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Arguably understanding the audit process of the IRS is the second important aspect of tax preparation. Although the IRS only audits about 2% of those who send in returns and therefore your chances of receiving an audit may appear to be less than 1 in 50, if you itemize deductions on your return and if you are “aggressive” with your write-offs, those odds increase substantially. As we have stated elsewhere on this website our clients almost always come out of an audit owing nothing more than when they went in. Unfortunately though, if they make use of our assistance to be sure they are completely prepared for the process, they still have to pay us and the end result is a monetary loss. But perhaps the most difficult aspect of an audit, above the shear terror that accompanies receiving the letter, is simply the time and effort trying to get all of your records into order, especially when the audit is usually two years after you filed. Most actors have trouble remembering what they were doing last week without some effort. If you have properly prepared your taxes you should already have most of this work accomplished. If you can validate your write-offs and if the areas you included in those deductions are legitimate under IRS rules, you shouldn’t have anything to be concerned about. Seriously. That’s why training and instruction on how to keep your records and understanding what deductions are allowed by the IRS is a regular part of our preparation process. On the other hand, most of the problem cases we come across occur when we are asked to assist those who had their returns completed by outside preparers and not one of our associates. Here then are some points we suggest you all consider.
CORRESPONDENCE AUDITS If you receive a notice asking you to participate in a Correspondence audit (an audit where they ask you to copy and mail all of your records to some far off office) we urge you to politely turn down their request and instead demand an office or personal audit. It’s your right to do so under IRS rules regardless of what the office may tell you over the phone. As indicated with the following excerpt from IRS Publication 1 you have the right to request a personal (or office) interview rather than go through the correspondence process. We have bolded the more relevant lines: By Mail We handle many examinations and inquiries by mail. We will send you a letter with either a request for more information or a reason why we believe a change to your return may be needed. You can respond by mail or you can request a personal interview with an examiner. If you mail us the requested information or provide an explanation, we may or may not agree with you, and we will explain the reasons for any changes. Please do not hesitate to write to us about anything you do not understand. By Interview If we notify you that we will conduct your examination through a personal interview, or you request such an interview, you have the right to ask that the examination take place at a reasonable time and place that is convenient for both you and the IRS. If our examiner proposes any changes to your return, he or she will explain the reasons for the changes. If you do not agree with these changes, you can meet with the examiner's supervisor. In addition Publication 556 states the following: IV. Representation You may either represent yourself or, with proper written authorization, have someone else represent you in your place. Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. If you are in an interview and ask to consult with such a person, then we must stop and reschedule the interview in most cases. You can have someone accompany you at an interview. You may make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting. Obviously you are denied the right for representation when the audit is performed by mail. Don’t be misled, your right for a change of location is IRS law. Most of these audits originate from office located in Ohio, Utah, Texas or upstate New York. Because you are an actor and located in Los Angeles, New York or presumably some other city with a greater experience and understanding of the entertainment world, it makes far more sense that your interview takes place with auditors who are locally based and usually far more experienced in the specifics of Actors Taxes and the complexities of your particular taxes. The biggest area of problem these Correspondence audits creates is the bureaucratic policy demanding that you submit a letter from your employer validating the reimbursement policy for your expenses. This is caused because IRS rules demand we use a Form 2106 entitled “Employee Business Expenses.” For most businesses this may be a valid request, but not for actors. Read this part carefully: For the most part this demand has nothing to do with actors, although the correspondence offices have trouble understanding this. Our expenses are all Job Search activities, including the payment to our agents or managers (unless you are on a series or under a regular contract.) To quote the Market Segment Specialization Program manual (manuals to guide auditors in various professions) created by the IRS for the Entertainment community:
In other words if you work under a union contract you are always reimbursed under our contracts for any expenses you may incur as a result of the work. What you are writing off is the costs of the process to prepare you (education) for work and to seek work. Even compensation to your agent is payment for them seeking work for you. You aren’t paying them because you worked but because they worked to find you the job in the first place.
We suggest you attend the Audit Although you have every right to a representative, we urge you to attend the meeting with your representative. The common attitude from most professionals is that you not participate. We disagree. The audit process is to allow the auditor to go through your receipts and records to validate what you wrote off. There is no way any one else can be as familiar with and able to explain your expenses as you are. A CPA friend of mine once said that he enjoyed going to audits for his clients. As he expressed it, “I like giving away someone else’s money.” What he meant was that in the mind of most preparers, if they can get you out of an audit for the least amount of cost, that’s a win. In our office you shouldn’t lose an audit if you are writing off the proper things in the first place and have the records to validate those expenses. One story comes to mind about the auditor who asked, “Who this guy Samuel French was.” Unfortunately most preparers can’t tell you the answer either. But you can.
There is a lot more information
we can offer you about audits, in fact too much to try to place here.
So if you have more questions, please do not hesitate to call us.
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