IRS Audit – Some Background
In order to make sure that Arizona taxpayers follow the law, the IRS conducts audits on a certain percentage of us each year. The IRS has several methods to determine who gets selected. The most common are:
The Discriminate Information Function – A computerized scoring system
Infection Audits – The practice of auditing returns that are related to another audited return
Issue Related Audits – The incorrect calculation of the Earned Income Tax Credit, is an example of an issue-related cause for an audit.
Despite what you may think, the IRS audit isn’t focused necessarily on the “well to-do”. The U.S. General Accounting Office has reported over the last few years that as much as forty percent of all audits conducted are done to people who are in the lowest tax bracket.
There are several types of IRS examinations:
- Correspondence Exams – Examinations done by mail
- Office Exams – Examinations done at the IRS’ office
- Field Exams – Examinations done at the Taxpayer’s place of Business or Home
- Employment Tax Audits – Examinations focused on business employment tax withholdings
By far the most common audit is the Correspondence Exam. These are conducted via mail and begin with an IRS letter requesting an explanation and/or supporting documents to substantiate certain items on the return. Many people contact our office after the audit stage is over as they have ignored the IRS notices or they didn’t provide the IRS with enough evidence to resolve the problem.
Audits reach a resolution in only one of three ways:
- The taxpayer will agree with the IRS’ findings
- The taxpayer will disagree with the IRS’ finding
- The taxpayer will ignore the findings
The “30 Day” Letter
When the taxpayer disagrees with or ignores the audit findings the IRS will issue a notice commonly called a 30 day letter. The 30-day Letter will review the findings made by the IRS examiner and provide an explanation about the taxpayer’s appeal rights. The taxpayer will have 30 days from the date on this Letter to request a conference with the IRS Appeals Office. Most taxpayers ignore the 30 day Letter. This is usually a mistake because the taxpayer loses one of the chances available to challenge an incorrect result. The 30-day Letter is not a “statutory” letter, so extensions can be granted to request the appeals conference.
If time is short and the statute of limitations deadline for the IRS to finalize the Audit is close to expiration, the IRS will not always send the 30-day letter. It will instead skip to the 90 day letter. (See Below)
The “protest” is sent with the request for a conference with an IRS Appeals Officer as a result of receiving the 30 Day Letter. What form the protest must take depends on the circumstances and the amounts involved. If the total amount of the additional tax, claimed refunds or over-assessment is over $10,000.00 for any one period, than a written protest that lays out the facts, the law, and the arguments the taxpayer is relying on, must be submitted under penalty of perjury. If the amount is between $2500.00 and $10,000.00, a short written protest that lays out the disputed issues is required. If the amount is only $2500.00 or less, and it is a field audit case, an office interview or correspondence exam, an oral protest should be enough. The taxpayer should make a written protest anyway.
The protest should include name, social security number, a copy of the Power of Attorney form if the taxpayer is represented, a copy of the 30-day Letter and the Audit Report that lays out the years involved and the changes that are being proposed. The protest should also include:
- A statement that the protest has been timely provided
- A request for an Appeals conference
- A detailed list of the changes made by the IRS to the return that the Taxpayer disagrees with and specific reasons
- A list of the facts supporting the taxpayer’s position
- The legal basis supporting the position
- The taxpayer’s signature or a statement by the Representative that he or she prepared the protest and knows the facts alleged to be true (to the best of his or her knowledge)
- The Attachment of supporting documents
The “90 Day” Letter
If the 30 day letter is ignored or if it is responded to timely, but Appeals and the taxpayer don’t end up reaching an agreement, the IRS will issue a “90-day Letter” or a Final Notice and Right to CDP Hearing.
This Statutory 90-Day letter shouldn’t be confused with any other letters that may provide for a 90 day response… especially not the letter required when an innocent spouse relief request is denied. See IRC § 6015.
The taxpayer also receives the 90 Day Letter if the Office of Appeals issues a finding after a protest is provided and the taxpayer doesn’t agree with those findings.
The 90-day letter gives the taxpayer 90 days of course… during which a Tax Court Petition can be filed and thereby a request for the US Tax Court to re-determine the liability that is being proposed by the IRS’ Examiner. If the issue is only one of filing status, the taxpayer should consider whether a joint return should be filed before the petition is filed. See IRC § 6013(b)(2)(B). Once a Tax Court petition is filed, a joint return is no longer permitted to be filed.
The 90 day period is statutory. This means the date the Tax Court petition is due can’t be extended for any reason. It is very important not to miss the 90-day deadline as a result.
The 90-day period is calculated from the date the Notice of Deficiency is mailed to the taxpayer’s last known address. The IRS is required to include directly on the notice the last day the Tax Court Petition can be filed. SeeIRC § 6213.
During the 90-day period and until the Tax Court reaches a decision, the IRS can’t make a tax assessment or engage in collection activity. See IRC § 6503(a)(1)
Failure to file a Tax Court Petition Timely
If the taxpayer files the tax court petition late, the IRS will assess the proposed amount. The IRS must assess the debt before the collection process can begin. Again… the date the Tax Court petition is due can’t be extended for any reason, so if the taxpayer files the petition late, the assessment will take place and collection activity will begin.
Once the debt is assessed the IRS will begin sending the taxpayer a series of collection notices demanding payment. An automatic lien under IRC § 6321 in favor of the United States on all property and any rights to property that belong to the taxpayer will exist if after the IRS provides a notice of the assessment and a demand for payment the taxpayer doesn’t pay the tax.
This lien isn’t good against any purchaser, holder of a security interest, judgment lien creditor, or mechanic’s lien until an actual notice of the lien is recorded with the County Recorder’s Office. That notice of lien is recorded where the taxpayer lives or where he or she owns property. See IRC § 6321
The final letter in a series of letters that the IRS sends the taxpayer is a “Final Notice” at least 30 days before it issues a a Notice of Levy. See IRC §6330 This statutorily required notice must provide the amount of the tax and contain language explaining that the taxpayer has a right to request a CDP or Collection Due Process hearing within 30 days. The notice also provides the administrative appeals rights and the procedures to follow in order to obtain the release of the levy or lien. Any decision of an Appeals Officer following a CDP hearing is subject to judicial review in Tax Court. If the taxpayer wants to challenge the IRS’s proposed action, a Form 12153 must be used.
The Form and an alternative to the proposed collection of the proposed collection is sent to the IRS office that sent the notice. A taxpayer has this right to appeal attached to the first collection due process notice for each year. In some cases, the CDP notice is a second or third notice issued over a number of years. If the taxpayer fails to submit a Form 12153 within the 30 day period, the IRS will continue with it’s proposed collection activity which is typically a wage garnishment or a bank levy or both.