FISCHER, CARRILLO & ASSOCIATES

 

$500k - FCA is VICTORIOUS - February 2007

FOREWORD

Even though an audit can happen at any time during the year, it is rare to have one in February.  Typically audits take place during the summer months through the end of the year.  Having an audit in February, clearly demonstrates how the IRS is pulling out all of the stops to make up for the tax gap, which is a directive from congress.

INITIAL AUDIT NOTICE REVIEW

February 2007 our office received a call from an individual, as they had received a notice of audit for 2004.  After reviewing the client records and return as well as the notice, we had noticed key issues with the audit notice and case at hand.  

  • The client had been previously audited the year before for 2003. 
  • Some areas previously examined in 2003 had no changes or disallowances. 
  • In this case the IRS was requesting to examine two of the prior year audit no change areas, as well as new un-chartered ground, totaling six distinct areas, one of which was income.  With these six areas under examination $500k became the stakes, and the IRS was eagerly trying to get their hands on it.

IRS NON COMPLIANCE WITH INTERNAL REVENUE CODE

  • The Internal Revenue Code - states (in summary) that if an examined area has had no disallowances, the IRS can not re-examine those areas for 2 tax years.

INITIAL PHONE CONTACT WITH AUDITOR IN CHARGE

  • Founding Partner - Guy Fischer contacted the auditor in charge and clearly pointed out the IRS's non compliance with their own regulations, regarding previously no change audited areas. 
  • Mr. Fischer went on to state that his clients would not be entertaining the IRS requests in these areas.
  • If the agent was to attempt pursuit of  those areas that a formal complaint would be filed against the agent and IRS. 
  • Additional, Mr. Fischer stated he would file an appeal regarding this matter if necessary.

RESULT of INITIAL PHONE CALL

    • The auditor was clearly shaken and removed the two previously examined areas immediately.
    • Just that phone call alone reduced the audited areas by 33%, an immediate $165K in our clients favor.

THE AUDIT

INITIAL PHASE

The auditor was so polite, but it was painfully obvious she was attempting to fish for more money.  During the initial phase the auditor proceeded with asking the economic life questions,

  • Has all the income been reported?
  • Was the taxpayers previously married?
  • Are they receiving alimony?
  • How many bank accounts do they have? 
  • and many more

Normally taxpayers would answer these questions and sometimes get themselves into more hot water.  Most taxpayers are not aware you have no obligation to answer the economic life questions during an audit, unless it directly links to the areas of audit.

FCA:  These questions are out of the areas in question and we are not prepared to respond at this time.

AUDITOR: I have been doing this for twenty years and no one has ever told me they won't answer, what am I suppose to do?

FCA: move forward to the areas in question, which she did after much resistance.

PROBLEM AREA'S

After hours of providing receipts, calculations, bank statements and arguing points for the business expenses, the auditor attempted to change two areas;

  • Increase - Income based on bank statements 
    • based on deposits on statements
  • Disallowance - Cash paid sub contract labor
    • Paid by cash - not traceable
    • No 1099's issued even though under $600 each
    • No name or address's of individuals

    These two areas would have increased the tax liability by a 150K in favor of the IRS.

    FCA TACKLES PROBLEM AREAS

  • Increased income - After requesting the bases of increase and examination of information, we determined the agent was not taking into account several factors:
    • Returns
    • Bounced Checks - not recovered
    • Late year deposits which carry forward to the next year

  • Disallowance  sub contact labor

    • We recited the "Cohan Rule" fair estimation without actual receipts
    • We immediately stalled for time while we created a "Sworn Affidavit" for the client to sign - which stated that the information and expenses where accurate and true.

Per the Internal Revenue Code a Sworn Affidavit acts the same as a receipt and they have to accept it.

CONCLUSION

Fischer, Carrillo & Associates were able to reverse both  problem areas.  All of the clients rights where protected, not to mention their $500K.