So-Called "Audit Protection" does not protect

[Bruce D. Kowal]

Recent case with a new Client who use a well-known self-prepare tax program, let's call it "HyperTax".   Got confused with the questions regarding Material Participation and elected that status.  Got audited by IRS.  Which is rare.  They have limited Manpower and a Form 1040 with a Material Participation election, well, you would think they had bigger fish to fry.  But no.  They assigned a  Revenue Agent, and issued a document request.  Well, the Taxpayers thought that they were safe, because they bought the Audit Protection service, which is NOT part of HyperTax, but is a separate company.  

So, what did the Taxpayer get for their Audit Protection?  Well, the job of protection went to an Enrolled Agent, who apparently did this as a sideline, because he notified the Revenue Agent that he had to delay any response until after 4/15.  

When the EA finally got around to dealing with the audit, all that he did was agree with the Revenue Agent  on every assessment which IRS made. And to make matters worse, the EA did not provide documentation for Schedule E expenses, despite the fact they they were available.  Which greatly puzzled the Taxpayers.  The final tally, plus interest and penalties was a little over six figures.  (I don't want to give dollar amounts).  

In the end, I got Power of Attorney, and we ended up getting all penalties abated, and all operating expenses accepted.  On the issue of Material Participation, the facts were not with the Taxpayers.

(Now, many EA's are crackerjack reps for dealing with IRS.  I was just listing his qualifications to represent a Taxpayer.  There are three:  CPA, EA and Attorney at Law.)

Lesson:  that HyperTax program has caused a lot of pain for a lot of taxpayers when the issue is beyond a simple W2 and some bank interest.  For Multistate real properties and Material Participation, it will cause you grief.  And as for audit protection, I would not rely upon it.

There.  Anyone else have a tale dealing with this?  I don't want to mention the name of the program, lest their lawyers throw a hissy fit with BP Management. 

[Aaron Zimmerman]

Very informative post. It's absolutely crucial the taxpayer and preparer understand what they're signing. If you're going to offer audit protection, at least make it a quality service! Not a great look for the profession for this court case