Any experience shared regarding irs audits of preparers due diligence

[jdgroupacc]

I am in the middle of a preparer due diligence audit, the irs lady seems very lost in the forms and it took her a whole hour to audit one tax return out of 25 we pulled out for her, and she is promising penalty already !!!!  I have all the 8867 forms in there signed , files with schedule c are printed and signed included with all other documents such as birth certificates social security cards schools and doctors' notes 1099 and so forth, after all that she asking about comments on file !!! some of these files do not have comments since I have the relevant documents that prove the eligibilty for the credit...any experience? anybody?

[itonewbie · Accepted solution]

Just so that you know your odds, over 90% of those selected for due d compliance audit are penalized, according to the IRS.  You do, however, have the right to appeal if you do not agree with the assessment.

Given the volume of returns you prepared with refundable credits (per your previous post), it is not surprising that the IRS selected you for audit because they already perceive that there is a high chance of errors.  Otherwise, they may have sent you Letter 6223/6224 for an admonishment/advisory-type Knock and Talk Visit instead.

Having basic documents, such as those you mentioned, on file is not sufficient proof that you have done your due diligence.  There should be probing questions that help you establish each taxpayer's eligibility for each of those credits claimed and for filing HoH, based on their responses in tax organizers and records of your follow-up questions, especially where there may be gaps or inconsistencies in the information they submitted.  This is probably what the IRS is looking for and it could be problematic if you do not have that level of documentation on record for substantiation.

In addition, they will be checking your level of knowledge in tax law and whether you are meeting the record retention requirements.  It's probably fine if you have minor issues with isolated returns but they could expand the audit to more returns in the event they are not satisfied with result of the initial review.