things that fall out of that pattern that look like, okay, this just looks questionable.
• 18:22
  SPEAKER_00: Yeah.
• 18:22
  SPEAKER_00: You know, it's outside the normal range, nothing else makes sense to explain this.
• 18:27
  SPEAKER_00: Let's audit it.
• 18:28
  SPEAKER_00: I think you're going to see IRS moving towards that, but the the logic behind it, I don't think it's going to be any different than it was in the 1980s.
• 18:35
  SPEAKER_00: You know, some way I can look at something and and you could almost do it with your eyes.
• 18:39
  SPEAKER_00: When I worked for them in the 1980s, sometimes we would get returns and just visually look at things and go, well, that expense looks a whole way out of line given you know what they're reporting or what industry they're in.
• 18:51
  SPEAKER_00: I mean, we got so comfortable doing this that we could sometimes you know look at these things and figure out where the audit issues were just by examining the thing with our own eyes.
• 18:59
  SPEAKER_00: Yeah.
• 18:59
  SPEAKER_00: Looking at them with our own eyes where we want to put our efforts.
• 19:02
  SPEAKER_00: So I think AI is going to help them get there in a little more efficient way.
• 19:07
  SPEAKER_00: Yeah.
• 19:07
  SPEAKER_00: When they've got less staff, so they're looking for those efficiencies.
• 19:10
  SPEAKER_00: And they're looking for efficiencies, and this is sort of an interesting aside.
• 19:14
  SPEAKER_03: Yeah.
• 19:14
  SPEAKER_00: They're trying to figure out they've only got so many internal revenue agents that do these audits.
• 19:19
  SPEAKER_00: So the ultimate question is, well, what audits, what businesses do you have them go audit?
• 19:23
  SPEAKER_00: And when they go audit those businesses, what issues, what tax deductions or what income reporting issues do you have them pursue?
• 19:32
  SPEAKER_00: And I think that's where AI can help them a lot is identify which businesses they are which particular entities, taxpayers, they need to audit, and within that tax return for that taxpayer, which line item should they focus on?
• 19:45
  SPEAKER_00: And I think AI can help them do both.
• 19:47
  SPEAKER_01: Yeah.
• 19:47
  SPEAKER_01: Yeah.
• 19:48
  SPEAKER_01: Thank you for that perspective.
• 19:50
  SPEAKER_01: One area that creates a lot of stress is when audits begin uncovering additional issues, and we kind of alluded to a little bit earlier on.
• 19:57
  SPEAKER_01: How do businesses navigate situations where the IRS expands the audit or proposes adjustments the company disagrees with?
• 20:06
  SPEAKER_02: Well, as far as expanding the audit, that does happen a lot.
• 20:09
  SPEAKER_02: You know, where usually that's going to happen when you provide an answer to something and that maybe opens up a different door where the auditor says, okay, well, let's explore that a little bit further.
• 20:22
  SPEAKER_02: Or maybe you provide certain records.
• 20:24
  SPEAKER_02: Let's just take the airplane as an example.
• 20:25
  SPEAKER_02: Maybe they didn't know the business had an airplane.
• 20:27
  SPEAKER_02: Yeah.
• 20:27
  SPEAKER_02: And then all of a sudden, when you provide all the books and records, they start seeing all these airplane expenses on there, uh, like say in their Excel file.
• 20:35
  SPEAKER_02: Um, they start seeing all this airplane detail, but then they expand the scope to say, okay, well, let's audit this airplane.
• 20:40
  SPEAKER_02: Let's get your books and records on that, let's get your flight logs, maintenance logs, let's see if this was business or personal.
• 20:45
  SPEAKER_02: Yeah.
• 20:46
  SPEAKER_02: Um, all that sort of thing.
• 20:47
  SPEAKER_02: But it can happen with a variety of issues.
• 20:48
  SPEAKER_02: But once they start digging in, then yes, they can all of a sudden start expanding.
• 20:51
  SPEAKER_03: Okay.
• 20:52
  SPEAKER_02: I mean, you can try to it's hard to get them to not expand the scope though, not without at least an initial look.
• 20:58
  SPEAKER_02: Okay.
• 20:58
  SPEAKER_02: You know, but you may be able to get them to kind of come off of it if it's not a material issue or something like that.
• 21:03
  SPEAKER_02: So you would look and see, is there anything I can do to kind of prevent them from expanding the scope of this audit unnecessarily?
• 21:08
  SPEAKER_02: Arguing that's immaterial or maybe the auditor misunderstood, you can do that possibly.
• 21:13
  SPEAKER_02: Other than that, you know, you're just trying to mitigate the best you can, providing the records and just trying to get them to the right answer.
• 21:19
  SPEAKER_02: But you try to mitigate it where you can.
• 21:21
  SPEAKER_02: If you get an assessment you disagree with, which happens almost every time there is an assessment, there's not too many occasions where a client or us gets an assessment and we agree with it.
• 21:29
  SPEAKER_02: We may say, hey, it's too small to worry about pursuing any further, we'll pay it, you know.
• 21:33
  SPEAKER_02: But usually, you know, most of the time people disagree.
• 21:36
  SPEAKER_02: Um and from there, that's where there's a variety of different appeal options from the once you get an initial assessment.
• 21:42
  SPEAKER_02: I mean, a lot of times what you're going to get first is just the auditor's initial work papers or like a just an initial preliminary assessment.
