Assisting with tax audits.

Tax audits provide an opportunity for CPA firms to generate extra revenue. Some of the various types of audits and related activities are:

1. Office audits.

2. Field examinations.

3. Audits of pension plans and nonprofit organizations.

4. Preparation of appeals and protests.

5. Tax Court petitions. (CPAs can be admitted to practice before the U.S. Tax Court if they show a need to be admitted and pass a biannual test. Being admitted to practice will enable one to file Tax Court petitions, which offer at least two more avenues for negotiating and settling a case. The tests are given once every other year, usually in September, October or November, in Washington, DC. There are fewer than 200 nonattorneys so admitted. For information about the date and location of the next examination, visit www.USTaxCourt.gov, and click on "Forms" and "Admission Information for Non-Attorneys." The Tax Court can also be reached at [phone] or 400 2nd Street, NW, Washington, DC 20217. Tax professionals can also purchase copies of previous examinations and the Tax Court's rules of procedure.)

6. Criminal tax cases, including liaison with counsel.

7. State tax audits and appeals, including sales, income and personal property taxes and penalties. 8. Correspondence audits.

Preparing for an Audit

A CPA firm's tax department usually handles audits, not the preparer or engagement partner. Generally, a person specializing in tax audits handles them. In assisting with a tax audit, a tax adviser must:

* Prepare adequately for the audit. The amount of preparation time is inversely proportional to the time spent with the agent.

* Be skilled in negotiating strategies.

* Know when to be quiet and just listen.

The tax adviser needs to be able to handle sensitive matters, including underreporting of income and other acts, both civil and criminal, and to know when to insist that something be reported, as well as how to walk away from the engagement. CPAs must always be cognizant that they risk their licenses, livelihoods and liberty when they engage in illegal actions or look away from a client so engaged. They must always be aware of their legal, ethical and moral responsibilities. CPAs should do nothing that they cannot clearly defend and explain should they be on a witness stand; they should assume that they might be in that position for everything they do.

There are two ways to be engaged by clients to represent them during an audit. The first method is when the client receives a notice and contacts the firm for help. The exhibit below is a sample tax audit engagement letter that can be used for a client's tax examination. Although not discussed in this column, some CPA firms are offering an "audit insurance or protection plan" under which their fee is covered by an initial payment made under the plan. This is generally offered to low-risk clients for a nominal fee.

Exhibit: Sample tax audit engagement letter

[Date]

[Client name]
[Client address]

Dear [Client name]:

This letter will confirm the arrangements for our representation with
respect to the State of New York's examination of your New York State
Resident Income Tax return for the years 200X and 200Y.

Tax Audit Services

We will represent you before the State of New York during this
examination, unless the arrangement is terminated in
writing by either pony. Further, in the event we cannot
resolve all of the issues at the initial level, we will be available
to appeal any proposed deficiencies and/or penalties at the Appeals
Division of the State of New York, although that appeal is not part
of this engagement.

We will not audit, or otherwise verify, any information provided by
you for presentation to the State of New York during the course of
the examination, unless we deem it necessary or you specifically
request us to do so in writing. However, we may ask you for further
clarification and expert you to provide that clarification promptly
and candidly.

Our communications are "confidential," not "privileged"; i.e., they
may not be disclosed unless you approve under mast circumstances. On
the other hand, privileged communications are not permitted to be
disclosed, even in court. Although there is now a limited CPA-client
privilege in Federal matters, it does not apply to matters prior to
the passage of the Internal Revenue Service Restructuring and Reform
Act of 1998 and does not apply to state matters. Accordingly, if we
are served by a properly issued administrative summons compelling
us to testify in court proceedings, even our confidential
communications could he subject to disclosure.

The tax agencies have recently begun emphasizing a number of
procedures during examinations to ascertain that taxpayers have
complied with their tax filing responsibilities. These procedures
have led to a growing number of requests by examining agents to
interview the taxpayer directly. However, you do have a statutory
right to be represented, and not to meet with the examining agent
(unless you are served with an enforceable administrative summons).
It is in your best interest to refer any questions or other contact
from the agent to us without discussing the case with the agent. By
signing this engagement letter, you acknowledge that any direct
contact by the State of New York will he promptly referred to us as
your authorized representative. It is hereby acknowledged that if
you choose to appear before or discuss this case with the agent
against our advice, you do so at your own risk.

Fees

Fees and expenses are due and payable on presentation of our invoice
to you. Our fee for representing you will be based on our lime, billed
at our rate of Sxxx per hour for partners and Sxx to Sxxx per hour for
staff, plus out-of-pocket expenses. We anticipate that most of the
services involved in the examination will be performed by a partner. In
order to proceed, we require a retainer in the amount of Sx, xxx.

If we have not received payment in accordance with the stated terms, we
reserve the right to terminate this engagement with no further notice.

Conclusion

If this letter reflects your understanding of the terms of our
engagement, please sign below and return one copy to us with the
retainer amount. We want to express our appreciation for this
opportunity to serve you.

Very truly yours,

[Partner's signature]

Accepted by:

Client's signature

Date

Summary

CPA firms that can assist clients undergoing examinations can add to their bottom line. They should offer such help if the opportunity arises.

Mr. Holub is a former chair of the AICPA Tax Division's Tax Practice Management Committee. Mr. Porter is the chair of the AICPA Tax Division's Tax Practice Improvement Committee. This column is adapted from Mendlowitz, Managing Your Tax Season (AICPA, 2006).

Co-Editors:

Steven F. Holub, CPA

Aidman, Piser & Co.

Tampa, FL

Jeffrey A. Porter, CPA

Porter & Associates, CPAs

Huntington, WV

Author:

Edward Mendlowitz, CPA/PFS, ABV 

Shareholder

WithumSmith+Brown

New Brunswick, NJ