Preparing for an IRS Audit

Transcription

1 Preparing for an IRS Audit And other common agency audit requests... Disclaimer: These materials and the oral presentation accompanying them are for educational purposes only, and do not constitute accounting or legal advice or create a professional relationship between Rutherford & Johnson, P.C. and participant. Although Rutherford & Johnson, P.C. has made every reasonable effort to ensure that the information provided is accurate, Rutherford & Johnson, P.C., and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.

2 Presented by Angela L. Rudolph, CPA Rutherford & Johnson, P.C. Winchester, Virginia

3 What is an Audit? An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm). An IRS examination of a taxpayer s return or other transactions. The IRS performs this examination to verify the accuracy of these filings. A report of problems you didn t know you had in ways that you don t understand.

4 What is an Audit? Other agencies to consider: Department of Labor State Unemployment Worker s Compensation Sales Tax

5 Types of IRS Audits Correspondence Audit IRS sends letter in mail requesting more information about a part of a tax return. Office Audit Invitation to the IRS office for a meeting, attendance required. Field Audit The IRS will visit your home or office.

6 Audit Statistics: Business Audit Targets FY 2010 FY 2011 FY 2012 Corporation with total assets up to $10M.94% 1.02% 1.12% Corporation with total assets > $10M 16.58% 17.64% 17.78% S Corporations.37%.42%.48% Partnerships.38%.40%.47%

7 Audit Statistics: Individual Audit Targets FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Income < $200,000.95%.96% 1.0% 1.0%.94%.88% Income > $200,000 < $1,000, % 2.9% 3.1% 3.9% 3.7% 3.3% Income > $1,000, % 6.4% 8.4% 12.5% 12.1% 10.9%

8 Red Flag Audit Triggers Mathematical Errors If the lines on your tax return do not add correctly chances are you will receive a letter from the IRS requesting clarification. Higher Income Income over $1M for individuals reveals a much higher rate. (Corporations Assets > $10M)

9 Red Flag Audit Triggers Informational Returns Matching 1099 s (MISC, INT, B, R, S, etc) 1098 s W-2 s

10 Red Flag Audit Triggers Proportionate Expenses / Activity Computer Scoring (UIDIF) Unreported Income Discriminant Function System Score given to each return to rate the potential of unreported income. High scoring returns may get selected for audit. There are ranges of typical itemized deductions and other statistical data that help to reflect those that would fall outside of the average range.

11 How to Prepare for Audit Retain the Services of a Professional If you are unsure of the interpretation of the notice received in a correspondence audit or if you may not have all of your documentation call a professional. If you are under an office or field audit it is helpful to have someone help you prepare that is knowledgeable about what the IRS may be looking for. A professional can also help you determine exactly what information to provide. Be careful not to provide more than requested to prevent additional inquiry.

12 How to Prepare for Audit Source Data Keep good records organized by chance they would be examined after your taxes are filed. Retain any secondary information that may have been used to prepare your return. (spreadsheets, data logs, etc.) Develop a record retention schedule that exceeds statute of limitation.

13 How to Prepare for Audit Do Your Homework Be prepared for the types of questions an auditor would ask. Familiarize yourself with the relevant tax code that may come into play within the audit area. If the auditor proposes a tax adjustment, request the tax code source to research it. You have an answer period to review the proposed adjustments prior to agreeing to an assessment.

14 How to Prepare for Audit Maintain Professionalism If at all possible, comply with the wishes of the IRS as to the time and location of the audit. Be polite, prompt and professional You catch more flies with honey than vinegar. Realize the auditor is not there to make friends. He/she is however doing their job.

15 Other Audits to Consider

16 Other Audits to Consider Other agencies to consider: Department of Labor State Unemployment Sales Tax Worker s Compensation

17 IRS Suffers Budget Cuts

18 Department of Labor Audits Enforcement of multiple areas ERISA ACA COBRA FLMA HIPAA An audit from DOL may open examination into other areas.

