It’s the time of year when tax audits are being started en masse. The IRS has the ability to put the fear of God into people.

Cooperation and documentation are the key. First, the taxpayer can and should pull together any documentation that proves the numbers on the tax return. But ONLY the numbers that the auditor is questioning. (You never want to produce documentation about other items that aren’t being questioned!)

Second, attitude is everything. Appearing cooperative can help your case quite a bit. Remember, the auditors don’t have the easiest job in the world, and they probably deal with a lot of negative reactions. They want the audit done just as soon as you do. Being cooperative helps the audit go much more smoothly.

Read more about how to get through an audit.

New York Attorney General Eliot Spitzer has filed suit against H&R Block Inc. for alleged fraudulent marketing of individual retirement accounts (IRAs). It is alleged that over the last four years, H&R Block has opened over 500,000 “Express IRA” accounts for tax clients, but 85% of those customers paid more in fees than they earned in interest.

Spitzer claims that management knew that the Express IRA customers were losing money. The suit includes charges that H&R Block didn’t disclose the fees associated with the accounts or that clients would incur tax penalties if they closed the IRAs early.

A study conducted by Wisconsin’s Legislative Fiscal Bureau shows that taxpayers could have saved $1.9 billion over 20 years if the Taxpayer Protection Amendment had been law.

The amendment would force government officials to consolidate or work more efficiently to better utilize taxpayer money.

According to Jim Pugh, a spokesman for business lobby Wisconsin Manufacturers & Commerce, the amendment allows reasonable increases in government wile protecting taxpayers.

The Taxpayer Protection Amendment would limit annual tax increases to inflation or the increase in the state’s personal income. Allowances for population growth and new construction would also be included.

For the second year in a row, Fannie Mae is postponing the filing of its annual report with the U.S. Securities and Exchange Commission. Fannie Mae is also likely to issue a management report, stating that its internal controls over financial reporting were ineffective as of the end of 2005.

The company is still working on its review of accounting policies, and says that it is has made significant progress toward completing the work. Some accounting errors that weren’t disclosed until recently include accounting for some investments at the incorrect cost basis, accounting for some guaranty fees in connection with some mortgage backed securities trusts, and some loan-related accounting issues.

Wesley Colwell, the former head of accounting of Enron’s wholesale energy unit testified that in July 2000, he shifted $14 million from reserve accounts to pump up earnings. He also testified that neither Kenneth Lay nor Jeffrey Skilling directly told him to manipulate earnings.

Colwell testified that Enron’s wholesale unit delayed financial reports for the fourth quarter of 2000 until they were instructed on how much profit the company wanted to report.

He also testified that in 2001, the company improperly delayed reporting losses in the retail energy operation.

Colwell is cooperating with the government, and has already paid a $500,00 fine to settle SEC allegations that he manipulated earnings.

The tax preparation company of H&R Block Inc. has incorrectly calculated its own state taxes. A mistake in calculating its state effective income tax rate means that the company owes $32 million in back taxes that go back to 2004.
A company representative said that the error isn’t material. But it sure hurts when the company is already experiencing a slow year, which has been impacted by a technology problem that drove away 250,000 customers.

Every year, taxpayers lose refunds they’re entitled to because they haven’t filed tax returns.

Currently, the IRS owes over $2 billion to 1.7 million people for the tax year of 2002. But they can’t get the refunds unless they file the returns, and the deadline to file is April 17, 2006. Taxpayers have up to 3 years to claim refunds, but after that, they forfeit any refunds.

Note 1: There are no penalties for late filing of individual tax returns if the IRS owes the taxpayer a refund.

Note 2: Refunds for 2002 won’t be sent to a taxpayer until he or she has also filed tax returns for 2003 and 2004.

Milberg Weiss Bershad & Schulman, the New York law firm that helped get a class-action settlement with the accounting firm KPMG LLP is offering an unusual fee arrangement for outside lawyers. In exchange for persuading clients to join the class and drop their individual suits, the Milberg firm is offering outside attorneys a piece of their $30 million fee.

Milberg helped broker a $225 million settlement for clients who were sold fraudulent tax shelters by KPMG. The accounting firm offered them as legitimate investment strategies, but they later admitted wrongdoing and paid $456 million to the government in restitution. 17 former KPMG tax professionals have been federally indicted.

Michael Avenatti, the attorney for two clients who declined to participate in the class action, says Milberg should have gotten at least $500 million in any settlement.

This case is unusual because lawyers in class action suits rarely offer to share their fees with attorneys for non-class plaintiffs. However, if too many non-class plaintiffs proceed with their cases, KPMG can back out of the class settlement. This possibility may be the reason that Milberg is inviting more plaintiffs to join the class action.

A tax audit creates fear and anger in individuals and business owners. It also creates a need. The need for documentation to prove income and expenses when the auditor is scrutinizing them. It is not uncommon for documents to be lost or discarded by business owners and individuals.

As soon as a taxpayer is notified of an audit, a “financial intervention” must begin. The taxpayer should gather any and all documentation that is available. In the case of a natural disaster, there may be absolutely nothing left.

Documentation will include both paper records and digital records. Taxpayers should gather bank statements, canceled checks, deposit slips, credit card statements, and expense receipts. Missing data could be recovered from banks, credit card companies, and companies with which the taxpayer did business.

When solid documentation is received from sources such as banks and credit card companies, the process of recreating the taxpayer.s books and records is fairly straightforward. However, gaps in data are best filled with the help of a forensic accountant.

There are several ways to help substantiate deductions during an audit:

* Oral explanations or testimony can be used to support deductions. If the taxpayer is credible and the explanation is supported by the facts, the deduction can be allowed.
* Affidavits from people or businesses that can support your deductions can be helpful.
* Use data from other months, quarters, or years to prove patterns in numbers.
* Ratio analysis may help a forensic accountant estimate expenses
* Available industry data also may be used to estimate a reasonable level of expenses.

These are not the only ways to prove income and expenses, but are among the most common. It is important that the taxpayer make every effort possible to gather documentation that supports reported income and expenses for the year under audit.

Working with an expert who is familiar with methods used to recreate books and records is also a critical part of the audit process. Utilize an advocate who can be creative and aggressive to calculate numbers that are useful and believable, and which help the taxpayer achieve the best result possible from the audit.

Read the full article here.