By: L. Alexis Whitley, Esq. and Nick Richards, Esq.
In The Basics of IRS Audits: What Is an Audit, Why Was I Selected for Audit, and How Does the IRS Conduct Audits? , we reviewed the audit process from the Internal Revenue Service’s (“IRS”) perspective, including how the IRS chooses returns for audit and what an audit looks like. In this follow-up article, we expand on these facts by providing important information on taxpayer rights during an audit, as well as when and how to respond and appeal an adverse IRS decision.
The Taxpayer Bill of Rights affords taxpayers important rights during an audit. A taxpayer’s right to be informed means that the taxpayer is entitled to be informed of IRS decisions and to a clear explanation of the laws, procedures, and outcomes applicable to them. Taxpayers have the right to only pay the correct amount of tax that is legally due and to have any payments made properly applied by the IRS. Further, taxpayers have the right to challenge the IRS’s position and to appeal a proposed adjustment. This includes the right to raise objections and provide further information in response to formal IRS actions and the right to a fair impartial administrative appeal of most IRS decisions. These rights are heavily implicated in IRS audits.
When a taxpayer receives an audit notice, the taxpayer should gather all documents that the IRS requested in its audit notice. The IRS generally requests documents via Form 4564, Information Document Request (“IDR”). These documents could include receipts, bills, canceled checks, legal papers, loan agreements, and a variety of other records. If there are additional documents that the IRS did not request but which substantiate items on the taxpayer’s return, the taxpayer should also have these available. Taxpayers must remember that they have the burden to substantiate the information on their tax returns, so maintaining organized and detailed records is highly important. Taxpayers should ensure they respond with the requested documents and any other information within the time period stated in the audit notice. If a taxpayer receives further IDRs, the taxpayer should carefully check the date on each to determine when documents must be provided to the IRS. Taxpayers that need additional time to gather information can request an extension from the IRS.
After an audit is complete, it will conclude in one of three ways. First, a “no change” audit is one in which the IRS review results in the decision to accept the taxpayer’s return as filed rather than proposing changes to the taxpayer’s audited return. Alternatively, the IRS might propose changes which result in additional tax, which leads the taxpayer to either agree or disagree with these proposed changes.
If the taxpayer agrees with the audit’s proposed changes, the taxpayer can sign an agreement form and pay the additional tax. This will also include paying interest and any applicable penalties. If a taxpayer fails to pay the additional tax, the taxpayer will receive a bill. The IRS requests that deficiencies of less than $100k should be paid within 21 business days, while deficiencies over $100k are requested to be paid within 10 business days. Unless the bill is paid within the applicable time period, additional interest and penalties will accrue. If a taxpayer reaches the end of an audit and cannot pay the additional tax due, the taxpayer can request an installment agreement to pay the balance over time in more manageable payments.
Alternatively, if a taxpayer disagrees with the audit’s proposed changes, the taxpayer can request a conference with the Independent Office of Appeals (“Appeals”) by submitting Form 12203, Request for Appeals Review or, in more complex cases, a formal written protest. Appeals is separate and independent from the IRS and seeks to resolve tax controversies without litigation in a manner that is fair and impartial to both the IRS and the taxpayer. A taxpayer must request a conference with Appeals within 30 days of receiving the IRS determination or “30-day letter” that provides the taxpayer with the audit examiner’s findings.
If a taxpayer fails to request an Appeals conference within the 30-day time period, the IRS will issue a Notice of Deficiency (also referred to as a 90-day letter). At this point, the taxpayer has 90 days to either pay the tax or file a petition in Tax Court.
Navigating the complexities of dealing with IRS audits can be challenging, but Greenspoon Marder attorneys are available to assist taxpayers. Contact Nick Richards at nick.richards@gmlaw.com with questions.
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