Discussion:IRS audit of Schedule C Expenses

How do I approach this with IRS agent??..He is going to see $45k receipts and no COGS and other expenses (looks like made up numbers by the accountant) incld car expense based on 30k miles for the year...It appears that this accountant is getting audited for his other clients as well...My client is very concerned as he gave all the bank statements to this accountant every year and he did the tax return from those numbers and now those numbers are not reported correctly...He did not (intentionally) try to hide anything but the accountant did not do his job to report the numbers correctly...This is a SP with Schedule C income...One more thing, the TP has used this one bank account for everything, business and personal expenses...I can not believe he did that but he did..what is the best course of action..

And the taxpayer didn't notice the unreasonably low sales amount on the tax return he signed?

"It appears that this accountant is getting audited for his other clients as well."

Any you know this, how? If true, your client might be best represented by an attorney, especially if the audit is part of a sytematic investigation of the preparer.

"TP has used this one bank account for everything, business and personal expenses."

This is a poster child for worst practices.

-- Larry Hess, CPA ~ Albuquerque, NM

BTW, Bal, where did you learn to use ellipses instead periods?

I thought we as EA/CPA can do what an attorney can do..representation is what I am trying to do and this looks like a perfect client?? why an attorney??

He better make sure he has receipts to cover all the costs of goods sold. As long as you can prove the difference between $240k of sales and the reported amount of $50, it won't affect taxable income. I'd worry about the other stuff.

If this is an audit of suspected criminal activity then your representation discussions and preparation with the client are not are privileged. For criminal matters only an attorney has privileged communications with client. See IRC 7525. Do you know if the "agent" is a special agent (if I remember correctly, they carry guns!)? They are the ones involved in criminal activity.

Hopefully, Larry or one of the others that do representation will come online and give a better explanation, but do see IRC 7525.

Best of luck to you. Ben.

It was basically information the IRS used in their case against the preparer. And surprise, surprise. The taxpayer got no relief on the amount they owed.

Bottom line is that as messy as this is, if the client kept his records he could come away from this ok.

I looked at your web page titled, "Should I Hire an Attorney to Represent Me?" I would hope you would give an EA or CPA more explanation as to why he should recommend an attorney and what of some of the signs.

Involving an attorney does not take you off the case; it augments your work. Beleive me, they don't want to do all the grunt work you've been doing so far on the case. I have several working relationships with tax and immigration attorneys to whom I refer clients and they likewise refer clients on to me. Rather than seeing tax attornies as competition or a threat to your business, you should look on any conversation with a tax attorney as an opportunity to land several more clients for almost no upfront cost.

We like you, Snowbird. The problem is typed things leave off subtle nuances and can seem negative when they are not intended to be. Keep posting, and keep asking questions; it's the only way to learn.

"I've took the position before that my client is trying to do it correctly, he's a contractor not an accountant and that is why he hired an accountant to do the books for him. The accountant gave him bad advice. I actually got the accuracy penalty waived for that reason alone." I hope this will work out...should I offer to do amended return based on the new numbers or just shut up and wait what he asks for??? Do I have this write in terms of steps going forward??? I really appreciate all you guys help..thanks

Hey, I'm south of you in the Crossroads district - howdy, neighbor!

I'd for sure have your client provide images of cancelled checks and pray he didn't always draw out cash, because then your client is in trouble. (If he did, I have some ideas because I just went through something like that. We relied on records obtained from the client's vendors, local cost of living, IRS collection stds for KC, and projections based on the info we had available to prove payments for personal vs. business. It was a giant pain in the neck, and although the client came out pretty well (considering), that was my opinion but not his -- so there was that issue to deal with too. I'd be happy to discuss with you. Oh, get more money up front if you need to do this)

I've also had good luck getting penalty waivers based on errors/omissions of the return preparer. I don't offer an amended return, I'm pretty sure the agent could care less about that. But once we have come to an agreement on what is owed I might file an amended return reflecting the changes. I always do if for whatever reason the IRS don't ask for my client to sign off on changes to the return. Otherwise if he needs to bankrupt out of tax or penalty later, the IRS may (will) take the position that the statute of liability never began to run for that tax year or at least, for the amount of change.

Don't forget that an amended state return needs to be filed anyway, or in a couple of years MO will send your client a demand for payment based on info from the Feds. I don't know about your software, but I use Profx, and I have to redo the federal Sch C anyway in order to easily change MO.

Teague Pasco - I'm in the KCMBA phone book

You got the penalty waived due to errors/omissions of the preparer?? does that mean that preparer made the errors and that should allow to waive the penalty for the money owed...that sounds like a good idea...my client's preparer was just picking numbers out of thin air (that is how it looks to me)...none of the numbers are not matching and client is scared..he provided all the bank statements to the preparer and he just ignored the info and got his own numbers from previous year's tax return..numbers look so close to the last year numbers that I think he made some changes to the last year and plugged those in as he did lot of sch c tax returns..Really Strange!!