1990 Westwood Blvd. #200
Los Angeles CA 90025
Phone: (310) 446-0088; Facsimile: (310) 446-0079
"TIP OF THE MONTH"
(December 1995)
Economic Reality Audits. Should You Be Afraid?
The primary function of the Internal Revenue Service (IRS) is to collect revenue. The IRS believes that it will collect more money if its auditors do a better job auditing tax returns. To this end, the IRS has been promoting what is called an "economic reality" audit.
In an economic reality audit, agents are trained to look for lifestyles that don't match income or expenses shown on the tax return. This would help the auditor identify areas of the tax return that might yield additional tax.
The fear among taxpayers and taxpayer representatives is that the IRS might require taxpayers or taxpayer representatives to disclose confidential and sensitive information about the taxpayer that could result in negligence penalties, fraud penalties, and even criminal prosecution.
Recently, two IRS service centers reminded practitioners that a taxpayer does not have to answer questions posed by IRS agents during economic reality audits. In a newsletter for practitioners, the IRS specifically stated that this includes questions asked to determine expenditures for personal assets and support.
Unlike attorneys, whose communications with clients may be protected by the attorney-client privilege, CPA's have no CPA-client privilege, and the government could compel them to disclose sensitive client communications.
If you believe you have sensitive information that you would not want your tax representative to disclose to the IRS, you may be better off keeping the information to yourself until you consult legal counsel. Your attorney may be able to hire your accountant, and thereby extend the attorney-client privilege to the CPA.
If you would like more information about "economic reality" audits send me an e-mail message,
and I will help you.
mhl@michael-lester.com
As always, general advice may not apply to your specific situation, and rules change constantly, so you should get a professional opinion before you rely on this information.
Read the "Tip of the Month" for
November 1995.
Read the "Tip of the Month" for
October 1995.
Read the "Tip of the Month" for
September 1995.
Go back to Michael H. Lester's Home Page.
Use of copyrighted graphics in this home page is strictly for the purpose of making links to other www sites more pleasing to the visitor's eye. I have made no other use of these graphics, and intend no other use or infringement. I will immediately remove any graphic or link upon request or demand by the copyright holder.
Disclaimer: Web pages are
revised constantly.
Michael H. Lester, J.D., CPA cannot be responsible for the content
or suitability of linked pages.
Michael H. Lester (mhl@michael-lester.com)
mhl@michael-lester.com
http://www.michael-lester.com
Copyright © 1995-2002 Michael H. Lester