Topics
Handling the Audit
If you have authorized someone to represent you at the examination, your representative may appear at the examination without you. If the IRS wants to question you, it must issue you an administrative summons. If you are present and questioned, you may stop the examination to consult with counsel, unless the examination is pursuant to an administrative summons.
The key to handling the audit is advance preparation. When you arrive at the IRS office, be prepared to produce your records quickly. Records should be organized by topic so that you do not waste time leafing through pages for a receipt or other document.
If the agent decides to question an item not mentioned in the notice of audit, refuse politely but firmly to answer the questions. Tell the agent that you must first review your records. If the agent insists on pursuing the matter, another meeting will have to be scheduled. The agent might decide it is not worth the time and drop the issue.
Common sense rules of courtesy should be your guide in your contacts with the agent. Avoid personality clashes; they can only interfere with a speedy and fair resolution of the examination. However, be firm in your approach and, if the agent appears to be unreasonable in his or her approach, make it clear that -- if necessary -- you will go all the way to court to win your point. A vacillating approach may weaken your position in reaching a settlement.
| ||||||||||||
Back to top
Recording the Examination
You have the right to make an audio recording of any interview with an IRS official. Video recordings are not permitted. No later than 10 calendar days before the interview, give written notice to the agent conducting the interview that you will make a recording. Later requests are at the discretion of the IRS. You must pay for all recording expenses and supply the equipment.
Back to top
Tax Penalties for Inaccurate Returns
A 20% penalty generally applies to the portion of any tax underpayment attributable to any of the following: (1) negligence or disregard of IRS rules and regulations; (2) substantial understatement of tax liability; (3) overvaluation of property; or (4) undervaluation of property on a gift tax or estate tax return. These penalties may be avoided by showing good faith and reasonable cause for the underpayment; a stricter version of this exception applies to charitable contribution overvaluations as discussed later in this section. There is no stacking of penalties. Only one 20% penalty can be imposed on a portion of an underpayment, even if that portion is attributable to more than one of the above types of prohibited conduct.
There are also penalties on taxpayers who fail to disclose participation in "reportable" transactions, and on taxpayers who understate tax liability on reportable transactions with a significant tax avoidance purpose.
Back to top
Agreeing to the Audit Changes
After the audit, the agent will discuss proposed changes either with you or your representative. If you agree with the agent's proposed changes, you will be asked to sign a Form 870, which, when signed, permits an immediate assessment of a deficiency plus penalties and interest, if due. The Form 870 is called "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment."
By signing the form, you limit the amount of interest charges added to the deficiency. A signed Form 870 does not prevent the IRS from reopening the case to assess an additional deficiency. If on review the deficiency is increased, you will receive a revised Form 870. You can refuse to sign the form. The signed first form has the effect of stopping the interest on the original deficiency. As a matter of practice, however, waivers of acceptances ordinarily result in closing of the case.
The payment of tax before the deficiency notice (90-day letter) is mailed is, in effect, a waiver of the restrictions on assessment and collection. If the payment satisfies your entire tax liability for that year, you cannot appeal to the Tax Court. You must sue for a refund in either federal district court or the Court of Federal Claims.
Back to top
Disputing the Audit Changes
If you disagree with the agent and the examination takes place in an IRS office, you may ask for an immediate meeting with a supervisor to argue your side of the dispute. If an agreement is not reached at this meeting or the audit is at your office or home, the agent prepares a report of the proposed adjustments. You will receive a 30-day letter in which you are given the opportunity to request a conference. You may decide not to ask for a conference and await a formal notice of deficiency (90-day letter).
Back to top
Appeals Conference
If your examination was conducted as an office audit or by correspondence, or the disputed amount does not exceed $25,000, you do not have to prepare a written protest for a conference with the IRS Appeals Office. The written protest is a detailed presentation of your reasons for disagreeing with the agent's report. Even where a formal written protest is not required, you must provide a brief written statement indicating your reasons for disagreeing with the agent when you request an appeals conference. See IRS Publication 5, "Appeal Rights and Preparation of Protests for Unagreed Cases." At the conference you may appear for yourself or be represented by an attorney or other agent, and you may bring witnesses. The conference is held in an informal manner and you are given ample opportunity to present your case. If you cannot reach a settlement, you will receive a Notice of Deficiency, commonly called a 90-day letter. In it, you are notified that at the end of 90 days from the date it was mailed, the government will assess the additional tax.
Back to top
Interest Abatement
An IRS delay in completing an audit increases the interest that you have to pay when a deficiency notice is eventually issued. You may ask the IRS on Form 843 for an abatement of interest charges that are attributable to unreasonable errors or delays by IRS employees in performing a ministerial or managerial act.
Back to top
Going to Court
When you receive a 90-day letter, if you are still convinced that your position is correct, you may take your case to one of three courts. You may within 90 days file a petition with the Tax Court without having to pay the tax. The Tax Court has a small tax case procedure for deficiencies of $50,000 or less. Such cases are handled expeditiously and informally. Cases may be heard by appointed special trial judges. A small claim case may be discontinued at any time before a decision, but the decision when made is final. No appeal may be taken by you or the IRS.
Instead of petitioning the Tax Court, you may pay the additional tax, file a refund claim for it, and -- after the refund claim is denied -- sue for a refund in a federal district court or the U.S. Court of Federal Claims. Generally, the decision to litigate should be considered by an experienced tax practitioner.
Back to top
Summary
- The key to handling the audit is advance preparation. When you arrive at the IRS office, be prepared to produce your records quickly. Records should be organized by topic so that you do not waste time leafing through pages for a receipt or other document.
- If the agent decides to question an item not mentioned in the notice of audit, refuse politely but firmly to answer the questions.
- If you agree with the agent's proposed changes, you will be asked to sign a Form 870, which, when signed, permits an immediate assessment of a deficiency plus penalties and interest, if due.
- If you disagree with the agent and the examination takes place in an IRS office, you may ask for an immediate meeting with a supervisor to argue your side of the dispute.