• 21:50
  SPEAKER_02: And a lot of times you'll get like an informal version of that where you get a chance to go to the auditor and say, the auditor will come to you and say, Here's what I'm thinking, does this make sense?
• 21:57
  SPEAKER_02: And then you can provide additional records, that sort of thing, before they write.
• 22:00
  SPEAKER_02: Of a formal report.
• 22:01
  SPEAKER_02: This is if you're working really well with the auditor.
• 22:03
  SPEAKER_01: Okay, you aren't just like buttoning it from the beginning.
• 22:05
  SPEAKER_01: Exactly.
• 22:06
  SPEAKER_02: You're working well with them and all that kind of stuff.
• 22:07
  SPEAKER_02: Then a lot of times they'll give you their informal findings and you can say, Oh, well, actually, I do have a travel receipt to substantiate this expense or whatever, and you can take that one out.
• 22:15
  SPEAKER_02: That happens.
• 22:16
  SPEAKER_02: Or they'll give you their first initial report, which is the 4549.
• 22:19
  SPEAKER_02: Uh they'll give you like that, they'll give you a written-up version, but still it's relatively informal where they'll give you, you know, 14 days, however much time they give you.
• 22:27
  SPEAKER_02: Um I've had different artists give me different amounts of time on that, and they're a little more flexible on those time frames for the 4549.
• 22:33
  SPEAKER_02: A lot of times, again, if you have a good regulation, they can be a little more informal, and you can still provide records and all that kind of stuff.
• 22:39
  SPEAKER_02: Um, I'm thinking of travel records because I'm working one now where we got 4549 and there was a line item disallowing a bunch of travel expenses, and then we just went back and got them and provided them to the auditor.
• 22:49
  SPEAKER_02: The auditor removed them, gave us a new 4549 with those removed.
• 22:52
  SPEAKER_02: Um really no big deal.
• 22:54
  SPEAKER_02: Um, you can seek penalty removal at that stage too.
• 22:57
  SPEAKER_02: If the auditors just stick it to their guns at that stage, then you can request a manager conference, and that gives you a chance to basically go to their manager and say, hey, they're not accepting these travel records, for instance, or they're not waiving this penalty.
• 23:08
  SPEAKER_02: Here's why we think we have a good argument for that.
• 23:10
  SPEAKER_02: It's a quick phone call with the manager, usually, and that gives you a chance before you have to go to appeals.
• 23:15
  SPEAKER_02: Okay.
• 23:15
  SPEAKER_02: Um, and then if you're just getting nowhere there, then you can go to the independent office of appeals.
• 23:20
  SPEAKER_02: You'll get a final notice, and then you can go to the independent office of appeals.
• 23:23
  SPEAKER_02: And that gives you another bite at it.
• 23:25
  SPEAKER_02: Now that's more formal though, where you have to kind of write up a big formal written appeal saying all your grounds, here's the facts on my client's situation, here's exactly what happened during the audit, here's what they disallowed, um, here's why we think they qualified for this deduction, let's say, you know, you write the law on round why, you know, the rules on travel deductions, what you have to what's allowed, what substantiation's required, here's why we think it was allowed, here's why we think it had a good business purpose, you know, all that sort of stuff.
• 23:52
  SPEAKER_02: You write up all your details and you say, well, here's why we think this assessment should be reversed, for instance, or this piece of it.
• 23:56
  SPEAKER_02: You don't always disagree with the entire assessment.
• 23:57
  SPEAKER_02: Sometimes you'll say, Yeah, we disagree with the travel expense portion, for instance, but then we are okay with this other part, and so you're only appealing one part.
• 24:05
  SPEAKER_02: And then you get a hearing assigned, and then you can go, um, you don't literally go anymore, you just do it on the phone, but you can have a telephone hearing where you tell the appeals officer, here's, you know, basically you don't read through the appeal, of course, but you kind of tell them the highlights of here's what's going on.
• 24:18
  SPEAKER_02: You make your case essentially.
• 24:19
  SPEAKER_02: It's sort of like an oral argument.
• 24:21
  SPEAKER_02: You kind of have your hearing.
• 24:22
  SPEAKER_02: Um, and often they'll have the IRS auditor or somebody from their team.
• 24:25
  SPEAKER_02: You know, if it's a particular, like a specialized dispute where they like in conservation easement case or something, they may have like their appraiser on the phone saying, here's why we think this appraisal was, you know, inflated or whatever.
• 24:36
  SPEAKER_02: So there may be specialists on the phone as well, uh, on their side.
• 24:39
  SPEAKER_02: But basically both sides make their case, and then the appeals officer goes off and sometimes they'll request additional records from you and give you time to provide that.
• 24:45
  SPEAKER_02: Um, but then they'll go off and uh make their decision.
• 24:48
  SPEAKER_02: So and then from there, a taxpayer, if they still disagree, could go to tax court or they could file a refund claim and sue in district court.
• 24:54
  SPEAKER_02: So there's a variety of different options, but the informal ones are sort of ones outside of court that we would handle would be appealing back to the initial auditor.
• 25:03
  SPEAKER_02: Uh informally, usually.
• 25:05
  SPEAKER_02: Sometimes we will write up a formal appeal to the auditor if it's like a pretty technical situation.
• 25:09
  SPEAKER_02: It's you know, you really need to write it up.
