Do I Need a Forensic Accountant for an IRS Audit?
Hi. And welcome to another New Jersey Forensic Accountant discussion. Today, we're gonna talk about something that most people fear but unfortunately at some point, it's going to happen to you, it's an IRS audit. Now I say IRS audit but what I really mean is any kind of audit, sales-tax audit, state audit, unemployment audit, or any kind of audits. And we may be saying to yourself "Well, you know, why are we so concerned about IRS audits?" Because every year the Internal Revenue Service sends out millions of notices. The question is when you're going to get one and what you're going to do about it.
And like I said, it could be some other notice. Maybe it's not an IRS notice but you will get it. And people say, "Well we don't get a lot..." You do. Everybody is going to get one of these at some point. Some people get multiple ones. And let me just talk a little bit about some of the situations we get involved in. Now you may be saying, "Well if I get an audit notice, I'm gonna handle myself, I'm gonna let my accountant handle it, or I'm gonna let a lawyer handle it." Or gonna have one of these online scams where, you know, "we're gonna help you with your IRS audit."
Typically, you don't need a forensic accountant, and I understand that. But when things get out of hand, that's when they bring in the forensic accountants. Sometimes they should bring them in a little bit earlier because we have a different way of looking at things. And when we look at audits and we get involved in audits, and like I said a lot of times lawyers will bring us in when things get out of hand or if there's a family member getting audited, they'll bring us in. So you may want to think about that. But if it looks like it's a very difficult thing, you may want to do.
And I'll just give you an example of one we just had. We recently had a case where a gentleman in his late 70s was forced into bankruptcy and the IRS is about to take his home and his car. Now, what happened was he was getting divorced like five or six years ago and he had a couple of businesses, a very successful businessman. And his wife, soon-to-be ex-wife walked into the IRS and said, "Hey, you know, my husband has two sets of books." And, you know, so they audited him and over the years things got went from bad to worse.
And eventually, they charged him with tax fraud and on advice of his high-priced lawyers, they said, "Listen settle the case otherwise you could go to prison." And so he took their advice and my...talking with him and spending some time with him, it's obvious that he did not understand accounting, taxes, or anything else. He was a great businessman. Supposedly, he made a lot of money, which I think he did at some point. But, you know, in the situation he was in he came to see us where he was referred to another lawyer because the IRS was basically gonna take his house and his car and he lived with his elderly parents who were in their late 90s and they were going to be thrown out. So things were really bad.
And so what we did was we went back and looked at what happened. We looked at the books, we did an analysis of this so-called second set of books. And what we found was that the tax returns that were filed were not that different from the second set of books. And in fact, you know, there's nothing wrong with keeping two sets of books unless you're trying to steal money, but he wasn't doing that. What he was doing was tracking payroll and costs on one set of books and the other one was just a general ledger and they were not really that different.
And so we're looking at this and say, "Well we don't understand why..." And he was like, "Yeah. I didn't steal money, you know?" But they said the books didn't make sense but they did, they did make sense. So what we were able to do we said, "Listen there was no tax fraud here." And, you know, we went through and we actually prepared like a 300-page report. And a lot of it was exhibits. And the way we do things, it's very easy to, even though they're big thick reports in this case because it was all these allegations, we were able to go into the IRS and say, "Listen, he was just given bad legal advice. There's no tax fraud here." And they actually looked at our work papers and agreed. But because of his age, it would have taken so long to undo this and we've taken so much time, we decided and we recommended, "Don't do it. Listen, we'll just stop the IRS from taking your house, you know, and taking your car and your parents will be safe and move on."
And then, of course, the state came after him too and the state was more vicious than the IRS, believe it or not. But we did the same thing. We sat down with them, we showed them the records. This guy did not steal any money, okay? But we understand it's too hard to undo that because it could take 10 years and like I said he's in his late 70s and doesn't want to spend all his time in the courtroom or meeting with IRS agents and accountants and forensic accountants. So anyway that is just a quick sample of what can happen if you don't really focus and understand the audit.
Now let me just talk about some audit triggers. What triggers an audit? Okay. Most audits are triggered because the W-2s or 1099s that you receive don't agree with what you put on the return. And they're pretty simple to fix. And that's why you should always check the 1099s. If you're working for someone to make sure they have the right social security number, make sure they have the right name, make sure they have the... If you have a company, make sure they're using the federal ID number, make sure the company name matches, make sure all that stuff agrees. It could be related to another IRS audit.
For example, he got audited and a lot of his suppliers and vendors got audited because they figured he was stealing money, they were too. I don't know what happened to his vendors and suppliers, but he was not stealing any money. There's a computer scoring system which we kind of had...we were able to figure this out over the years. And what it does is if you hit certain parameters, if you score a certain number your audit goes up, chances again your audit goes way up. We have it now, so we kind of know if you have a high chance of getting audited or a low chance, self-employed people, business owners that's in a big audit trigger.
Deductions not in line. You know, why are things fluctuating so much? That can trigger an audit. You took rental losses, they love to do that. Home office deduction. We were telling people for years, "Don't take the home office deduction because what you...the benefit is so small but the chance of going up audit is tremendous." And audits are very expensive and not only in money but in your time. Random audits sometimes it's just pure luck.
Now if you do get audited, okay? This is where he made a mistake, okay? Don't ignore the notices, which he did. Read the notices carefully, which he didn't do. Make sure you understand the issues, which he was totally clueless about the issues. He just said, "I have two sets of books." But we're like, "Well, okay, were you stealing money?" And, "No, you know, this is how I track my employees." And, you know, he did other things with it, which is not illegal. What's illegal is not showing the income and your expenses. But, you know, he did that. So he didn't understand the issues and he basically let other people, accountants, and lawyers tell him what they saw. But what they were looking at was not correct. Make sure you have organized records. His records were a disaster. Okay?
We fixed them. Okay. That's how we were able to present to the IRS and within three hours they understood we were telling the truth that he did not steal money, that nothing was missing. So they have to be organized in a certain way, which we know how to organize. We send...constantly we're sending, you know, 100, 200, 300-page reports to the IRS to the state and say, "Here's the information, here's all the backup." Because remember they don't really want to spend...they're not gonna spend their time helping you. You need to fix and make sure it's very simple. It can't be confusing, okay? One plus one is two, here's one, here's two, make sure everything is referenced, everything is easy, okay? And then they can go back to their supervisor and say, "Here's a 300-page report that explains why the taxpayer is correct."
Missing records. Now you may be able to get better records now because you know the issue, right? Replace them. You could replace them. As long as they're real records, you can use that. This is so important. Make sure the facts are clear and easy to understand. There was someone in our building and he said his mother was getting audited and, you know, it wasn't a big enough for us to be... And I said, "Listen, you could do this." I said, "Just set it up very clear, make sure you have copies of everything." He did what he... And he came to me I guess like a year later he says, "You know what? That was the best advice I ever got, because he did exactly what I told him. I said, "Listen, the IRS and the state are here to help you. They're not here to hurt you, okay?"
So if you have a legitimate point of view, be organized, be polite, and show them. Make copies, okay? Because records always get lost when you're dealing with the IRS, okay? We have files and, you know, we sent sometimes three or four or five times the same file, okay? I just put copy on it, I have one of my, you know, assistants mail it out because they lost it or they sent the notice again. We just keep mailing and mail and mailing, okay? And eventually, someone is gonna read it.
Okay. Listen, if you guys have any questions on any of this stuff we went through pretty quick just leave a comment below, we'll get back to you right away. And if you like what we did here, you know, just subscribe to our channel. I really would appreciate it. Thanks a lot.