The IRS has specific rules regarding which returns a Revenue Agent (RA) can audit. It all starts with the return that is assigned through the normal audit selection process. Once assigned, the RA may expand the scope of the audit to include prior and subsequent years of the return assigned and to a “related return”.
IRM 18.104.22.168 defines a related return as meeting one of these criteria –
- Adjustments made to one return require corresponding adjustments to the other return, to ensure consistent treatment. Refer to IRC 1313(c) and IRC 267; or
- Returns are for entities over which the taxpayer has control and which can be manipulated to divert funds or camouflage financial transactions. Refer to IRC 267(b).
The first requirement can refer to many situations, such as flow-through entities and their owners, alimony discrepancies, etc. The second requirement most often applies to C-corporations owned by the taxpayer.
Understanding the rules an RA must follow is important because it can help protect your clients and you.
I heard the following story from a fellow CPA. The CPA was representing a taxpayer during an examination by an RA. The CPA didn’t prepare the return under exam or any other returns of the taxpayer. His only connection to the return under audit was that of power of attorney.
Partway through the audit, the RA calls and tells the CPA that he’s been looking at his return and didn’t like a couple of things on there. He tells the CPA he can file an amended return with him or the RA will audit the CPA’s return. The CPA decided to file an amended return with the agent rather than go through with the audit.
In this case, the RA was clearly out of line because he had no authority to look at the CPA’s own return let alone conduct an examination.
The bottom line here is that knowledge of IRS policies can go a long way when dealing with the IRS. RAs like the one I mention above are thankfully few and far between. As practitioners we need to know where the lines are so we can make sure the IRS stays inside of them.