Coach, translator, best friend: Preparing clients for an IRS audit

With the Inflation Reduction Act upping the IRS' budget by $80 billion over the next 10 years, it's reasonable to expect more audits in your clients' futures.

If and when the stressful event occurs, the CPA or accountant will always take the lead in preparation. But as someone who has assisted clients with tax planning and compliance, I've seen the value of financial planners in the process and how they can work with certified public accountants while supporting clients in a number of roles. Here are three of them.

The translator
While financial planners often have some experience in the tax world, CPAs are immersed in the tax code on a daily basis, allowing them to stay up to date on constantly evolving tax law. But working in the weeds of rules and regulations, CPAs may not always take the time — or possess the communication skills — to clearly explain their recommendations in terms the client will understand. As your client's trusted financial advisor, you can help bridge this gap by serving as translator. Additionally, since you have already established a trusted relationship with the client, they are more likely to heed your recommendations and feel reassured by your support.

The coach
Financial planners also take on a coaching role during audit preparations as they work to manage client expectations and ensure all documentation is ready before meeting with the CPA. Importantly, advisors can prove their value by "calling flags on the play" before they meet with the CPA, checking for lack of proper documentation for charitable gifts. 

It's also important to keep an eye out for transactions related to deals that don't make economic sense. A client once approached me about investing $100,000 in a plan to buy property from a bank and donate it to a charity. The partnership claimed that the deduction for the donation would be approximately $400,000 and the tax savings would be $148,000, indicating a 48% return solely from the tax savings. A quick internet search revealed this transaction was high on the IRS watch list, but it still took some time to convince the client the deal was too good to be true. Whatever the particulars of the situation, your role is to help clients identify risks and know what potential exposure exists ahead of time so that they can take the necessary corrective actions. 

The best friend
The great thing about best friends is that they support you when you're right and tell you when you're wrong. This is crucial when preparing clients for an audit, as you will need to have candid conversations to advise them on the best course of action. Several years ago, a client came to me after having a series of frustrating conversations with their CPA over a $15,000 evaluation report that the CPA was urging the client to get in conjunction with a million dollar gift to a closely held business. I was able to analyze the situation and sit down with the client to explain why the evaluation report was necessary. Because we had already established a friendly rapport, the client was receptive to my suggestion and willing to take the proper corrective actions.

In addition to pointing out when the client is wrong, you also serve as an advocate by discussing different options with their CPA or coming up with alternative methods to achieve the same desired result. As you work with clients in this endeavor, it's important to remember that many will be overwhelmed. Your primary role is to help them stay calm and collected throughout the process.

In my experience, bringing financial planners into the audit preparation process is a best-kept secret when it comes to helping clients prepare. There is incredible value in having financial planners work alongside CPAs, as you can bounce ideas off one another, analyze issues and align on strategy. Working together also enables you to provide clients with tailored advice curated through multiple lenses of expertise.