Navigating the audit process

Tax audit notices can come as a shock to practitioners, but knowing what to expect eases the upset, says Cleveland-based consultant Owen E. McCafferty, CPA. Winning an audit-related case depends heavily on the experience of the agent and the caseload of the district office, he says. It also depends on the accountant, he adds.

"The worst mistake a practitioner can make is buying a cheap accountant," McCafferty says. "There's no question, you'll get what you pay for."

McCafferty recommends controlling the audit by providing exactly what the auditor requests and treating the Internal Revenue Service (IRS) representative with consideration.

"Some people are nasty, and that's stupid," he says. "You want an auditor who's experienced; it can be a major savings. Inexperienced auditors will make allegations that you have to prove against. And you can help the process by being respectful."

If a discrepancy is discovered but cannot be settled, there is a series of defense steps for taxpayers. In the following bullet points, McCafferty sheds light on steering through the audit process from start to finish.

• Written notice is the first clue auditors are knocking. It should read like a "dear John letter" and acts as the IRS' first attempt to resolve what the agency deems a tax discrepancy involving the practice. A local auditor will be assigned to the case and work with owners and accountants to remedy inconsistencies. This is the cheapest level for practice owners contesting IRS claims. Additional guidance from the agent's supervisor can be requested.

• If resolution attempts fail, practice owners can request a technical assistant by writing to IRS' national office for aid. Tread lightly as this amounts to a "slap in the face" for the local agency. Most cases are settled by this phase.

• The appeals function is the next step and serves as the administrative forum for any taxpayer contesting an IRS compliance action. Independent reviewers first must decide on the case's merit. If the case moves forward, face-to-face conferences are held in front of appeals officers.

• After appeals, cases leave the IRS for U.S. Tax Court, a federal court of record established by Congress. "This is where the big bucks come in for legal fees," McCafferty says. Tax court is composed of 19 presidentially appointed members, and a case is commenced by petition. While the court is in Washington, judges travel nationwide to hear conduct trials. Beyond Tax Court, extreme cases can be heard before the U.S. Supreme Court.