Best accountancy practices when preparing for a visit from the IRS to a client

Best Accountancy Practices When Preparing for an IRS Visit to a Client

Preparing for an IRS visit goes far beyond gathering paperwork. It requires thoughtful planning, proactive strategies, and clear communication to achieve the best possible outcome for both accountants and their clients. The following expanded best practices will help ensure a smooth, compliant, and less stressful IRS audit experience for everyone involved.

Understanding the IRS Notice

Review the IRS Notice Carefully

• Read the audit notice thoroughly to determine which tax years and specific items the IRS will review.
• Highlight important deadlines, documentation requests, and areas of focus noted in the letter.
• Concentrate your preparation on the flagged areas to avoid unnecessary work and ensure accuracy.

For example, if your client receives a notice focusing on business expenses for the 2021 tax year, gather all relevant receipts, expense reports, and supporting documentation for that period. For a detailed walkthrough, see Preparing for an IRS Audit: A Step-by-Step Guide.

Clarifying Ambiguities

• If any part of the notice is unclear, contact the IRS representative listed on the notice to clarify expectations.
• Document all communications with the IRS for your records.

Taking these steps early can prevent misunderstandings and ensure you provide exactly what is required.

Document Management and Organization

Organize Documentation Effectively

• Gather all relevant financial documents, including:
  • Filed tax returns for the years under audit
  • Receipts and invoices that support deductions or credits
  • Bank statements and canceled checks
  • Payroll records and W-2s
  • Supporting schedules, such as depreciation or amortization
• Arrange documents in the order specified by the IRS notice, making the review process more efficient.
• Double-check all documentation for completeness and accuracy to avoid delays or follow-up requests.

Consider using checklists, such as those provided by the H&CO IRS Audit Preparation Guide, to ensure nothing is overlooked.

Document Organization Methods: A Comparative Table

Method	Advantages	Disadvantages
Physical Filing (folders, binders)	Easy to review during in-person meetings, familiar for many clients	Time-intensive, risk of misplacing documents, harder to duplicate
Digital Filing (scanned PDFs, cloud storage)	Quick search and retrieval, easy sharing with IRS agents, secure backups	Requires technology access, cybersecurity and privacy considerations

Example: Efficient Document Preparation

One accountant used a cloud-based folder system organized by tax year and document type. This allowed for quick retrieval during the audit and enabled secure sharing of only the requested documents with the IRS agent, streamlining the process significantly.

Proactive Review and Correction

Conduct an Internal Audit

• Perform an internal review using the same documents that will be given to the IRS.
• Identify discrepancies, inconsistencies, or missing items before the audit date.
• Document any corrections or explanations for items that cannot be fully substantiated.

If you discover missing receipts for significant expenses, gather alternative documentation—such as bank statements or affidavits—or prepare a written explanation.

Addressing Red Flags

• Proactively review areas commonly scrutinized by the IRS, such as large deductions, home office expenses, or unusual income fluctuations.
• Prepare explanations and supporting documents for any items that may stand out.

For instance, if the client claimed a high number of business meals, be ready to provide receipts, calendars, and client meeting logs.

Client Communication and Support

Maintain Open Communication with the Client

• Brief your client on the audit process, expected timeline, and what documents are needed from them.
• Set clear expectations about potential questions or issues that could arise during the audit.
• Remain available to answer questions and address concerns quickly.
• Coach your client on how to respond to IRS questions, emphasizing honesty and brevity.

For practical tips on client communication, visit Thomson Reuters Audit Management Steps.

Example: Preparing the Client for the Audit

Before the audit, a CPA met with the client to role-play potential IRS questions, helping the client feel more confident and reducing anxiety on the day of the visit.

Safeguarding Client Rights

Educate Clients on Their Rights

• Review the IRS Publication 1, Taxpayer’s Bill of Rights, with your client to ensure they understand their protections.
• Inform clients about their right to professional representation and to only provide requested information.
• Prepare to advocate on behalf of your client if there are disagreements or unclear issues during the audit.

For more details on taxpayer rights, see Preparing for an IRS Audit: A Step-by-Step Guide.

Example: Asserting Client Rights

During an audit, an IRS agent asked about a prior tax year not covered in the notice. The accountant politely reminded the agent that the audit was limited to the specified years, helping to protect the client from an unnecessarily expanded review.

Managing Information Sharing

Limit Information to What the IRS Requests

• Provide only the documents and information specifically requested by the IRS.
• Do not volunteer additional records, as this can broaden the scope of the audit.

For example, if the IRS request focuses on 2021 payroll records, do not include unrelated bank statements or documents from other years.

Best Practices for Information Sharing

• Keep a copy of every document shared with the IRS and maintain a log of all submissions.
• Review all materials before submission to ensure privacy and confidentiality are maintained.

Active Participation and Representation

Attend the IRS Visit

• The accountant should be present during the IRS visit to answer questions, provide clarifications, and keep the audit focused on the designated scope.
• Act as the client’s advocate and ensure the client’s interests are protected throughout the process.

Active participation helps prevent miscommunication and allows for immediate resolution of simple issues.

Engage External Experts When Necessary

• If the audit involves complex issues, such as international tax matters or legal disputes, consider bringing in a tax attorney or outside auditor.
• External experts can offer specialized knowledge and additional support in challenging situations.

Case Study: Successful IRS Audit Preparation

Situation: A small business client received an IRS notice requesting an audit of travel and entertainment expenses for two specific tax years.

• The accountant carefully reviewed the notice, identified the areas of concern, and gathered all relevant receipts, credit card statements, and employee reimbursement forms.
• An internal review revealed a few missing receipts, which were replaced with signed employee affidavits as allowed by IRS guidelines.
• Throughout the process, the accountant maintained regular communication with the client, preparing them for possible questions and ensuring they understood their rights.
• Only the requested documents were shared with the IRS, and the accountant attended the audit meeting to clarify any issues on the spot.
• The audit concluded quickly, with no additional tax assessed and the client expressing relief over the smooth experience.

Conclusion

By implementing these best accountancy practices, accountants can help clients face IRS visits with confidence and preparedness. Thorough documentation, proactive internal reviews, clear communication, and an unwavering focus on client rights are essential to achieving a positive audit outcome.