Contacted by the IRS and Confused – A Basic Primer on Audits, Tax Appeals, and Collections
Taxpayers often receive audit notices from the IRS and it can be confusing to know what all these letters mean. With that said, below is a general overview of an audit of a taxpayer’s tax return, the options available to the taxpayer, and a discussion of IRS collection procedures for overdue taxes.
The IRS generally has three years from the date a return is filed or due, whichever is later, to audit a return. The IRS may audit your return based on computer scoring or information received from third-party documentation, such as Forms 1099 and W-2, that does not match the information reported on your return. Your return may also be selected for examination as a result of information received from other sources on potential noncompliance with the tax laws or inaccurate filing.
If your return is audited, the examination may be handled entirely by mail or may also include meetings with an IRS revenue officer in your home, place of business, an Internal Revenue office, or the office of your attorney, accountant, or enrolled agent.
During the examination you may act on your behalf but it is advisable to seek the services of a tax attorney to represent you. Accordingly, your representative must submit a Form 2848, “Power of Attorney and Declaration of Representation,” permitting him or her to act on your behalf before the IRS.
An examination of your return usually begins when you are notified that your return has been selected. The IRS will inform you of the records you will need and will explain any proposed changes made to your return.
If you agree with the proposed changes, you can sign an agreement form, pay any additional tax you may owe, and any interest accrued on any additional tax.
If you disagree with any proposed changes you can appeal the case for review by the revenue officer’s supervisor. Assuming an agreement is not reached between you and the IRS at this point, you will receive a 30-day letter within a few weeks after your closing conference with the examiner and/or supervisor. The 30-day letter provides you with 30 days from the date of the letter to appeal the IRS tax decision to a local office of appeals, which is separate from and independent of the IRS office taking the action you disagree with. The office of appeals is the only level of appeals within the IRS, and conferences with this office are held informally by correspondence, telephone, or at a personal conference.
If you do not respond to the 30-day letter or if you do respond and still do not reach an agreement with an Appeals Officer, the IRS will send you a 90-day letter, which is also known as a notice of deficiency. The taxpayer has 90 days (or 150 days if the notice of deficiency is addressed to a taxpayer outside the United States) to file a petition with the United States Tax Court. A petition must be filed with the Tax Court for the case to be heard. However, a case petitioned to the Tax Court will normally be considered for settlement beforehand by an IRS Office of Appeals.
If the taxpayer does not respond to the 90-day letter or responds but does not settle the case with IRS appeals and does not prevail in Tax Court, the tax will be assessed. This means that the case will enter the collection stage. (See the section hereafter on collections for further discussion.)
Tax Court and Refund Jurisdictions
There are three courts available to taxpayers – the Tax Court, the United States District Court, and the United States Court of Federal Claims. A taxpayer may petition the Tax Court to hear his or her case without having paid any tax liability. The District Court and the Court of Federal Claims, known as refund jurisdictions, differ from Tax Court in that these refund jurisdictions only hear cases from taxpayers who have paid all of their tax liability. If a taxpayer prevails, then the tax liability is refunded.
Generally, a claim for refund in the District Court or the Court of Federal Claims must be filed within 3 years from the date the taxpayer filed his original return or 2 years from the date the taxpayer paid the tax, whichever is later. If a claim for refund is not filed within this period, a taxpayer may no longer be entitled to a credit or a refund.
Once a taxpayer is in the collections stage, the IRS expects payment for the amount due. If the taxpayer does fully pay the outstanding tax liability, interest and penalties will continue to accrue until the full amount is paid.…