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Running Head: CURRENT SITUATION
Current Situation
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CURRENT SITUATION
Memorandum
Regarding: Current Situation
Recently, Internal Revenue Service (IRS) informed you about their plan to audit your
tax returns for the previous year. Here, you need the help of our accounting company to deal
with the process of audit.
Current Situation: IRS Audit Process
Every year, the Internal Revenue Service gets different tax returns. The IRS processes
them by conducting a computer screening program that helps to identify if there are any
differences or calculation errors between the numbers of returns and provided
documentation.After the completion of this process, each of those returns goes through
another process that is known as DIF or discriminant inventory function. In this process, a
score is calculated in terms of the previous data on previous audits. This score reflects that the
selected returns have a higher probability of giving the IRS with the probability of higher
additional taxes. Next, the auditors reviewed and received the returns to determine how the
outcome of the return should be audited and have additional taxes.
Current Situation of Client
The Notice of Proposed Adjustment is sent out by the IRS after the completion of the
audit. This NOPA stated that the deduction of $5,000,000 is disallowed as the per diems given
to XYZ’s staff were combined payments for entertainment/meal and lodging. Therefore, the
deduction for tax purposes is denied as they don’t have the substantiation of expenses.
IRS Deduction Rules
The IRS does not have substantiation of the expenses, so it is making adjustments to
the deduction. Here, you need to retain accurate records for claiming specific credits or
deductions. Else, the deductible expense will not be considered a deduction. The
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CURRENT SITUATION
substantiation of business deduction for a taxpayer involves having proof of the incurred for
the expense or the amount paid and offering the correct evidence related to expenses. It has
found that only essential and ordinary expenses incurred for profit-seeking or business
purposes are deductible under §162 IRC.
For instance, you need to retain an item to give evidence developing the deductibility
and character of the expenses, which are signed invoices, carbon copies of checks, receipts,
check registers, and charge slips. Don't worry if you don't have the records, as you can use the
Cohan rule to claim a certain deduction that helps the taxpayers to use estimates. Here, you
can prove your deductible expenditure but cannot show any kind of evidence for the expenses.
Hence, there is a need to be aware of the use of the Cohan rule. Moreover, the strict
substantiation requirements of IRC §274(d) can be applied to deductions claimed for
entertainment items, traveling expenses, expenses concerning property, and business gifts. No
deduction is allowed under IRC§ 274 (d) (1) unless the taxpayer provides certain information
by sufficient evidence or by adequate records collaborating the statements of taxpayers.
There is a need to maintain documentary evidence and records that reflect the place
and time of the expense that occurred, the amounts of the expenses, and the business
relationship between the recipient and the taxpayer in order to achieve the adequate records"
requirements.” It basically covers the business purpose of the items, the amount of the item,
the place and time of the expense that occurred, and the business relationship between the
recipient of the benefits and the taxpayer.
Time period
Finally, we accepted to start the audit that we would acknowledge to the Notice of
Proposed Adjustment within 90 days. A copy of NOPA is attached here, and you can refer to
where the time is already mentioned. If you have any doubts or queries in your mind, then you
can connect with me via email or phone.
