IRS Audits

Paul Roberts
September 11, 2007 — 1,624 views  
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Audit. The word strikes fear in the heart of a taxpayer, and presents a challenge for the tax practitioner called upon to guide the frightened client through dangerous territory. The more a practitioner knows about different types of audits and the issues likely to arise, the better the chance of a positive outcome.

Audit preparation begins with preparation of the tax return. If the practitioner completes each return from the perspective that he or she may one day be explaining treatment of items to a revenue agent, verification in the case of an audit will be a matter of compiling information rather than searching for justification after the fact. Don't take this to mean that practitioners should abandon their roles as advocates and make decisions based on what they believe would satisfy the whims of a revenue agent; with that approach there would be no need for a representative. It simply means that, whether a position is aggressive or not, the time for establishing validity is at the time the return is prepared.

When the practitioner is asked to represent a taxpayer who had their return prepared by someone else, the preparation phase begins anew. The practitioner must go through the same process as if the return were being prepared from scratch, classifying each item and identifying issues that might provoke questions.

IRS Representation

A representative is an individual who acts in place of the taxpayer in dealings with the IRS. A representative is authorized to perform most acts with regard to tax matters, such as signing consents extending the time to assess tax, recording an audit interview, or executing waivers agreeing to a tax adjustment. The representative can communicate with the IRS regarding taxpayer rights, privileges, or liabilities; represent taxpayers at conferences, hearings, or meetings; prepare and file documents with the IRS; and correspond and communicate with the IRS regarding the taxpayer's returns.

Most representatives may attend an audit interview without the taxpayer being present.

The following individuals are authorized to represent taxpayers before the IRS:

  • CPA
  • Enrolled Agent
  • Attorney
  • Officer of a business entity's organization.
  • Full-time employee of the taxpayer.
  • Member of the taxpayer's immediate family.
  • Enrolled Actuary

Unenrolled return preparer. An unenrolled return preparer is an individual other than an attorney, CPA, enrolled agent, or enrolled actuary who prepares and signs a taxpayer's return as the preparer, or who prepares a return but is not required to sign the return.

An unenrolled return preparer cannot sign any document for a taxpayer and may only represent taxpayers before customer service representatives, revenue agents, and examination officers, with respect to an audit regarding the return that he or she prepared. An unenrolled return preparer cannot:

  • Represent a taxpayer before other offices of the IRS, such as Collection or Appeals.
  • Execute closing agreements.
  • Extend the statutory period of tax assessments or collection of tax.
  • Execute waivers.
  • Execute claims for refund.
  • Receive refund checks.

Corporations, associations, partnerships. Only individuals are eligible to practice before the IRS. Business entities are not eligible.

Form 2848, Power of Attorney and Declaration of Representative. Form 2848 authorizes a person to represent a taxpayer before the IRS. Form 2848 will not be honored for any purpose other than representation before the IRS. The power of attorney authorizes the representative to receive and inspect the client's tax information, and to perform any and all acts with respect to the stated tax matters. The authority does not include power to receive refund checks, the power to substitute another representative, or the power to execute a request for disclosure of tax information to a third party.

Central Authorization File number. The representative must have a Centralized Authorization File (CAF) number, which is a nine digit number assigned to the representative which is used for all of the representative's audits. If a CAF number has not been previously assigned, write "None" as the CAF number on line 2 of Form 2848. The IRS will issue a CAF number directly to the representative. The representative then uses the assigned CAF number on all future powers of attorney.

Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service. Practitioners should review Treasury Department Circular 230. The publication contains information about the following topics.

  • Rules governing authority to practice.
  • Duties and restrictions relating to practice before the IRS.
  • Sanctions for violation of the regulations.
  • Rules applicable to disciplinary proceedings.

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Paul Roberts

McLaughlin Tax Service