Tax Audit Horror Stories: What To Do When The Unthinkable Strikes

NEW YORK (MainStreet) — For Shauna Wekherlien, the owner of Tax Goddess Business Services PC in Scottsdale, Ariz., the scariest tax audit she saw was a corker, including threats from the Internal Revenue Service and a dash of ignorance and hostility.

“This client was in manufacturing,” she says. “They sent out a young auditor, who CPAs refer to as ‘iPod auditors’ because during the whole audit all they do is listen to their iPods. This auditor came in and asked for bank statements — a very normal thing for an auditor to do. However, in this instance, the auditor kept telling the client that he was missing the November bank statement. Of course, the auditor had the November bank statement, but didn't understand the bank statements didn't close exactly on the first of each month and end on the 31st of each month.”

That led to further problems, Wekherlien says.

“The auditor actually threatens my client, saying that if he did not provide the November bank statements he would have the ‘entire IRS come down on him so hard that he wouldn't know what hit him.’ It was at this point that we requested a new auditor. When you have an auditor doesn't know how to read bank statements, you know you're in trouble,” she says.

Sometimes, a tax audit horror story doesn’t point the finger of guilt at the big, bad, IRSm but on “toxic” tax professionals.

“We have had a couple of matters — one involving a forge company and another one in general manufacturing — where each had hired ‘tax professionals’ who represented them in examinations,” says Walter Harris, a former IRS executive and current director of IRS practice and procedure at New York City-based Alliant Group, a tax services firm. “In both cases, the examinations went south because of poorly prepared materials, unreasonable arguments and tax positions that obstructed the IRS personnel.”