Options for IRS Audit Issues
Many people don’t realize that a federal tax assessment, including those for penalties and interest, is not the final word. When the Internal Revenue Service (IRS) sends a report or letter explaining their proposed tax adjustment or their collection action, buried in the document is an explanation of the taxpayer’s right to appeal their decision and an explanation of how to ask for an appeal. A taxpayer should take action immediately and work with a professional who has experience with their facts and in dealing with the IRS. The IRS has a great deal of power when it comes to enforcing laws and collecting taxes, but taxpayers have rights as well. Know yours, and you’ll be in a better position for dealing with the IRS successfully. This is especially true if there is any unreasonable proposed tax issue because of the many special tax provisions for certain industries. These rules may lead to unreasonable disagreement with a tax issue and friction between the IRS agent and the taxpayer or the taxpayer’s representative.
In general, The IRS established a Taxpayer’s Bill of Rights summarized as follows:
The Right to Be Informed - They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.
The Right to Quality Service -Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, in a clear and easily understandable communications from the IRS, and to have a way to file complaints about inadequate service.
The Right to Pay No More than the Correct Amount of Tax -Taxpayers have the right to pay only the amount of tax legally due and to have the IRS apply all tax payments properly.
The Right to Challenge the IRS’s Position and Be Heard -Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly.
The Right to Appeal an IRS Decision in an Independent Forum -Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties
The Right to Finality - Taxpayers have the right to know the time they have to challenge the IRS’s position as well as the time the IRS has to audit a particular tax year. Taxpayers also have the right to know when the IRS has finished an audit.
The Right to Privacy - Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights.
The Right to Confidentiality -Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law.
The Right to Retain Representation -Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS.
The Right to a Fair and Just Tax System -Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely.
Based on these rights you have a number of options to try to solve any tax issue raised during an audit. Discuss the issue with the agent, his supervisor and/or district manager. If the issue is not resolved after requesting/having those meetings, there are other options. These options include Fast Track, Early referral, Regular Appeals, Tax Court, Court of Federal Claims, District Court or a combination of the aforementioned. The fast track and early referral require the cooperation of the examining IRS agent.
If early resolution options are not being offered or procedures followed by the controlling IRS agent, consideration should be made to contact the Taxpayer Advocate Service. This is an independent organization within the IRS and is the taxpayer’s voice at the IRS. Their job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights as a taxpayer. They offer free help to guide you through the often-confusing process of resolving tax problems that you haven't been able to solve on your own. Remember, the worst thing you can do is nothing at all.
Fast Track
Fast Track also known as Alternative Dispute Resolution (ADR) is a voluntary mediation program that may help you resolve your tax dispute more quickly than a traditional appeal. You can request Fast Track for most examination disputes, Offer in Compromise cases and Trust Fund Recovery Penalty cases once the IRS agent has completed their work and there are issues that remain unresolved. The IRS says the program should, in most cases, allow resolution of issues related to an audit within 60 days. With Fast Track, a non-IRS independent Appeals mediator will try to help you and the IRS reach an agreement on the disputed issue(s). The Appeals mediator will facilitate settlement discussions and may offer settlement proposals. Mediators fulfill their role of helping the parties reach an agreement by:
Facilitating communication between you and the IRS,
Helping identify core issues or barriers to settlement,
Helping identify possible settlement terms,
Providing perspective and encouragement and
Ensuring a level playing field and mutual respect during the mediation session.
Because Fast Track is voluntary, the mediator cannot force you or the IRS to participate or to accept a proposed agreement. You retain control over decisions you make about your case. If you are unable to resolve your dispute through Fast Track, you will still have the right to request a traditional appeal or a conference with an IRS manager. To apply to the FTS program: 1. The taxpayer and examiner must jointly complete Form 14017, Application for Fast Track Settlement. 2. The examiner will process the Application through the Group Manager. Getting the examining agent to use this option could be a problem if there is any friction between the IRS agent and the taxpayer or taxpayer’s representative.
