No matter how accurate you think your accounting records are and how hard you try to follow all the rules, when we get those IRS audit letters in the mail, your stomach still turns from anxiety. The first rule to follow if that audit letter does arrive, is to call your CPA. Most CPAs have managed a number of these audits and know the right procedures to follow and they will protect you and obtain better results than you would on your own.
But for some reason, the same fear does not seem to strike business owners when they receive audit letters for the NYS Department of Taxation and Finance related to sales tax or income tax audits or from the NYS Department of Labor. I believe people look at these audits as nuisance audits. Many times I get the call to help out on these type of audits well after the audit has begun and the client realizes that they are in way over their head and they start to see the negative direction the audit is going.
Taxpayers believe they are fully compliant in these areas and try to save some money by managing the audits themselves. What people do not know is when an auditor sees problems, the look back period could be three years plus, depending on past filings. You should be aware that audit adjustments can result in big tax bills when the auditors extrapolate their findings over the longer periods of time and larger populations of transactions.
So when an auditor makes contact with you, what should be your first step? Immediately send a copy of the audit letter to your CPA. Your CPA will have you sign a Power of Attorney providing them with the right to represent you in that particular matter. From that point on, the auditor will work with your CPA for all their questions and procedures. Your CPA will then review your returns and records carefully looking for possible risk areas. They’ll ask themselves, why was this client selected for audit? Sometimes returns are selected solely on statistical formulas, so there may not be anything wrong with your return. But the Labor and Sales Tax auditors go deep into your accounting records looking for non-compliance in their respective areas. CPAs are very careful to review the information for red flags and to know the problems and the solutions before the auditors review any of it. They are also cautious about not giving auditors anything they did not ask for to ensure they do not expand the scope of their audit.
Another reason your CPA should be part of any audit right from the start is because they speak the same language as the auditor and will be able to manage the auditor’s requests. Often the audit will be held at the CPA’s office so the client never has to interact with the auditor directly.
It is important to know that sometimes an auditor may show up completely unannounced requesting to speak to an owner or accounting personnel. Your best response in that situation is not to speak with the auditor, but to provide your CPA’s contact information to them and advise them that your accountant will be in touch with a Power of Attorney to discuss the matter.
The above rules are simple to follow – if you are contacted by any governmental auditor – do not respond directly – protect yourself by contacting your CPAs.
Wayne L. Martin CPA CGMA