What steps does your tax return preparer take to reduce your audit risk?

The last few weeks I have been sharing questions you can ask your tax preparer to determine if your tax preparer is right for you or not.

Does reading this question make you wonder if your tax preparer is doing everything they can to reduce your audit risk?

Many people are afraid of being audited. Here are some common concerns I hear:

They are concerned that their tax return will have errors. They worry about being able to provide the required information. They fear the cost. Most people focus on the cost of taxes, penalties, and interest that might be due, but what about the cost of hiring a tax professional to handle the audit? Professional fees incurred during an average audit are 10-15 times the fee to prepare your tax return!

The IRS is stepping up its efforts Now, there are even more reasons to add to the list. The IRS is stepping up its efforts to increase overall compliance.

The IRS is doing 3 times as many audits as it was a few years ago. Plus, due to the current economy, the IRS is expected to continue to increase the number of audits performed.

The IRS recently announced its commitment to examine 6,000 business returns. The IRS will focus on payroll taxes and employment issues, including the classification of workers (such as independent contractors), workers’ compensation, fringe benefits, and non-filers.

The IRS is also stepping up its efforts regarding tax return preparer compliance. The IRS is sending letters and visiting thousands of tax return preparers to, among other things, discuss common mistakes.

By the way, one of the common mistakes discussed is checking the relevant taxpayer’s books and records. If you read my report last week, this is one of the questions I suggested a tax return preparer be asked!

With these increased efforts, audit risk is a must to discuss with your tax preparer.

Here are some things to look for to determine if your tax preparer is taking the right steps to minimize your audit risk.

Does your tax preparer ask you questions? Questions indicate that your tax preparer is trying to verify information and gain adequate understanding so that your tax return is filed accurately. One of the reasons returns are audited is because the information is incorrect.

Does your tax preparer have the experience you need? Having a tax preparer who knows the ins and outs of your industry makes all the difference, especially when it comes to filing an accurate tax return.

For example, some industries must make certain tax elections to properly claim tax benefits. An experienced tax preparer in this type of industry will know the rules and the questions to ask you to make sure the election is filed correctly.

Even the IRS is concerned that tax preparers know the rules. Starting this year, all tax return preparers are required to register with the IRS, and in some cases, some are even required to pass a test.

Does your tax preparer discuss filing strategies with you? Often when I file a tax return, there are certain things that can be done to minimize audit risk.

For example, suppose there is a larger-than-usual deduction to claim. There are some situations where a large deduction can attract scrutiny from the IRS. This is an example of a situation where the archiving strategy can help minimize audit risk.

First, when the deduction is claimed on the tax return it can affect audit risk. In this situation, you would ask the taxpayer questions about the deduction to gain a better understanding and then determine which rules apply. In many cases, more than one set of rules applies and this can provide an opportunity to reduce audit risk.

Second, voluntarily attaching documentation to explain the larger-than-usual deduction may affect audit risk. If the return is flagged due to the large deduction, an agent will review it and additional documentation may resolve the issue without further action.

Does your tax preparer offer an audit defense plan? An audit defense plan covers professional fees incurred in connection with an income tax audit, examination, review, investigation or verification of any item on your federal or state income tax forms.

While an audit defense plan does not ensure that you will not be audited, it does ensure that professional fees to handle a federal or state income tax audit of a tax return are covered. The audit defense plan also includes responding to received federal or state notifications.

When a tax preparer offers an audit defense plan, it indicates that the tax preparer is thinking about audit risk and has an incentive to minimize it.