what happens during an audit as a tax preparer

Photo Credit: Tamika Lamb

If you are a paid tax professional, the IRS looks at returns with a high chance of errors completed by the same preparer and use that information to select preparers for audits.

The IRS may have contacted the preparer by sending a letter, a phone call or an educational visit initially before an audit is initiated.

Before the filing season begins, IRS employees conduct due diligence audits based on the prior year refundable credits returns. They will schedule an appointment in advance for these pre-filing season audits and it is expected for the preparer to schedule the audit within 15 days

During the filing season, the IRS will conduct due diligence audits without advance notice. More than likely, a letter was previously sent the preparers informing them of a potential audit. That's why they ask for up-to-date information when completing PTIN and/or EFIN registration.

If a high number of your client's files are being audited, the IRS is possibly monitoring the returns than you file.

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During these audits:

  1. The IRS employee provides official IRS identification.

  2. The examiner interviews you about your business practices. If you are an employee of a tax preparation firm, the examiner also contacts your employer for an interview.

  3. The examiner is looking for compliance with all four due diligence requirements and will review at least 25 returns reviewing the following documents:

  • The preparer's due diligence records,

  • The probing questions asked and the client's responses,

  • All questionnaires, checklists, worksheets and

  • Copies of any client provided documents relied on to determine eligibility for EITC or to compute the amount of EITC.

4. If the examiner identifies that you have failed to meet due diligence on any of the returns, they may expand the audit to more returns.

During the audit, the examiner looks for evidence showing the preparer met the knowledge standard. To meet the knowledge standard, a preparer must:

  • Know the law

  • Ask the right questions, especially when the client gives information that appears incorrect, inconsistent or incomplete 

  • Document the questions asked and the responses given by your client

  • Get all the facts to make sure your client truly qualifies for EITC

While auditing for due diligence, they also ensure that the preparer is in compliance with the PTIN, Preparer Tax Identification Number requirements and his or her personal tax return filing requirements.  

If the 25 returns are not in compliance, you will be possibly be penalized for each tax return and credit that you were out of compliance owing the IRS thousands of dollars. Other penalized could be assessed as well.

*Information obtained from the IRS

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