• 25:11
  SPEAKER_02: Uh so the auditor, manager, and then the office of appeals are kind of the avenues.
• 25:15
  SPEAKER_01: How often does that escalation happen?
• 25:18
  SPEAKER_02: I would say fairly often, honestly.
• 25:20
  SPEAKER_02: Uh at least up through appeals.
• 25:22
  SPEAKER_02: Um I would say it's less common to go to tax court.
• 25:25
  SPEAKER_02: Um and then less common still to go to like district court file refund claim.
• 25:30
  SPEAKER_02: Um I mean, tax court people do go to tax court all the time, but it just requires big dollars usually.
• 25:35
  SPEAKER_02: And also just like being willing to do that, you'd have to be like in the at least hundreds of thousands, probably on the assessment and feel like you've got a good case for it.
• 25:43
  SPEAKER_02: But I would say definitely going back to the auditor happens with regularity.
• 25:49
  SPEAKER_02: And then the manager that whether you do that or not just depends.
• 25:52
  SPEAKER_02: It's easy to do, so often we recommend it and we will do it.
• 25:56
  SPEAKER_02: If you just know you're not gonna get anywhere, you might skip it and just go straight to appeals, especially if it was kind of a more headbutting type audit where they're not as reasonable.
• 26:02
  SPEAKER_02: It's not and also with the manager, it's not like they're gonna just completely overrule their auditor.
• 26:06
  SPEAKER_02: That's kind of human nature, too.
• 26:07
  SPEAKER_02: That it's just like anybody with their supervisor.
• 26:09
  SPEAKER_02: You know, your supervisor, you're pretty much working in lockstep with them, you're running stuff by them before you submit stuff.
• 26:14
  SPEAKER_02: So they've probably run that 4549 by the manager, gotten approval before they sent it to us.
• 26:19
  SPEAKER_02: So, you know, is it gonna change anything going to the manager?
• 26:21
  SPEAKER_02: Maybe not.
• 26:22
  SPEAKER_02: We have had success with penalties, and that's an area where we've had some success with the manager.
• 26:26
  SPEAKER_02: And then going to the Office of Appeals, I don't know, maybe 50% of the time.
• 26:30
  SPEAKER_02: Uh something like that.
• 26:31
  SPEAKER_02: You know, it varies, but you know, you know, it's not every single case goes to appeals, but I mean a fair percentage, too.
• 26:36
  SPEAKER_03: Well, okay.
• 26:37
  SPEAKER_00: And I would just say that the IRS has two basic areas uh two divisions that do field audit work small business, self-employed, and they do businesses with assets less than$10 million.
• 26:49
  SPEAKER_00: They base it on assets, not sales, and also self-employed individuals.
• 26:54
  SPEAKER_00: Uh they have a large case, and that's and I've worked in both over my career with IRS.
• 26:58
  SPEAKER_00: They also have a large business international division that does mid-size and large companies, in other words, ten million dollars in assets or above ten million dollars in assets, and the sky's the limit.
• 27:09
  SPEAKER_00: So it can be company just hovering a little over ten million in assets or the biggest company in America, what have you, and everything in between.
• 27:16
  SPEAKER_00: Their procedures are a little more formal.
• 27:18
  SPEAKER_00: Chris gave a good synopsis of the general procedures that would apply to both divisions.
• 27:23
  SPEAKER_00: What you'll find with the LBI division, Large Business Business International, it's more formal when they propose a tax change, they call it a notice of proposed adjustment.
• 27:32
  SPEAKER_00: You'll actually want to respond to that in writing.
• 27:35
  SPEAKER_03: Okay.
• 27:35
  SPEAKER_00: Because basically they're going to give you what looks like a legal tax position.
• 27:39
  SPEAKER_03: Yeah.
• 27:39
  SPEAKER_00: And then that's the way you want to respond.
• 27:41
  SPEAKER_00: You're basically going to give them your tax position, you know, the facts, the law, and the argument, the legal argument.
• 27:46
  SPEAKER_00: So and that's done in writing.
• 27:48
  SPEAKER_00: That's a much more formal process.
• 27:50
  SPEAKER_03: Okay.
• 27:51
  SPEAKER_00: And and a lot of those cases do wind up going to appeals because they're not really arguing so much in those bigger cases over pieces of paper.
• 28:00
  SPEAKER_00: You know, gee, we're missing a box of records or whatever.
• 28:03
  SPEAKER_00: Those really aren't the arguments with those big companies.
• 28:05
  SPEAKER_00: The arguments are, okay, we can see the numbers.
• 28:08
  SPEAKER_00: We all agree these are the numbers.
• 28:10
  SPEAKER_00: It's the tax treatment of those numbers that we're arguing about.
• 28:14
  SPEAKER_00: Is it, you know.
• 28:15
  SPEAKER_01: Different layers of it.
• 28:16
  SPEAKER_01: Yeah.
• 28:16
  SPEAKER_00: And I always think when I went up, it was an LB and I remember an old agent told me one time, he says, you know, most of our arguments really are over timing.
• 28:23
  SPEAKER_00: What tax year do you report the income in and what tax year do you take the expense in?
• 28:28
  SPEAKER_00: And there's this friction, you know.
• 28:30
  SPEAKER_00: The taxpayer wants to report the income many years from now.
