Eric Green’s Tips for Reconstructing Records and Overcoming Difficult Auditors
Navigating an IRS audit — already a stressful process for many — can quickly become a nightmare when clients’ records are destroyed or they’re assigned an unreasonable auditor. In a recent SmartVault webinar, veteran tax attorney Eric Green shared past audit horror stories and offered tips to handle some worst-case scenarios. Here’s a summary of the conversation.
No Records? Think Again
“The water comes pouring out of the ceiling…right into [my client’s] filing cabinets,” Eric recalled about a client whose documents turned into paper mache after an apartment fire. Even though the records were destroyed — and they had photographic evidence of that — it doesn’t change the fact that they’re being audited. “The burden is on the taxpayer to show that [they] are entitled to a deduction or a credit. It is not the government’s problem.”
But there’s good news. As Eric reminded us, even when you think there isn’t a record, “there’s always something…There are digital fingerprints everywhere on all of us.”
Eric partnered with well-known forensic accountant Dawn Brolin to reconstruct the clients’ records. There are a few areas you should look at when reconstructing expenses, like bank and credit card statements, auto service invoices, appointment calendars, and mileage apps—to name a few.
You may also have to become creative. When Eric worked with a house flipper who didn’t have receipts, Eric obtained MLS sale listings showing before and after photos of the homes. He then had the taxpayer use Home Depot’s website to estimate the cost of obvious repairs visible in the photos. Though not ideal, this strategy earned the taxpayer a 73% deduction.
Dawn introduced Eric to SmartVault, a cloud-based document management system and client portal that simplifies collecting, storing, collaborating on, and recovering files. “Maintaining records in a secure way that can be accessed from anywhere has become more critical than ever,” Eric explained. Eric has since used SmartVault at his law firm. “SmartVault saves time, money, and, most importantly, sanity.”
When Auditors Are Wrong
So what happens when the auditor messes up? He recounted two auditors arriving at a 90% cash estimate for a pizza shop after observing only morning hours. “They were there for just three hours,” checking some receipts and observing. “They basically come up with millions of dollars of unreported income… and this person who runs the pizza shop gets a bill for $300,000 for unreported sales tax.” The problem, Eric said, is that the auditors were just there in the morning when the shop was selling things like bagels, newspapers, and coffee that most people purchase with cash. The auditors failed to see what happens during lunch and dinner when bills increase and more people use credit cards.
“So the point is,” Eric continued, “We [often] poke holes in the audit techniques.” Eric decreased that cash estimate to $8,900 by compiling receipts and creating a daily spreadsheet. And what happens when an auditor pushes back? Eric advised standing firm and elevating issues to IRS appeals, which is often more reasonable. Unlike auditors, appeals officers can negotiate settlements on penalties and issues.
Using a Document Management System to Improve Processes
“You should be using SmartVault, and your clients certainly should,” Eric said on the webinar. Why? SmartVault securely stores your data and documents in the cloud, so if you experience a natural disaster like a fire, you don’t have to worry about losing your records. It also makes requesting, collecting, reviewing, and signing documents with your staff and clients simple and organized.
“If you are not using SmartVault in your practice and with your clients, you are gambling with their money, your money, and your very practice,” Eric said. To see SmartVault in action, schedule a demo.