Audits

Audits in General

Most people rank an IRS audit as one of their greatest fears in life. Fear of an audit has been blown out of proportion due to social frenzy stemming from a great loathing of the IRS and the thought that “Big Brother” is always watching. It is important to keep in mind that an audit is nothing more than the verification of reported information. Read more to see examples of audit letters and other IRS letters.

CP 2000 Letters – Most Common

With the advancement of technology, the IRS has begun using computer software to analyze income and other items reported from employers, brokerage houses, banks, and others. Whenever you receive a W-2, 1099, or other tax document, a duplicate copy is always sent to the IRS. Recently the IRS has been receiving a majority of these tax forms electronically and with a click of a button is able see whether you reported your respective amounts on your tax return.

When differences arise between what the IRS has on file and what you have reported on your tax return the IRS’s software automatically generates an IRS notice called a CP 2000. This letter is NOT an audit, but rather a request asking whether these differences are true and accurate. Within the letter, the IRS will break down what you reported on your return and what the IRS has on file for a particular item. Additional taxes and/or penalties and interest as outlined on the CP 2000 notice are calculated based on the IRS's findings being 100% accurate and unreported on the tax return.  Therefore, if the IRS has made an error, the tax and penalties/interest will be reduced. 
 

Please click below to see an annotated example of a CP2000 Letter:

Example CP 2000 Letter
 

CP 2000 Letters – How to Proceed

You should ALWAYS verify the information the IRS reports as differences between what was reported and what they have on file. NEVER send in a check without reading the notice. The IRS is famous for misclassifying certain information, double reporting income items, and incorrectly identifying an item that was already reported on the tax return.

If you do not agree with the IRS’s proposed changes, you must enclose documentation to support your entries on the original return. At Neal Reitz and Company we are more than happy to assist you with your IRS CP 2000 responses. We can help you interpret what the notice says without charge but we bill for our time for anything additional. If, however, you agree with the proposed IRS changes, then you need to send them a check for the additional amount and sign the Response Form stating you agree with the changes.

Audit Request Letter:

An Audit Letter is a more specific request from the IRS to look in depth at particular parts of your tax return. The IRS has the authority to examine any part of your return including the return in its entirety. However, examiners usually sample a few items, which are mainly composed of deduction items.

You should carefully review the letter for any immediate action required on your behalf. The letter will indicate if you need to contact the IRS to schedule an appointment or if you will need to mail information to the IRS to review by a set date (called a correspondence audit). If you ever have questions you should contact the individual reflected in the heading of the letter as “Person to Contact”.

We are available to assist you during any of the steps above. It is always better and cheaper for you if we are involved at the start of the audit process.

Please click below to see an annotated example of Audit Letters:

1. The records for Cash Donations: For donations under $250, provide copies of canceled checks, credit card statements showing proof of donation, or letters from the charitable organization for those amounts under $250 (a letter must state that no goods or services were exchanged for the donation). The amount donated and the name of the charitable organization must be easily identifiable on the documentation. For donations over $250.00 per event, you must provide an acknowledgment letter from the organization dated prior to the filing of your original tax return. The letter must state that no goods or services were exchanged for the donation. After collecting the required documents, outline the total per organization as well as the total for the year which should match the tax return.
2. The list for Non-Cash Contributions under $5,000.00 (donated value) must include the item description, your cost, and the thrift shop value (approx 10% to 14% of your cost). Total the amounts per date, and show the total for the year agreeing with the tax return amounts. Include copies of your donation receipt(s) which you received at the time of donation.
3. For Employee Business Expenses, provide a summary page listing each expense category and total. Following the summary page should be copies of canceled checks, bank/credit card statements with the proof of payment, or receipts. The amount, item(s) purchased, and business purpose of the item(s) should be easily identifiable on the documents.
4. For Meals & Entertainment, you must show on each receipt the name of the person entertained, the business purpose (ie client meeting, possible new business client etc), and the amount. The location and date must also be displayed if you are using a credit card receipt or bank statement.
5. For Auto Expense, you need to provide two auto repair invoices showing the odometer reading as of the invoice date. The IRS will calculate the total miles driven from those two readings. The business miles must be provided on a schedule detailing the dates, distance, and the business purpose (called an auto log). The total business miles should agree with the amount reported on the tax return.
6. Note: Employee Business Expenses require a letter from your employer stating that you (the employee) were not reimbursed for any employee business expenses.

We have included below samples to assist you with common audit paperwork preparation:

 
1. Non-Cash Donations
2. Employee Business Expenses
3. Meals and Entertainment
4. Auto Expenses
5. Employee Business Expense Letter From Employer
 

At Neal Reitz and Company we are more than happy to help you with your audit needs. If you have been chosen for an in-depth audit evaluation we recommend you consult a professional. Our firm has extensive experience with the IRS and we would be more than happy to assist you with your audit ranging from a simple consultation to handling the audit on your behalf via a Power of Attorney. Please note that like most CPA firms, we bill for our time and audit work is not included in the tax preparation fee. Please contact us directly if you require assistance.