Tax Audit and Disputes

The Audit Process

Generally, the IRS accepts most taxpayers’ returns as filed. Literally millions of tax returns are filed each year and the government cannot audit every tax return filed. In the event the IRS sends an inquiry about your return or selects it for audit, it does not imply that the return is incorrect or fraudulent. The inquiry or audit may or may not result in more tax.

The process of selecting a return for audit typically begins in one of two ways. The first method of selection utilizes software and algorithms to identify returns that may have been incorrectly prepared. The formulae used by the software are based upon data compiled on information returns, such as Forms 1099 and W-2, on studies of past examinations, or on certain issues
identified by IRS compliance projects.

The second method is using information gathered from outside sources that indicates that a return may have incorrect amounts. These sources may include newspapers, public records, and individuals. If the IRS determines that the information is accurate and reliable, it will then use that information to select a return for audit.

Whether you prepare your return yourself, or have it prepared by a professional tax return preparer, it is usually advisable to hire a tax professional to represent you before the IRS or state taxing authority rather than to do it yourself. The tax sytem is complex and often times subject to various interpretations. The more complex the tax return, the more advisable to have competent representation.

The Appeals Process

Once the audit us completed you will have the chance to agree or disagree with the IRS agent’s proposed changes. If you disagree, you have the right to appeal the agent’s tax assessment to the Appeals Office of IRS. Although part of the IRS itself, the appeals office is impartial and most differences can be settled without expensive and time-consuming court trials.

If you do not wish to use the Appeals Office or disagree with its findings, you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims, or the U.S. District Court where you live. If you take your case to court, the IRS will have the burden of proving certain facts if you kept adequate records to show your tax liability, cooperated with the IRS, and meet certain other conditions. If the court agrees with you on most issues in your case and finds that the IRS position was largely unjustified, you may be able to recover some of your administrative and litigation costs. You will not be eligible to recover these costs unless you tried to resolve your case administratively, including going through the appeals system, and you gave the IRS the  information necessary to resolve the case.

The Tax Collection Process

By law, the IRS has the authority to collect outstanding Federal taxes for 10 years from the date your tax liability was assessed. However, the 10-year collection period is suspended during any period in which an installment agreement is in place, for tax periods included in a bankruptcy while the automatic stay is in effect, plus an additional six months, and for certain other events.

In the event you cannot pay all your taxes immediately, the IRS on its web page and in its own publications recommends that you pay as much as you can rather than just ignoring the issue. Making partial payments will at least reduce the amount of interest and penalty you will ultimately owe. If the taxes accumulate to a point where it is mathematically impossible to pay given your annual income, assets, other obligations, etc., there are certain procedures available.

Installment agreements

allow the payment of your debt in smaller, more manageable amounts. Installment agreements generally require equal monthly payments that will result in full payment of the tax you owe within the time left in the 10-year period during which the IRS can collect the tax from you. If you cannot pay your tax in full by the end of the collection period, but can pay some of the tax you owe, you may qualify for a partial payment installment agreement.

If the IRS determines that you cannot pay any of your tax debt, the IRS has the power to temporarily delay collection until your financial condition improves. However, this does not make the tax debt go away — your debt will increase because penalties and interest are charged until you pay the full amount.

If you qualify, the IRS may accept an

Offer in Compromise (OIC)

to settle unpaid tax accounts for less than the full amount of the balance due. This applies to all taxes, including any interest, penalties, or additional amounts arising under the Internal Revenue laws. The OIC program is an option for those taxpayers who are unable to pay their tax account in a lump sum or through an installment agreement and have exhausted their search for other payment arrangements. Notwithstanding claims made on the internet and in TV commercials, the OIC process is not simple and by no means always be successful. The IRS will carefully scrutinize all your financial data, including income, retirement plans, investments, home equity and bank statements.