Early Referral
Another option, a taxpayer may request early referral to Appeals of any developed, unagreed issue arising from an audit. The examining IRS agent will continue to develop issues that have not been referred to Appeals. Appropriate issues for early referral are limited to those that: (1) if resolved, can reasonably be expected to result in a quicker resolution of the entire case; (2) both the taxpayer and the District agree should be referred to Appeals early; (3) are fully developed; and (4) are part of a case where the remaining issues are not expected to be completed before Appeals could resolve the early referral issue.
Regular Appeals
After the 30-day letter is issued a taxpayer may request an appeals conference for any remining disagreed issues. This conference is an informal meeting in which an impartial IRS officer settles a dispute between a taxpayer and the examination agent, in the same way an arbitration officer settles a legal dispute. The appeals agent’s goal is to resolve the disagreement without having to go to court. The taxpayer must file the appeal within the designated timeframe, usually 30 days from the date on the letter.
A taxpayer is entitled to hire a professional to represent them during the appeals process, as long as that professional is authorized to practice before the IRS. Only licensed enrolled agents, attorneys, and CPAs are authorized to represent you during the appeals process.
Tax Court
A taxpayer may still fight back against an IRS Notice of Deficiency or Notice of Determination (a 90-day letter) that includes a disputed issue by filing a petition in Tax Court. Just like anything else involving the IRS, filing a petition in tax court can be complicated. A taxpayer must decide whether to select Regular or Small Tax Court case procedures. Generally, if the amount in dispute is less than $50,000 small-case procedures are available and are less formal, but you don't have a right to appeal if the court rules against you. Unless you can establish an inability to pay, you must pay a $60.00 fee to file a petition with the tax court. The petition must be timely filed with the Tax Court in Washington, D.C. A trial location should be requested by filing a form called "Designation of Place of Trial" which informs the tax court where you request your trial to be held.
Federal Claims or District Court
As the last option a taxpayer may file in the Court of Federal Claims or District Court. However, both of these courts require that the disputed tax must be paid before a case can be filed.
Offer-In-Compromise (OIC)
Many taxpayers who cannot pay the amount of tax they owe in full seek to make a deal with Internal Revenue Service (IRS) to pay less than the full amount owed. The deal to settle the debt is commonly referred to as an Offer-In-Compromise (OIC). An OIC, if approved, can lower your total tax due, but there are strict qualification criteria.
Generally, the IRS uses three criteria to determine whether you’ll be considered.
Doubt of Collectability. The IRS must have evidence that—based on your income, expenses and assets—you’ll never be financially able to pay your tax debt in full.
Doubt of Liability, the IRS agrees to a compromise because there is a legitimate doubt as to whether the tax assessment is correct.
Effective Tax Administration, the IRS and the taxpayer agree to the amount and accuracy of the tax liability but find that paying the tax in the full amount would prove to be an economic hardship for the taxpayer.
Complete IRS Form 656 and attach the $150 processing fee as well as a payment on the tax owed. On Form 656, you will need to indicate whether you are willing to make a one-time lump sum payment to cover the tax debt, a short-term periodic payment offer, or a deferred period payment offer. A lump sum payment must be paid in full in no more than five payments after the taxpayer is notified of the acceptance of the OIC. If a taxpayer opts for this choice, he or she will need to include a down payment of 20 percent along with Form 656. For the short-term period payment, the tax debt must be paid within 24 months of the offer being accepted by the IRS, and for the deferred periodic payment offer, the tax must be paid over the statutory period for collecting the tax.
Make your two checks or money orders, one for the $150 fee and one for the initial payment, payable to the U.S. Department of Treasury. TN 38130-0804
Summary
Dealing with tax issue can be complicated and frustrating when individuals have preconceived ideas. The taxpayer or the IRS could arrive at an unreasonable tax
conclusion and be unwilling to follow procedures designed to quickly resolve unagreed tax issues. The taxpayer needs to know his rights so the process to arrive at the proper tax may be accomplished timely and efficiently for both the government and the taxpayer. That is why there are a number of options to have a third party review the disagreed conclusion. The Taxpayer Advocate Service may be of help if the IRS agent is not willing to allow a quick resolution process. Your tax advisor should know your rights, and be in a better position for dealing with the IRS successfully. This is especially true if there is any unreasonable disagreement with a tax issue or other friction between the IRS agent and the taxpayer.