• 28:34
  SPEAKER_00: The IRS report wants it reported this year.
• 28:38
  SPEAKER_00: And with the expense, it's of course the opposite.
• 28:40
  SPEAKER_00: The taxpayer wants to deduct it.
• 28:42
  SPEAKER_00: This year, an IRS is saying, no, I think that's a deductible thing that's, you know, should be prorated over time for whatever reason to match income over time or what have you.
• 28:51
  SPEAKER_00: So those were the two big arguments.
• 28:53
  SPEAKER_00: But again, that arena, they tended to be very formal.
• 28:56
  SPEAKER_00: But Chris gave a great synopsis of just how this thing works generally.
• 28:59
  SPEAKER_00: Trevor Burrus, Jr.
• 28:59
  SPEAKER_02: And honestly, your point about being formally, you reminded me, I like to respond and almost always do respond, we all do, formally in writing, to basically everything, honestly, other than just like talking to the auditor and say, hey, we disagree with this, but then we're going to follow up with something formal in writing.
• 29:13
  SPEAKER_02: Because I feel like this is just something I've learned over the years.
• 29:15
  SPEAKER_02: I feel like with auditors, it just seems to be human nature for people that if you disagree with them, they dig their heels in and explain why they were right and you're wrong.
• 29:22
  SPEAKER_02: And but sometimes I feel like if you give it to them in writing, first of all, you sort of can overwhelm them with the facts and overwhelm them with the law a little bit of like, here's all these reasons why we're correct and you're incorrect.
• 29:32
  SPEAKER_02: And it's almost like so much that they go, Oh my goodness, I guess I have to.
• 29:36
  SPEAKER_01: Yeah, let me let me rethink this.
• 29:37
  SPEAKER_02: And I feel like if they have time with it, instead of having to respond to you like on the top of their head, I feel like if they have to respond off the top of the head, it just think about any disagreement you get into with anybody anytime, it's just natural for them to dig their heels in.
• 29:47
  SPEAKER_02: Yeah.
• 29:48
  SPEAKER_02: And then what happens usually after prolong this thing.
• 29:50
  SPEAKER_01: Right.
• 29:50
  SPEAKER_02: And then what happens in any disagreement you have with anybody?
• 29:52
  SPEAKER_02: Later they come back and go, well, you know what I was thinking about.
• 29:55
  SPEAKER_02: That was kind of maybe I was a little too hasty.
• 29:58
  SPEAKER_02: Yeah, exactly.
• 29:59
  SPEAKER_02: So that's how I feel with appealing too.
• 30:00
  SPEAKER_02: It's like just in person, we're gonna they're gonna disagree, but if they have it and consent with it, they might go, Well man, maybe I do need to look into this.
• 30:07
  SPEAKER_02: Maybe I maybe maybe they got something here.
• 30:09
  SPEAKER_02: I don't know.
• 30:10
  SPEAKER_02: So I I I think it's always best to do that anyway.
• 30:13
  SPEAKER_01: Just start with paperwork first.
• 30:15
  SPEAKER_01: Just put it all in their face first.
• 30:16
  SPEAKER_01: Got it.
• 30:17
  SPEAKER_01: Okay.
• 30:18
  SPEAKER_01: Penalties and interests can sometimes become as significant as the underlying tax issue itself.
• 30:24
  SPEAKER_01: So what options do taxpayers have when it comes to penalty abatement, appeals, or negotiating resolutions?
• 30:32
  SPEAKER_02: The penalties and interests can be a huge part, um, especially with older tax years.
• 30:37
  SPEAKER_02: This has come up a lot with conservation easements, for example.
• 30:39
  SPEAKER_02: You know, that's a little bit of a special case with conservation easements because they went through litigation for so long, drawn out audits, and they would go through litigation, then the cases settle.
• 30:48
  SPEAKER_02: And sometimes I just had a notice come in the other day for a client for a 2017 tax year where they just got the notice, and the penalties and interest are at least equal to the to the tax amount.
• 30:57
  SPEAKER_02: I mean, the interest alone is almost equal to what the tax was.
• 31:01
  SPEAKER_02: And so that can be a huge thing that shocks people and creates a huge liability.
• 31:05
  SPEAKER_02: Setting conservation easements aside, because they're a bit of a s kind of a special issue.
• 31:08
  SPEAKER_02: In general, when you have issues like this, um, you can always write in for penalty abatement.
• 31:13
  SPEAKER_02: Uh, you would have to seek a reasonable cause abatement for the most part.
• 31:16
  SPEAKER_02: First time abatements are also available for certain penalty types and cases, just your stand-up failure to file, failure to pay.
• 31:22
  SPEAKER_02: Often they can call in for first-time abatement, but that's if you've never had a penalty of that type in the prior three years.
• 31:27
  SPEAKER_02: So basically, if you have a clean filing history for the most recent several years, this is just an easy way to think about it, then you can call and request first-time abatement.
• 31:34
  SPEAKER_02: If it's over a certain dollar amount, sometimes they won't do it over the phone.
• 31:37
  SPEAKER_02: And sometimes I've just found over the phone, sometimes they won't do it for whatever reason.
• 31:40
  SPEAKER_02: Can't really tell you why.
• 31:42
  SPEAKER_02: So then you have to write in.
• 31:42
  SPEAKER_02: So if you write in, you can write in what we do.
