An IRS Audit Survival Story

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An IRS Audit Survival Story

• City of Prairie Village, Kansas

Karen Kindle, CPA, CPFO Finance Director City of
Prairie Village, Kansas kkindle_at_pvkansas.com 913-3
81-6464, Ext. 4213
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My First Day on the Job

• Welcome to the City of Prairie Village by the
  way, we have an IRS audit in two weeks.
• What have I gotten myself into?

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The Visit

• We were the subject of a compliance check.
• Technical assistance visit with the intent of
  assisting the taxpayer to comply with the law.
• Could have turned into an audit, but didnt.

4
The Visit

• The IRS Representative interviewed City staff
  about procedures related to employment taxation
  issues.
• The reason we were chosen for a field visit was
  our 2003 1099s.

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The Red Flag

• 2003 1099s had several issues
• Missing TINs
• TINs not in correct format
• Mismatched name/TIN combinations
• There also seemed to be twice as many 1099s in
  2003 than in 2002 and 2004.

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The Red Flag

• We were able to pull all of the records requested
  - except the 2003 1099 file.
• The Good Thing The 2004 1099s did not have the
  issues that the 2003 1099s had.

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Other Issues Noted in the Report

• Meal Reimbursements
• Issue The City reimburses employees for lunch
  when their training is in town.
• According to IRS Regulations the value of the
  meal should be included in employee wages because
  the training did not require an overnight stay.

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What did we do?

• 1099s
• We require a W-9 to be on file before we will
  even set up a new vendor.
• Allows us to avoid doing backup withholding
• Our two biggest departments have the forms and
  work with new vendors up front to get the W-9 so
  that payment is not delayed.
• We reviewed records for vendors paid in 2005 and
  obtained any missing W-9s.

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What did we do?

• 1099s
• We reviewed the vendor records in the financial
  system to ensure they were set up correctly
  regarding whether or not a 1099 was required.
• We are going to let the system do the work for us
  in generating the 2006 1099s.

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What did we do?

• Meal reimbursements
• We have had some discussions, but are still
  working on this issue.

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Cell Phones

• We received a letter from our external auditors
  about IRS rules regarding cell phones.
• We started working on a new cell phone policy.
• Still working 8 months counting

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Cell Phones

• Listed Property
• Lends itself to personal use
• Subject to substantiation requirements.
• Substantiation requirement records of business
  and personal use are kept

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Cell Phones

• The value of the personal use is included in the
  employees wages and taxed accordingly.
• If substantiation requirements are not met,
  entire value should be included in the employees
  wages and taxed accordingly.

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Cell Phones

• The real issue How cell phones will be used in
  our business
• Translation who really needs a phone?
• Hybrid policy
• Allows for a stipend (run through payroll)
• Alternative City provided phone required to
  go through bills and indicate personal usage and
  reimburse the City for it.

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What else are we doing?

• We are going through the Taxable Fringe Benefits
  Guide published by the IRS to see if there are
  any other situations that apply to us.

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Useful Resources

• www.irs.gov
• Taxable Fringe Benefits Guide (IRS rules in
  plain English)
• Publication 15 (Circular E)
• Publication 15-A
• Publication 15-B
• Form 1099 and related instruction documents
• GFOA
• Taxation of Employee Fringe Benefits A Guide for
  State Local Government Employers, 2nd Edition

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Questions?