It's a jungle out there: survival techniques.

• Author: Lane, David F.
• Position: Preparation for IRS audit

Preparing for an IRS audit of a closely held business should begin when the CPA complies the corporate income tax return and owner's personal returns. Remember that each year's returns provide the Service with potential audit candidates despite past attention or inattention by the IRS.

The Service plans to double its audit coverage of corporations with assets below $10 million book value in 1992 (relative to 1987's level), and it has an automated system for information report match-ups (payer/recipient reporting) due to begin operations in 1993. These changes should work to create greater breadth and depth of examination coverage for the typical local or regional CPA firm's client base. How can clients be better prepared?

First, make sure that all information on the business and personal returns reconciles. The various information reports issued for corporate wages, commissions, rents, dividends (and other profit distributions) and interest should be properly classified and easily traceable by an IRS agent to the returns.

Break expenses into small components

On the corporate return, break down income and expenses into their smallest components. Descriptive labeling of items is something of an art, and can be handled if you get the necessary detail. Many believe this exercise can significantly lower a return's chance of selection for exam.

Also, practitioners should advise their clients to update the corporate minute book annually. Current minutes are important support for many tax-related issues (such as salary and bonus policy), and should be reviewed by the client's attorney with full understanding of the tax objectives.

If a business return is selected for an IRS exam, the practitioner should advice the client not to hide the fact from employees, particularly those who may be called on to assist in gathering the requested records and documents. The client should choose an employee liaison to deal with the IRS agent when he is present at the client's office. (Most agents will not accept working solely at the CPA's office.) In this way, the owner can be present, but "insulated" from the agent. Owner visibility is important to substantiate participation and compensation.

The experience and knowledge level of IRS agents can vary greatly. It is not the practitioner's role to educate an unsophisticated agent. Instead, agents should be asked to submit questions and requests for information in writing directly to the CPA.

Just the facts

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