• 31:45
  SPEAKER_02: If we think there's a good reason why they filed late, for instance, you know, they were in the hospital or something like that, let's just say.
• 31:50
  SPEAKER_02: Uh, if they were in the hospital for months, it'd have to be something pretty serious, you know, nothing minor.
• 31:55
  SPEAKER_02: But if there's just some reason they truly could not file, then you could write in and say, Well, here's what all went on, here's all the facts.
• 32:01
  SPEAKER_02: We think they qualify for first-time abatement anyway, but if not, here's why they have reasonable cause.
• 32:05
  SPEAKER_02: And with reasonable cause, you basically just have to show that they didn't intentionally they didn't do it on purpose.
• 32:10
  SPEAKER_02: Yeah.
• 32:10
  SPEAKER_02: They had some reason that was beyond their control, they followed ordinary business care and prudence, did everything an ordinary, a reasonable taxpayer in those circumstances would do, and still, through no fault of their own, filed late.
• 32:21
  SPEAKER_02: Yeah.
• 32:22
  SPEAKER_02: And then you basically make the factual case, apply the facts to that.
• 32:25
  SPEAKER_02: There's a lot of tax score cases out there with tons of different situations on reasonable cause cases, both pro-taxpayer and anti-taxpayer.
• 32:32
  SPEAKER_02: So it gives you a good case to be able to build.
• 32:34
  SPEAKER_02: You know, look for similar cases.
• 32:36
  SPEAKER_02: That's what we try to do.
• 32:37
  SPEAKER_02: Look for something a similar situation, because there's definitely nothing new.
• 32:39
  SPEAKER_02: These have all been done before, you know.
• 32:41
  SPEAKER_02: And so you can find a similar case to help support yours to write in for reasonable cause abatement.
• 32:46
  SPEAKER_00: I would also like to add within the audit context, you know, if we're talking about penalties, we will sometimes see, you know, a late filing penalty asserted in an audit context because the return itself was late, so any additional tax due, you know, coming from the audit sometimes can be subjected to that late filing penalty.
• 33:04
  SPEAKER_00: But the big thing we fight with audit penalties is what's called the accuracy related penalty.
• 33:09
  SPEAKER_00: It's 20%.
• 33:10
  SPEAKER_00: It's a big one.
• 33:10
  SPEAKER_00: It's 20% of whatever the additional tax the auditor says is due that is on the audit report.
• 33:16
  SPEAKER_00: And IRS is almost always applying these.
• 33:19
  SPEAKER_00: They almost apply them and then you gotta fight them.
• 33:21
  SPEAKER_00: It's 20% of that.
• 33:22
  SPEAKER_00: So if we're we're representing a big company, for instance, and uh the auditor comes back with a report that says there's a hundred thousand dollars of tax deficiency, in other words, additional tax, the audit penalty, what's called the accuracy related penalty, is twenty percent.
• 33:36
  SPEAKER_00: It's twenty thousand dollars.
• 33:38
  SPEAKER_00: We had one recently, we just got up into appeals and won.
• 33:42
  SPEAKER_00: It was, I think, thirty-three thousand dollars.
• 33:44
  SPEAKER_00: And that was an individual that had to pay that kind of thing.
• 33:47
  SPEAKER_00: Audit penalty was thirty-three thousand dollars, and we you know, Chris did a good job of making a reasonable case argument.
• 33:53
  SPEAKER_00: In those cases, an audit, what the IRS is gonna pursue is a line of reasoning that you were negligent.
• 34:00
  SPEAKER_00: You were negligent in completing your return.
• 34:02
  SPEAKER_00: You were negligent in determining the numbers to put on your tax return, therefore you owe this other twenty percent.
• 34:07
  SPEAKER_00: So we're fighting that negligence argument.
• 34:09
  SPEAKER_00: And there's also another one they use called substantial understatement.
• 34:13
  SPEAKER_00: You substantially understated your tax liability.
• 34:15
  SPEAKER_00: There's a math component to that, but you can still bring the reasonable cost factors in to try to get relief for it.
• 34:22
  SPEAKER_00: But that's a big one we fight with audits, and that's a huge penalty.
• 34:25
  SPEAKER_00: Yeah.
• 34:25
  SPEAKER_00: 20%.
• 34:27
  SPEAKER_00: And that doesn't count interest.
• 34:28
  SPEAKER_00: On top of that is interest, and interest is statutory, it's very difficult to get out of.
• 34:32
  SPEAKER_00: You almost never can.
• 34:34
  SPEAKER_00: One thing I tell people is whatever that tax assessment ultimately becomes, we might get you out of the penalty piece of it, but the interest on that back tax, that audit assessment is going to be paid.
• 34:46
  SPEAKER_02: Yeah, the only time you can get out of interest, I mean, as you alluded to, is if it was erroneously assessed.
• 34:50
  SPEAKER_02: And honestly, it's very uncommon.
• 34:52
  SPEAKER_02: Yeah, yeah.
• 34:53
  SPEAKER_02: Yeah, it is.
• 34:54
  SPEAKER_02: It'd be a situation where like I we had one recently that one of our team members helped us with, and it was just a case where IRS basically misapplied a payment to the like the taxpayer actually paid the payment correctly, got applied to the wrong year, or something like that.