19 Department of Labor Audits Employee Retirement Income Security Act of 1974 (ERISA) Documentation Annual Forms 5500 & required schedules (3 Years) Audit reports & accountant s opinions The summary plan description and amendments thereto The summary annual reports Plan administration documents including trust agreements Copy of the fidelity bond policy Copy of the fiduciary liability policy IRS qualification letters (initial & most recent) List of all plan trustees, administrator & employees Sample participant benefit statement Sample of notices or schedules received by the plan

20 Department of Labor Audits Affordable Care Act (ACA) Audits Review of the documents, procedures and processes related to benefits. Employers should maintain a binder or electronic file that provides easy access to written records of all ACA compliance steps and procedures made.

21 Department of Labor Audits Affordable Care Act (ACA) Audits Documents Requested Under Grandfathered Plans Sample written notice sent regarding dependent care coverage to age 26 Copy of notices regarding coverage denial & list of those participants Plan limits for each plan year after September 23, 2010 Notices sent advising lifetime limit on dollar value of benefits no longer applies and individuals may once again be eligible for coverage Documents showing annual limits for each plan year on or after September 23, 2010

22 Department of Labor Audits Affordable Care Act (ACA) Audits Documents Requested NOT Grandfathered Choice of provider notice regarding pediatrics or OBGYN Documents related to emergency services Plan s review procedure Notices of adverse benefit determinations Agreement with any vendor that provides external review

23 Department of Labor Audits Affordable Care Act (ACA) Audits Other areas assessed for noncompliance: Number of qualifying events for the time frame under examination Methods used to notify qualified beneficiaries of COBRA rights Notifications to plan administrator that qualifying events have occurred The qualified beneficiaries coverage election to continue health coverage The premium paid by qualified beneficiaries for COBRA coverage

24 State Unemployment Audits In 2010 the Virginia Employment Commission Audited 1% of all employers. The Joint Legislative Audit & Review Commission presented a report to the Governor & General Assembly of Virginia. Here is what they found.....

25 State Unemployment Audits

26 State Unemployment Audits Employers who property classify workers pay higher payroll costs and may be less competitive in their respective industries than those who misclassify. Worker misclassification lowers Virginia s income tax collections, leading to foregone revenues. Misclassified workers are often denied a variety of legal rights and benefits.

27 State Unemployment Audits Virginia Employment Commission (VEC) is the only state entity that gathers data on misclassified workers. Annually roughly 1% of employers are audited on a targeted random basis. Businesses and industries suspected of misclassification are audit targets List of audit eligible employers is maintained NAICS codes help to indicate employer industry

28 State Unemployment Audits In an unemployment audit be prepared to: Provide copies of all 1099 s filed Provide detailed general ledger for examination of contractor disbursements Provide copies of all payroll data The VEC may not be 100% in agreement with IRS guidelines Facts & Circumstances testing

29 Worker s Compensation Audits Worker s Compensation Audit Conducted by Insurance Company Provide copies of all 1099 s filed Provide detailed general ledger for examination of contractor disbursements Provide copies of all payroll data Provide employee names, titles, and duties performed. After audit a credit or supplemental bill will be issued depending upon actual wages vs. estimates.

30 Sales Tax Audits Virginia Department of Taxation Documentation listing will include: General Ledger Invoices for audit period Sales tax computations Exemption Certificates Use tax paid Fixed Assets List

31 Sales Tax Audits Virginia Department of Taxation The auditor will review a detailed sample of one month He/she will develop a list of exceptions The percentage of exception is applied over the entire audit period and the rate of exceptions is multiplied (in most cases) It is important to review the exception list carefully for dispute (not only to credit that exception but reduce the % applied) If you aren t 100% confident in your sales tax knowledge it is helpful to retain a professional for consultation.

32 Questions

33 Rutherford & Johnson, P.C. 116 Medical Circle Winchester, Virginia Contact: Angela L. Rudolph, CPA