Audit Representation and Assistance
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Audit Representation and Assistance
Proposed Changes Resulting From Audit
The Basics of a Fast Track Mediation
The Appeals Process of Your Audit
Your Various Payment Options
Offer in Compromise with IRS
Paying Through an Installment Agreement
The Internal Revenue Service, IRS, may conduct an audit of any taxpayer’s federal income tax return. An audit simply means that the IRS will examine a return to ascertain that income and expenses have been properly reported. The audit selection process is done randomly, by computer screening or by comparing income documents, such as W-2s, to what was reported on the return. If the taxpayer disagrees with the audit findings, he or she has the right to appeal.
Representation
People can represent themselves before the IRS. Alternatively, taxpayers can hire a tax professional who is enrolled to practice before the IRS. These include certified public accountants, enrolled agents and tax attorneys. The authorization for representation should be documented using Form 2848, Power of Attorney and Declaration of Representative, or another similar legal document. In this manner, the authorized agent can represent a taxpayer’s interests in his or her absence.
Proposed Changes Resulting From Audit
If the IRS examiner proposes changes, a taxpayer may agree or disagree with the agent’s findings. If a person agrees, the taxpayer may simply sign a form confirming that agreement and immediately pay the taxes and interest owed.
If he or she cannot immediately pay, the IRS will send a bill, and interest will not continue to accrue if the taxes are paid within 10 days of the bill’s date. If the taxes owed are less than $100,000, the taxpayer has more time and can avoid additional interest if he or she pays the taxes within 21 calendar days of the billing date.
If the individual disagrees with the proposed changes, there are several options. He or she may immediately ask to speak to a supervisor if the audit took place at an IRS office. If the dispute is resolved, the case is closed. If not, a taxpayer can request a conference at the Appeals Office and attempt to resolve the disagreement through mediation. This IRS dispute-resolution process is known as “fast track mediation.”
Fast Track Mediation
This procedure is in place to expedite the resolution of a number of potential disputes that a taxpayer may have with the IRS. Mediations are held in a neutral location and administered by an Appeals Officer who is skilled in mediation. The mediation can occur during the conference with the manager of the audit examiner or at a later time. If a taxpayer is not satisfied with the mediation, he or she has the right to appeal.
Appeals
If people still cannot resolve their differences with the IRS through mediation, or if they skipped this process, they have the option of appealing the case to the U.S. Tax Court, U.S. District Court or the U.S. Court of Federal Claims. There are specific procedures applicable to each court, and some courts may not adjudicate certain issues. If the taxpayer prevails in court, and he or she previously exhausted all IRS procedural remedies, the taxpayer may file a claim with the Appeals Office to receive administrative costs.
Payment Options
If the taxpayer agrees with the examiner’s proposed changes, or otherwise does not prevail, there are several payment options for financially distressed taxpayers. Two of these options are to apply for an installment agreement or an offer in compromise.
Offer in Compromise
An offer in compromise is an agreement with the IRS to reduce a tax obligation. In order to apply, the taxpayer must have filed all tax returns and paid current-year estimated taxes if applicable. The IRS will accept an offer in compromise under specific circumstances. There must be doubt as to the correctness of the amount of taxes owed. Alternatively, the IRS may accept an offer if it is unlikely that the total tax is collectable. Finally, and this is known as “effective tax administration,” the IRS may accept an offer in compromise if full payment of the taxes would put an excessive hardship on the taxpayer. This is the case even if the tax liability is correctly determined and full collectability is probable.
Installment Agreement
If the IRS accepts an application for an installment agreement, the taxpayer will make monthly payments toward fully paying the taxes. The person must make these payments on time and pay all taxes when due in future years. For taxpayers owing $10,000 or less, pursuant to a “guaranteed-acceptance” provision, the IRS will accept an application for an installment agreement if the person meets three criteria. The taxpayer must have filed tax returns for each of the previous five years and have paid all taxes when due. Additionally, based on information provided by the taxpayer, the IRS determines that the individual is unable to pay the taxes. Lastly, the taxpayer makes a commitment to pay the taxes within three years.
In order to preserve rights, a taxpayer must frequently respond to time-sensitive IRS notices. Response-deadlines and procedural complexities are best navigated by those most familiar with IRS protocol and that of the courts. It is advisable to have a tax professional represent a taxpayer’s interest during an examination and any subsequent appeal. While nobody looks forward to being audited, it is possible that the determination will be in the taxpayer’s favor resulting in a refund.
Reviewed by: Brian Winter, CPA