• 35:04
  SPEAKER_02: Like, and it wasn't the taxpayer's error at all, the IRS just moved it to the wrong year, and that's the situation where we can get the payment moved, but they didn't like backdate the payment to eliminate the interest automatically, and that's where we later would get the interest removed due to erroneous assessment because it was the IRS's fault.
• 35:18
  SPEAKER_02: The payment was timely.
• 35:19
  SPEAKER_02: Um, but it has to be some kind of oddball situation.
• 35:22
  SPEAKER_01: How was that caught?
• 35:23
  SPEAKER_01: I'm curious.
• 35:25
  SPEAKER_02: Yeah Yeah, we basically they got we noticed I think the IRS assessed them because they weren't showing a payment.
• 35:30
  SPEAKER_01: Okay.
• 35:30
  SPEAKER_02: And then the client had proof that we had made the payment, and then we basically had to do a bunch of digging, pulled transcripts, taught IRS, and we found, well, oh, it's over in this other module.
• 35:39
  SPEAKER_02: They call them modules inside.
• 35:40
  SPEAKER_02: It's like I think it was in another tax year, or they'd applied it to estimated payment for the next year or something like that.
• 35:45
  SPEAKER_02: And so then, you know, Luke on our team was able to call and get it moved, and what they should have done was moved it and made it the effect of the date they'd actually paid it.
• 35:52
  SPEAKER_02: Yeah.
• 35:52
  SPEAKER_02: But they didn't, they made it like today's date.
• 35:54
  SPEAKER_02: So it looked like a late payment.
• 35:55
  SPEAKER_02: Yeah.
• 35:55
  SPEAKER_02: And then there was interest and penalties, so we were able to get those removed.
• 35:58
  SPEAKER_02: Because it'd have to be some kind of situation like that, though, yeah, for a Ronnie's assessment.
• 36:01
  SPEAKER_02: The only thing you can do with interest, if in an audit, uh it doesn't come up that often, but conservation easement cases it does.
• 36:08
  SPEAKER_02: You can make deposit payments to IRS.
• 36:10
  SPEAKER_02: Um they're called 6603 deposit payments.
• 36:12
  SPEAKER_03: Okay.
• 36:13
  SPEAKER_02: And there's a whole process for how you have to do them, but the gist of it is you make a deposit, and if there's an assessment later, it stops the interest at back as of the date of your deposit payment.
• 36:21
  SPEAKER_02: Uh-huh.
• 36:22
  SPEAKER_02: So if you're anticipating some big thing and there's going to be all this interest, like if you know you're going to owe something big, you could make a deposit payment.
• 36:28
  SPEAKER_02: And in conservation easement cases, people will do that often to stop the running of interest.
• 36:32
  SPEAKER_02: But that's about the only other mitigation measure that I know of.
• 36:35
  SPEAKER_01: Oh my goodness.
• 36:37
  SPEAKER_01: So before we wrap up, let's focus on proactive planning.
• 36:41
  SPEAKER_01: So, what are the most important things businesses can do now to strengthen audit readiness and reduce risk long before an IRS notice ever arrives?
• 36:50
  SPEAKER_00: Well, I think the best way to look at this is what best practices can I adopt now going forward?
• 36:56
  SPEAKER_00: It's a little hard sometimes if you haven't done things right in the past and you've got some sloppy record keeping and you've got missing records.
• 37:04
  SPEAKER_00: You may not be able to do much about that.
• 37:06
  SPEAKER_00: You know, maybe a little bit.
• 37:08
  SPEAKER_00: But I think the best thing is good compliance practices going forward.
• 37:13
  SPEAKER_00: And I think one of the biggest things, and I used to tell people this when I was an IRS agent, you know, you know, there would be people that would just have a big mess going on, and I sometimes would just ask them, have you ever thought about getting an accounting firm just to help you?
• 37:27
  SPEAKER_00: Right.
• 37:27
  SPEAKER_00: You know, instead of doing this on your own.
• 37:29
  SPEAKER_01: You don't have to do this a lot.
• 37:33
  SPEAKER_00: We have a there's a big bunch of associates that we're we affiliate with that do that kind of work.
• 37:38
  SPEAKER_00: So I think uh the first and foremost is get a good reputable accounting firm involved.
• 37:43
  SPEAKER_00: Um and listen to that advice.
• 37:45
  SPEAKER_00: Because the people that are going to give you that advice know what they're talking about.
• 37:48
  SPEAKER_00: I know here at Bennett Thrasher, we do a great job of keeping all the records that we use to prepare a tax return.
• 37:54
  SPEAKER_00: So clients give us quite a few of these records and we've got them all housed and organized and and yes, they agree with the numbers on the tax return.
• 38:01
  SPEAKER_00: So a firm like ours will have a good starting point when these records are requested.
• 38:06
  SPEAKER_00: Now, that doesn't mean we're gonna have every invoice that was ever written for every check or credit card bill or what have you, nor are we gonna have every transaction piece of paper on income or what have you.
• 38:18
  SPEAKER_00: But we're gonna have uh the building blocks of this thing already here.
• 38:22
  SPEAKER_00: Um and so I think that's a good practice if if you don't think you're in good shape right now, get in good shape by getting somebody really qualified at a professional accounting firm to help you and clean it up going forward.
• 38:35
  SPEAKER_03: Yeah.
• 38:36
  SPEAKER_00: You know, there's probably not too much you can do about what's gone on in the past, but certainly clean it up now.
