In evaluation comments from Fall Tax School, we had numerous questions surrounding IRS representation. This article will outline the basics you need to know, including how representation is obtained, the information you must provide, and how to limit the information the IRS has access to.
What is IRS Representation?
When inquiries or audits from the IRS arise, taxpayers have the right to retain an authorized representative to consult them throughout the process. The IRS identifies these individuals as representatives. Representatives can take the place of the taxpayer in meetings unless the IRS formally summons the client.
How is IRS Representation Obtained?
Taxpayers can choose who represents them in IRS matters, provided the individual meets the requirements imposed on recognized representatives in Treas. Reg. §601.502. Generally, this means that an attorney, enrolled agent, or CPA must represent the taxpayer, although others can represent the individual in limited circumstances.
The representative will need to submit Form 2848 Power of Attorney, which grants them access to talk to the IRS about the taxpayer’s sensitive information. This form requires you to specify the tax years you are able to discuss and lists your professional credentials, such as your CPA license number and CAF number.
What Do Tax Practitioners Have to Provide to the IRS During an Exam?
The information you are required to submit to the IRS on your client’s behalf depends on the exam type. There are two types of common inquiries: compliance checks and audits. A compliance check is conducted under Title 26 to analyze if the taxpayer is following recordkeeping and reporting requirements. Compliance checks are generally related to payroll items.
The compliance check does not have to relate to any specific period. Compliance checks differ from an examination in that the books are not inspected, and the IRS does not try and calculate a tax liability. This means you are not required to remit any records to the IRS. The taxpayer can refuse a compliance check without any fines or penalties.
However, an audit does give IRS agents the authority to request records. The items requested can include receipts, bills, loan agreements, tickets, medical records, and more. A complete list can be found on the IRS website.
Additionally, the IRS stipulates that you must include details on the circumstances surrounding the document. For example, if you send a general agreement for a shareholder loan, you will need to include supporting information, such as the purpose of the loan. It’s important to note that you should never mail original copies to the IRS. Any documents submitted should be copies.
What Can the IRS Take with Them When They Leave?
The IRS does not retain any sensitive information of your client’s business after the examination. Once there is no longer a need for the QuickBooks file or other physical documentation, the information will be returned to the taxpayer or destroyed. Any copies located on the IRS agent’s computer will also be deleted once the audit is formally closed.
Does the IRS Have the Right to Get a Backup Copy of the QuickBooks File of Your Client?
Yes, the IRS does have the right to request a QuickBooks backup file. There are ways you can limit the information in the QuickBooks file. For one, disable any online service currently being used, such as banking connections. This prevents the IRS agent from stumbling on other transactions that could raise additional questions.
Moreover, you want to only give the IRS records for the year they are requesting. This will involve deleting or disabling the content from prior years. If you give the agent access to all prior years, they may look further into the records, potentially prolonging the engagement or possibly bringing up more issues.
Before you hand over your client’s QuickBooks file, ask the agent if excel spreadsheets will suffice. Only providing general ledger details for specific accounts will limit the information you are giving. If the IRS refuses this request and your taxpayer does not comply, the IRS may subpoena the entire QuickBooks file.
If you are required to submit the entire QuickBooks file, be sure you are setting up another user login for the agent. You should not give them the taxpayer’s login credentials. This can result in transactions being moved with your client’s name on the entry. Creating an additional user takes only a few minutes and provides a trail of the auditor’s actions in the taxpayer’s file.
How are Documents Submitted?
The method you use to submit documents will depend on the IRS agent and the reason for the audit. For example, if the audit is conducted by mail, you may be given an address to mail the documents. If there is an in-person audit, you should have the documents available at the audit location. Some documents can be electronically submitted. Additionally, the IRS does outline that the documents need to be organized.
Tax practitioners need to be aware of the information the IRS can request, including the regulations surrounding electronic accounting records. The use of full QuickBooks backup copies is generally not applicable to mail-only audits. Instead, this request is commonly seen in field audits.
If you are selected to be an IRS representative for your taxpayer, be sure you understand whether you are dealing with a compliance audit, correspondence audit, or field audit. Each type will have a different scope and requests. For more information on trending topics, tax changes, and ways to properly advise your client, subscribe to Tax School’s weekly blog, and be sure to check out our other blog posts.
By Rachel Szeklinski, CPA
IRS. “IRS Audits: Records We Might Request.” IRS, 3 Mar 2022, https://www.irs.gov/businesses/small-businesses-self-employed/audits-records-request. Accessed 9 Feb 2023.
IRS. “Need someone to prepare your tax return?” IRS, 6 Jan 2023, https://www.irs.gov/tax-professionals/choosing-a-tax-professional. Accessed 9 Feb 2023.
IRS. “FSLET Compliance Program: Compliance Checks, Examinations, and the Difference Between Them.” IRS, 3 Jan 2023, https://www.irs.gov/government-entities/federal-state-local-governments/fslet-compliance-program-compliance-checks-examinations-and-the-difference-between-them. Accessed 9 Feb 2023.
IRS. “Taxpayers have the right to representation when working with the IRS.” IRS, 29 Sep 2022, https://www.irs.gov/newsroom/taxpayers-have-the-right-to-representation-when-working-with-the-irs Accessed 9 Feb 2023.
IRS. “Use of Electronic Accounting Software Records; Frequently Asked Questions and Answers.” IRS, 29 Jul 2022, https://www.irs.gov/businesses/small-businesses-self-employed/use-of-electronic-accounting-software-records-frequently-asked-questions-and-answers. Accessed 9 Feb 2023.