Professional Service Firms Articles
Survival of the Fittest Tax Return
How To Avoid an IRS Audit – or Help the Process Run More Smoothly


Target Audience: Accounting Consulting Firm News and Updates Interest, Law Firm Professionals, Lawyers, Law Firm Associates


After many years of reducing the number of audits it conducts, the IRS is stepping up efforts. For example, the agency hired more than 1,000 auditors and collectors. As part of its Market Segment Specialization Program (MSSP), the IRS is targeting certain groups, such as law firms, restaurants, auto dealerships and architectural firms. And it has developed audit technique guides for each market, detailing industry issues, practices and terminology. You can take steps to avoid the IRS’s attention or, if you’re audited, resolve the process more quickly.

The IRS’s Prey

Obviously, the IRS can’t audit every law firm or lawyer, but it has developed criteria to target candidates. Firms that handle large sums of cash – such as personal injury, immigration and real estate practices – are attracting interest. The IRS, for instance, looks closely at real estate lawyers because they may take a property interest in a transaction and fail to report it. If you believe your firm may be audited or has received an IRS notice, here are some tips:

Ensure partners file tax returns. You can protect your firm by having partners sign statements annually verifying they’ve filed their returns. Auditors will focus on money borrowed from clients that is later forgiven for services provided. They may also examine each partner’s partnership or limited liability company (LLC) interests or stock received in lieu of cash for services provided.

Maintain good records. Auditors are usually more lenient when firms have thorough records that include accounting documents, updated cash-receipts and cash-disbursements information, and completed time records and journals.

Hire an accountant. The benefits are many. For one, your advisor can help you develop a strategy that could delay or avoid the need for interviews. Accountants also can remain emotionally neutral.

Respond promptly to IRS notices. Often, you may just need to clarify a detail or make additional payments. In any case, handle the matter as soon as possible because delaying your response or ignoring the IRS will raise concerns about your intentions.

Hold meetings off-site. If you’re called for an interview, conduct the appointment at the auditor’s or your accountant’s office. Meeting at your workplace can give the auditor an opportunity to compare your surroundings to the income stated on the return.

Maintain a professional relationship with the auditor. If a dispute arises and you’re unhappy with the result, keep calm. Your advisor can request a meeting with the auditor’s supervisor or a district supervisor. As a last resort, you can file an appeal with the IRS’s local appeals office. But avoiding litigation usually is your best course of action because the IRS wins the majority of these cases. Many times appealing costs more than paying the tax.

Point out previously audited items. The IRS will look only at a particular item a finite number of times. For example, if an auditor examined the same entry (such as mixed automobile use for business and pleasure) in the past two years and made no change, your tax advisor may be able to persuade the current auditor to bypass this part.

A Tactic

We hope your firm will never experience an audit. But following these tips can help you steer clear of the IRS’s ever-watchful eye or quickly resolve tax return issues. And remember, always review the return before you sign and mail it. For more information about these financial matters or other business concerns, please call us.

Find out how our expertise in accounting for professional service firms can add value to your business. Email us or call us at 1 (888) 875-9770.

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