• 38:41
  SPEAKER_00: Yeah.
• 38:42
  SPEAKER_00: And a lot of it's really not rocket science.
• 38:44
  SPEAKER_00: I mean, IRS is gonna look at line items on the return.
• 38:47
  SPEAKER_00: They're gonna, like Chris talked about earlier, they're gonna want the basic books and records, but they're also gonna want invoices and pieces of paper, if you will, that that support those deductions on the return.
• 39:00
  SPEAKER_00: Those amounts on the return, those reported in income amounts or deduction amounts, and they're gonna ask for things about that.
• 39:06
  SPEAKER_00: You need to have a decent filing system so if that stuff's asked for, you can put your hands on it.
• 39:10
  SPEAKER_03: Yeah.
• 39:11
  SPEAKER_00: You know.
• 39:11
  SPEAKER_00: So some of it's just that simple, and it's been that way forever.
• 39:15
  SPEAKER_00: Now, in the electronic driven world, I think it gets a little easier if you're on top of this stuff, where we have seen some problems, and Chris can probably opine on this as well.
• 39:25
  SPEAKER_00: In the electronic world, it's easy to lose electronic records sometimes.
• 39:29
  SPEAKER_00: You know, somebody had him on his hard drive, he doesn't work any here anymore.
• 39:32
  SPEAKER_03: Oh no.
• 39:34
  SPEAKER_00: We don't have access.
• 39:35
  SPEAKER_00: He didn't leave us his passwords and all the stuff locked up.
• 39:38
  SPEAKER_00: Yeah.
• 39:38
  SPEAKER_00: You know, but in the old paper days, it was easier.
• 39:40
  SPEAKER_00: You could go down to the basement and go, oh, there's those records.
• 39:43
  SPEAKER_03: Yeah.
• 39:43
  SPEAKER_00: And you were literally just okay, there's a box of stuff.
• 39:46
  SPEAKER_00: It might be messy, but it's there.
• 39:47
  SPEAKER_00: Yeah, yeah.
• 39:48
  SPEAKER_00: You know, so one of the biggest challenges you see now with electronic records are they don't have a good electronic internal filing system in some of these companies that we deal with.
• 39:57
  SPEAKER_00: Yeah, you bring up a good point.
• 40:00
  SPEAKER_02: Yeah, yeah, you bring up a good point about having proactive measures.
• 40:03
  SPEAKER_02: Of course, what I thought of initially was don't take ultra crazy aggressive positions on your return.
• 40:08
  SPEAKER_02: Number one.
• 40:09
  SPEAKER_02: Yeah, that's true.
• 40:10
  SPEAKER_02: And then you probably don't have that much to worry about.
• 40:12
  SPEAKER_02: And then number two, yeah, have a good record keeping system.
• 40:14
  SPEAKER_02: We actually did have a client recently where it was in a New York sales tax audit where they all of they basically they told me their controller was the one handling the audit.
• 40:24
  SPEAKER_02: They had all they were communicating with the auditor, saving all their correspondence, the auditor provided work papers, they had all these invoices, basically all the records of the audit were on this controller's hard drive.
• 40:36
  SPEAKER_02: They didn't know this at the time, I guess, because then when he left the company unexpectedly, I think he left with like no notice as far as I could gather.
• 40:44
  SPEAKER_01: So he just disappeared.
• 40:46
  SPEAKER_02: I didn't get all the T on it, but basically they kind of told me it kind of sounded like he just left with no notice, disappeared.
• 40:50
  SPEAKER_02: They came to us and said, Hey, can you guys handle this audit?
• 40:52
  SPEAKER_02: And I said, Sure.
• 40:53
  SPEAKER_02: Reached out to the auditor and said, Hey, could you bring me up to speed?
• 40:55
  SPEAKER_02: The auditor was the worst auditor I've ever worked with in my entire life.
• 40:59
  SPEAKER_02: She basically was like, Nope, you guys figure it out.
• 41:02
  SPEAKER_02: I'm not providing anything.
• 41:04
  SPEAKER_02: Get all your correspondence from them, would not give me anything.
• 41:07
  SPEAKER_02: Reached out to the client, the client said, Okay, we've looked, it must have all been on his hard drive because it's not here.
• 41:12
  SPEAKER_02: We don't have to be a little bit more.
• 41:12
  SPEAKER_02: Oh my gosh.
• 41:13
  SPEAKER_02: So I was completely blind in the audit.
• 41:15
  SPEAKER_02: I eventually was able to reconstruct stuff, and we actually did a decent job in the audit.
• 41:19
  SPEAKER_02: But talk about flying blind on that one.
• 41:21
  SPEAKER_02: Yeah.
• 41:21
  SPEAKER_02: But it was all because they didn't have a policy, or if they did, he wasn't following it.
• 41:25
  SPEAKER_02: Everything was just on his hard drive.
• 41:26
  SPEAKER_02: So yeah, just good record keeping of, especially if you're a smaller company, but any type of company, make sure that like you have shared drives, you have something where all the records are there to where if somebody leaves unexpectedly, you don't lose everything.
• 41:38
  SPEAKER_02: Like you can the next person could come in and figure out what was going on.
• 41:41
  SPEAKER_02: Have a good audit trail that's something and almost think, because I think about this with our record keeping, just imagine if somebody new came in, had no knowledge of anything, they could figure out what was going on.
