The Attorneys Audit Technique Guide is a comprehensive resource from the IRS that provides a detailed overview of the audit process for lawyers – and, in our view, required reading for every attorney. It covers everything from what to expect during an audit to what information the IRS may request. Even a cursory overview of the guide can provide lawyers with a much deeper understanding of the audit process. In this post, we discuss the pre-contact analysis.
Pre-Contact Analysis
Among other things, the Audit Guide highlights some of the steps taken by the IRS prior to contacting the target of the audit. These steps shed light on why it is important to actively monitor not only your financial records, but also your online presence.
For example, as to the people search, the Guide notes that:
A people search in Accurint will provide address information, telephone numbers and employment information (listed as people at work). This information can be used to verify the size and location of an attorney’s offices.
As to assets, the Guide notes that:
An Accurint asset search can provide information on motor vehicles, property assessments, property deeds, watercraft and aircraft. Asset searches may also disclose property ownership, purchases, and sales information that would not appear on a taxpayer’s return that may be discussed during the initial interview. While useful, care should be taken reviewing the search results to eliminate duplicate entries. Care should be taken to review parcel numbers, registration numbers, and other identifying information to eliminate duplicate information. An Accurint search of the specific assets should be performed for identified assets. The Federal Aviation Agency (FAA) Internet site also provides searchable information on aircraft assets.
As to businesses, the Guide notes:
Accurint searches can provide information about business entities, such as the business or taxpayer name, corporate filings, UCC filings, fictitious names (doing business as or “dba” names), and Experian business information.
The Guide also suggests reviewing court files:
Court files are another useful source of information. These files can provide information regarding marriage and divorce actions, bankruptcies, foreclosures, liens, judgments, and lawsuits. The court records on these legal actions, if available, may provide details of assets and other useful information warranting a trip to the Court where the records are held.
Separately, the Guide discusses Internet Searches:
A thorough search of the Internet should be completed prior to the initial interview. Searches should be completed using the taxpayer’s name, firm name, and area of expertise. Relevant websites found identifying the taxpayer should be printed and included in the case file for later reference, if necessary.
Web Currency and Banking Retrieval System
As the Guide explains, the “Federal Government has imposed certain cash reporting requirements in recent years. These reporting requirements were established to help monitor and track large cash flows. Several forms are of interest to revenue agents are available from Web CBRS. These forms may be summarized on an IRP report.”
There are five relevant forms:
- The first form, FinCEN Form 104, Currency Transaction Report (CTR), is used to report cash transactions (deposits and withdrawals) greater than $10,000 involving various financial institutions. These financial institutions, including banks, savings and loans, credit unions and other non-bank financial institutions such as check cashers, and wire transfer companies file the Form 104. The Form 104 identifies the individual making the transaction, the person or organization for whom the transaction was conducted, the financial institution involved in the transaction, and the amount of money involved.
- The second form, FinCEN Form 105, Report of International Transportation of Currency and Monetary Instruments (CMIR), is used to report the international transportation of currency or monetary instruments that in aggregate exceed $10,000. Individuals must file a FinCEN Form 105 whenever they carry more than $10,000 in cash and/or monetary instruments into or out of the United States. Also, individuals who physically send or receive (typically through the mail) more than $10,000 in cash and/or monetary instruments must file a FinCEN Form 105.
- The third form, IRS-FinCEN Treasury Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is a report of cash payments over $10,000 (U.S. dollars or foreign currency equivalent) received in a trade or business. This form is filed by the business receiving funds and is filed by retailers or businesses selling large ticket items, bulk inventory, and luxury goods. It identifies the customer, provides a description of the transaction and goods, and also lists the method of payment.
- The fourth form, FinCEN Form 103, Currency Transaction Report by Casinos (CTR-C), is used by casinos to report cash transactions (either cash received or cash disbursed) that exceed in the aggregate $10,000 in one gaming day. This form lists the individual or organization involved, details of the transaction, and the reporting entity.
- The fifth form, Treasury Form TDF 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR), is required of all entities, including individuals, having a financial interest in or signature authority over foreign bank and financial accounts with an aggregate value of more than $10,000.
The Guide points out that printouts “of any transactions reported and processed at the Enterprise Computing Center in Detroit are generally included in the case building material or may be obtained from the Web CBRS query system. The CBRS system servers are located in Martinsburg Computing Center. Every POD should have someone trained to access the CBRS query system and retrieve data from Web CBRS in printed or electronic formats.”
Other Pre-Contact Issues
The IRS performs a 3-year Comparative Analysis. As the Guide explains, it “is important to perform a comparative analysis of at least 3 years during the pre-audit planning phase. This step is necessary to determine if there are any unusual changes in income, expenses and taxes paid before initiating an examination.”
Finally, consider some of the questions that IRS auditors are instructed to ask at the initial interview:
- “How much cash was on hand at beginning and end of year?”
- “Were any loan proceeds received?”
- “Were referral fees received from other attorneys?”
- “Was compensation received in forms other than cash? Define bartering and use examples such as property interests, services, other assets received from a client in lieu of normal compensation.”
- “Are there any foreign accounts or offshore interests?”
- “Are there any interests in other entities?”
- “What Internet sites are maintained by the taxpayer?”
- “On-line income sources including consulting, on-line bartering?”
- “Other on-line services provided?”
Finally, the Guide instructs the IRS auditors to have a “bookkeeper walk through the recordation process from the point where the attorney is retained by a client to the settlement of the account”:
A thorough understanding of the taxpayer’s bookkeeping system and internal controls is necessary. Have the attorney or the bookkeeper walk through the recordation process from the point where the attorney is retained by a client to the settlement of the account. Clearly determine and document the taxpayer’s level of involvement in bookkeeping, check writing, and trust account activity.
In sum, it is important to be involved in the bookkeeping process even when outsourcing your accounting, which is why we work personally with our clients to reconcile the accounts on an ongoing basis.
Read the Complete IRS’ Attorneys Audit Technique Guide (Revised 1/11/2022)
At Law Ledgers, we know that running a law firm is challenging, and keeping up with the latest IRS regulations and procedures can be overwhelming. That’s why we’re here to help. Our team of experienced professionals understanding the rules and can provide valuable support during the audit process. In addition, we provide comprehensive tax and bookkeeping services to help keep your firm’s finances organized and in order. Our team can help take the stress and workload off of you, freeing up more time for you to focus on your clients’ legal needs.
Please note that the information provided on this website is for general informational purposes only and is not intended as legal or tax advice. The information is subject to change, and it is important to consult a specialist before making any decisions. Law Ledgers provides accounting services to New York lawyers and law firms, including escrow protection, tax advice and bookkeeping administration. Contact us today for personalized support.