IRS Audit Sample Size

Technical topics regarding tax preparation.
#1
Masto  
Posts:
3
Joined:
10-Jan-2017 12:56pm
Location:
Los Angeles
Hi everyone,

I am representing two clients being audited by the IRS and am flabbergasted by the sampling techniques on both audits. In one case the auditor is requesting 100% of the substantiation for 5 of the biggest categories on the tax returns (COGS, Outside Services, etc).

In the other audit the auditor is requesting invoices, statements, and support for about 500 transactions. It seems that the auditor picked these 500 transactions by going through the GL and selecting items that appeared personal or may not have been inherently clear on the QB memo description, rather than selecting the sample size based on a random sample or other methodology.

I've pushed back requesting a less voluminous sample size in #1 and also considering pushing back on the sample methodology used in #2.

Curious if any of you had any experience specifically contesting the sample size and methodology used. Based on IRM 04-047-003 Statistical Sampling Auditing Techniques (https://www.irs.gov/irm/part4/irm_04-047-003) the methods used are not appropriate. Any suggestions would be much appreciated!

Thank you
 

#2
KoiCPA  
Posts:
729
Joined:
8-May-2023 1:30pm
Location:
Washington
The IRM you cite only applies when they are doing a statistical sample, but I'm not aware of any requirement that they follow that method.

What you describe actually matches up with my experiences in the past - that they either want everything or that they pick specific things that are most likely to have been abused/misreported.

I have had luck getting them to narrow it down to a single month of the year and that may be particularly useful for #1, especially if there are lots of repetitive purchases. They'll often want January and/or December, since those are the most prone to abuse in terms of timing.

In some of the audits I've done, I think their clear goal was just to see if we could provide records at all. Like, I had a client print out data on every trip for auto mileage. The auditor looked at the top three pages and moved on. We passed by page count alone.
 

#3
skassel  
Posts:
680
Joined:
22-Apr-2014 6:04pm
Location:
San Mateo County, CA
Unless it's a large business, substantiation for 500 items seems a ridiculous amount. Discuss it with the Group Manager. What is the average size of the expenses for which they are looking? Is each $5,000 or are they penny ante type stuff? There has to be correlation between the work involved on both your part and that of the taxpayer and the dollar amount of the expenses. There's also a time to say, "Issue a Notice of Deficiency".
Steve Kassel, EA
 


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