• 41:50
  SPEAKER_03: Yeah.
• 41:50
  SPEAKER_02: They could at least find the files.
• 41:52
  SPEAKER_02: Um, and that would be a really good one.
• 41:53
  SPEAKER_02: And the other thing is just uh as far as proactive measures, I would say don't take ultra-aggressive, too good-to-be-true positions.
• 42:02
  SPEAKER_02: I'm thinking about it with certain things that we see where you know you just look at it and go, I don't know how somebody thought that that would be okay.
• 42:09
  SPEAKER_02: Like that there was no risk there.
• 42:11
  SPEAKER_02: Or if it is an aggressive position, that's okay, but just document it.
• 42:14
  SPEAKER_02: Um, just have some documentation, maybe contemporaneous memo.
• 42:16
  SPEAKER_02: I've actually done one of these for a client before where they were going to take a position that was a perfectly reasonable position.
• 42:22
  SPEAKER_02: It's just heavily scrutinized by IRS.
• 42:24
  SPEAKER_02: Uh, this client, I think, did qualify for it.
• 42:26
  SPEAKER_02: And so we wrote a contemporaneous memo basically saying, here's the rules on this deduction, here's how IRS is interpreted, here's how tax courts interpret it, here's why we think this person qualifies.
• 42:35
  SPEAKER_02: That way, if they ever do get audited, they don't have to reconstruct it after the fact, you know, two years later and try to remember everything.
• 42:41
  SPEAKER_02: We could pull this memo out and hand that to the auditor, and hopefully that will help.
• 42:45
  SPEAKER_02: So, you know, yeah, if you're gonna take something aggressive, have some documentation for it, it's helpful too.
• 42:49
  SPEAKER_01: Yeah.
• 42:50
  SPEAKER_01: And for that prior experience, did you all get the data that you needed?
• 42:53
  SPEAKER_02: We don't have to.
• 42:55
  SPEAKER_02: Yes.
• 42:57
  SPEAKER_02: Yeah, it took a while and it was rough, but we did.
• 42:59
  SPEAKER_01: Yeah, okay, good.
• 43:00
  SPEAKER_02: I mean, and honestly, it cost the client a lot of additional money, honestly.
• 43:02
  SPEAKER_02: That's another thing.
• 43:03
  SPEAKER_02: Because they had to pay us, you know, a lot of fees, honestly.
• 43:06
  SPEAKER_02: I mean, I don't remember how much it was, but it was fairly significant to spend that amount of time going back and reconstructing everything, kind of everything the controller had already done, but we had no records.
• 43:15
  SPEAKER_02: Um and the client for some reason wasn't able to get them.
• 43:17
  SPEAKER_02: And by the way, this was like a relatively notable law firm in Atlanta.
• 43:20
  SPEAKER_02: It wasn't like a tiny company.
• 43:22
  SPEAKER_02: It's like so it was a little, you know.
• 43:24
  SPEAKER_02: I have a hunch they had a policy and that guy just wasn't following it probably.
• 43:28
  SPEAKER_01: That's true.
• 43:29
  SPEAKER_02: I mean, honestly, I have found that sometimes I think there might be a stereotype of smaller companies that they aren't gonna have as good a record keeping and that kind of thing.
• 43:36
  SPEAKER_02: And I mean that happens, but honestly, it happens a lot with larger companies too.
• 43:39
  SPEAKER_02: I mean, for one reason, a lot of them grow by acquisition, and so you have different parts of the business that were different companies with different record keeping systems sometimes that don't really talk to each other.
• 43:48
  SPEAKER_02: And so they weren't integrated very well.
• 43:49
  SPEAKER_02: I mean, that can happen.
• 43:51
  SPEAKER_02: And also just with big companies, you get a lot of bureaucracy, a lot of moving pieces.
• 43:55
  SPEAKER_00: A lot of personnel changes.
• 43:57
  SPEAKER_02: A lot of personnel changes, absolutely.
• 43:58
  SPEAKER_02: Yeah, so it's not necessarily just limited to small companies, to your point.
• 44:02
  SPEAKER_02: You're right.
• 44:03
  SPEAKER_01: All right.
• 44:03
  SPEAKER_01: Well, thank you, James.
• 44:05
  SPEAKER_01: Thank you, Chris, for being on the show again.
• 44:07
  SPEAKER_01: This was very informative and great insights that you share with the audience, and I hope to see you all back.
• 44:12
  SPEAKER_00: Thank you, it's been a pleasure.
• 44:14
  SPEAKER_01: Of course.
• 44:16
  SPEAKER_01: That wraps up today's conversation with James Pickett and Chris Stevens.
• 44:20
  SPEAKER_01: IRS audits can be complex, time consuming, and disruptive.
• 44:24
  SPEAKER_01: But preparation, documentation, and the right strategy can make a significant difference in how businesses navigate the process and protect themselves from unnecessary exposure.
• 44:36
  SPEAKER_01: Thanks for tuning in to Beyond the Ledger.
• 44:38
  SPEAKER_01: For more insights and expert perspectives, visit btcpa.net and explore our latest resources.
• 44:44
  SPEAKER_01: And don't forget to like, follow, and subscribe.
• 44:47
  SPEAKER_01: Until next time, I'm Sardane Lakefield, and we'll see you for the next conversation.