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How to prepare for an audit

By: Jane Pribek//September 19, 2012//

How to prepare for an audit

By: Jane Pribek//September 19, 2012//

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Plan ahead to avoid issues with record keeping and logistics

Worrisome though it might be, if you’ve learned your company will be subject to an audit by the state, it’s better for in-house counsel to plan ahead and start preparing immediately.

Most businesses in state can expect to be examined by the Wisconsin Department of Revenue on a fairly regular basis, said Douglas Frazer, of DeWitt, Ross & Stevens SC, Brookfield. IRS examinations are less frequent, he added, but “almost always, the results of the Department of Revenue audit are going to go to the IRS.”

When notice of an audit arrives, here’s how to prepare:

Re-examine record-keeping procedures

Ideally, business records should be easy for an outsider to follow, Frazer said.

Perhaps the business keeps everything in a folder relative to expenses incurred with a subcontractor, which might be related to several contracts. An auditor might want to organize it by each job, requiring the business to reconstruct the records. It’s time-consuming and stressful, and unnecessary if the records had been better organized in the first place.

Negotiate logistics

The DOR often will push for the auditor to work at the taxpayer’s place of business as part of a “field audit,” Frazer said, but companies should think carefully about agreeing to that.

“That something that we typically do not agree to, or if we do, it’s with a lot of deliberation,” he said.

Companies can ask that the work be done at outside counsel’s office.

Avoid self-incrimination

Infrequently, department staff members drop by unannounced, said Rob Teuber, of Weiss Berzowski Brady LLP, Milwaukee. Be aware, he said, that if someone bears the title “special agent,” it very likely means the department suspects criminal activity.

You don’t have to open the doors and the books immediately, he emphasized. Likewise, avoid talking about whatever it is you think they’re seeking, he said.

“The first thing to do is say, ‘Thanks for the information. I’ll get back to you after I talk with my lawyer,’” Teuber said.

Designate point persons

Limit who communicates with the auditor to a few authoritative individuals, said Don Millis, of Reinhart Boerner Van Deuren SC, Madison.

It’s fairly common, he said, for an offhand remark to end up in an auditor’s final report, so it’s best to avoid potential issues.

“Once that gets in the report, and even if everybody else swears it’s not true, it can be very difficult to convince the department that it’s wrong,” Millis said of unauthorized comments.

Talk to a tax lawyer

Perhaps the audit can be handled in-house, after receiving unbundled advice. Or full representation may be required.

“Talk to someone who knows the rules and procedure, to make a decision if representation is necessary and which representation is right for the company,” Teuber said. “But don’t make that cost-benefit analysis without actually knowing the cost.”

Vickie Gibbons, deputy administrator of the Wisconsin DOR, said that if you’re going to hire private counsel, earlier is better.

“Sometimes they [lawyers] arrive too late to the discussion,” she said. “The audit’s done, negotiations have pretty much been wrapped up, and then the attorney is brought in. Then everything has to be re-opened again.”

Set a schedule and ‘sampling’ parameters

In Millis’ experience, sometimes a field auditor leaves, saying he’ll “get back to you later,” only to be absent for months.

Because of the four-year statute of limitations, often the auditor will return when it’s about to expire, and the DOR will want you to sign an extension agreement, he said.

But if you try to set a schedule upfront, that situation might be avoided.

Likewise, ask whether the department plans to use “sample” data, because auditing everything, especially in large enterprises, is impossible.

Negotiate a sample that’s truly representative of the regular course of dealings, Teuber said.

Then check that data uniformly has been documented. Millis said that in a past audit, a company recorded an expense under a vendor’s name, while in the following year it was documented under the product’s name. The auditor thought two separate taxable events had occurred, when it was just one. That’s the kind of information to bring to the auditor’s attention upfront, Millis said.

Be respectful

“You might disagree with them,” Millis said. “But always remember that they’re just doing their jobs. You always have to treat them with respect.”

Along these lines, Gibbons said to follow the department’s chain of command.

“Sometimes, you want quick action, so you go right to the top, right away,” she said, “but a lot of things can be settled at the auditor level. If you can’t get what you need from the auditor, then work with a supervisor, and then the audit manager or section chief-of-field.”

Try to be patient. Auditors are juggling multiple examinations simultaneously and they’ll remember your professional courtesy.

Document what the auditor reviews

Millis said the field auditor doesn’t always make copies of all the information used. So, make sure you know what sources of information he’s consulting and for what purpose. Be especially cautious if the information is something outside the company’s document-retention policy.

It’s also important to document, even in just a simple email, if the auditor has discretion to seek a penalty, but didn’t, Millis said. These types of communications come in handy, he said, when penalties are sought at later stages of the process.

Be creative

A little creativity can go a long way.

For example, Millis said to consider a “reverse audit,” where you hire outside accountants to help find more deductions that can be used as bargaining chips. Any money the company is owed earns 9 percent interest through successful refund claims.

Also consider, he said, whether to pay a deposit on the amount the department claims is owed. The sum paid cannot be considered an admission of liability by statute, Millis said, and it also earns 9 percent interest while the audit is pending.

Not every company has the reserves for that. But if it does, the interest earned can offset the assessment, especially if the case lingers.

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