Statute of Limitations
In most cases, the IRS has three years from the due date of the return or the date actually filed (whichever is later) to assess any additional taxes. The IRS generally has 10 years from the date of assessment to collect a timely assessed tax liability. There is no statute of limitations for fraud.
IRS Authority to Investigate
The Commissioner of the IRS, designated officers, and employees have the authority to examine any books, papers, records, or memoranda bearing upon the matters required to be included in the returns, to summon persons liable for tax and take testimony, and to administer oaths.
TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) status determines the procedures the IRS must follow during an audit. TEFRA applies to partnerships and limited liability companies (LLCs) that file as partnerships. In a small partnership, the IRS conducts audits for partners independently and treatment of partnership items for one partner can be different for any other partner. In a TEFRA partnership, the audit occurs at the entity (partnership) level, and not at the partner level. A TEFRA partnership has a tax matters partner who deals with the IRS on behalf of the partnership.
Generally, a partnership with 11 or more partners at any one time during the partnership’s tax year is a TEFRA partnership. A partnership containing fewer than 11 partners, commonly referred to as a small partnership, will qualify as a TEFRA partnership if it has as a partner that is any one of the following:
- Limited liability Company (LLC) which files a Form 1065 or is treated as a disregarded entity (see Revenue Ruling 2004-88) for federal tax purposes
- Trust (any type, including Grantor Trusts and grantor type trusts, even if the Schedule K-1 contains the SSN of the grantor)
- Nonresident alien individual
- S corporation
Among other rights, a taxpayer has the right to do the following:
- Disagree with his tax bill
- Meet with an IRS manager if there is a disagreement with the IRS employee who handles his tax case
- Appeal most IRS collection actions
- Transfer his case to a different IRS office if a valid reason exists (e.g., the taxpayer moves)
- Be represented by someone when dealing with IRS matters
- Receive a receipt for any payment made
Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose goal is to help taxpayers resolve problems. If a taxpayer has an ongoing issue with the IRS that has not been resolved through normal processes, or if a taxpayer has suffered or is about to suffer a significant hardship because of the administration of the tax laws, he should contact the TAS for assistance.
Contact of Third Party by IRS
The IRS must give reasonable notice in advance that, in examining or collecting a tax liability, it may contact third parties such as neighbors, banks, employers, or employees. The IRS must also give notice of specific contacts by providing the affected taxpayer with a record of persons contacted on both a periodic basis and upon request. This provision does not apply:
- To any pending criminal investigation,
- When providing notice would jeopardize collection of any tax liability,
- Where providing notice may result in reprisal against any person, or
- When the taxpayer authorized the contact.
Examination of Returns
The IRS examines (audits) returns for a variety of reasons, and examinations occur in one of several ways. An IRS Examination Officer may conduct correspondence examinations. Do not confuse examination officerswith revenue officers, who are highly skilled employees of the IRS Collection Division. A field examination is one conducted by an Internal Revenue Agent, usually at the taxpayer’s place of business. Generally, these audits are the most comprehensive.
- A computer program assigns a numeric score to returns after they have been processed. If a return is selected because of a high score, the potential is high that an examination of that return will result in a change to that taxpayer’s income tax liability.
- A return may also be selected for examination because of information from third-party documentation, such as Forms 1099 and W-2, that does not match the return.
- A return may be selected to address both the questionable treatment of an item and to study the behavior of similar taxpayers (a market segment) in handling a tax issue.
- In addition, a return may be selected because of information received from other sources on potential noncompliance with the tax laws or inaccurate filing. This information can come from a number of sources, including newspapers, public records, and individuals.
The IRS may close the case without change, or the taxpayer may receive a refund. The IRS can conduct an examination of a taxpayer’s return through the mail (correspondence audit) or in person.
Examinations by Mail
Sometimes a taxpayer receives a 1099 or other tax form in the mail after filing his return. Usually the sophisticated IRS computer system catches these errors. If information the taxpayer reported to the IRS does not match what his employers, banks, and other payers reported, the IRS sends Form CP 2000 to inform the recipient of changes the IRS is proposing to the tax return. The IRS sends a CP 2000 to provide detailed information about those differences, the changes proposed, and what to do if the taxpayer agrees or disagrees with the proposal. The CP 2000 reflects any corrections the IRS made to the original return and considers those changes in a recalculation of the tax due. It is possible that these changes result in a decrease in tax due, but usually an increase is the result.
An individual may receive the following documents along with the CP 2000:
- Notice 609, Privacy Act Notice
- Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree
- Publication 1, Your Rights as a Taxpayer
- Publication 594, What You Should Know About The IRS Collection Process
The CP 2000 is only a proposal that offers the taxpayer an opportunity to disagree, partially agree, or agree with the proposed changes. The IRS has not charged any additional tax at this point. It is important to respond to the CP 2000 by the due date shown on the notice. If not, the IRS assumes the proposed changes are correct and will continue processing the proposal ultimately to an assessment. If the taxpayer is unable to respond by the due date on the notice because more time is necessary to research records, the taxpayer can call the IRS to request an extension. Generally, the IRS will allow an extension 30 days beyond the response date shown on the notice. It is important to remember that additional interest and any applicable penalties will accrue on the account during the period of the extension if the tax increase is correct.
The IRS conducts some examinations entirely by mail. If the IRS conducts the examination by mail, the taxpayer will receive a letter from the IRS asking for additional information about certain items shown on his return, such as income, expenses, and itemized deductions. If the IRS conducts the examination by mail, the taxpayer may:
- Respond directly. In the case of a jointly filed return, either spouse may respond or both spouses may send a joint response.
- Have someone represent him in correspondence with the IRS. This person must be an attorney, accountant, enrolled agent, an enrolled actuary, or the person who prepared the return and signed it as the preparer. If a taxpayer wishes to have representation, he must furnish the IRS with written authorization on Form 2848, Power of Attorney and Declaration of Representative.
Examinations in Person
Internal Revenue Agents conduct field examinations, which officially begin when the IRS notifies a taxpayer that his return is selected for review. The IRS will tell the taxpayer what information to have available for the examination. Field examinations can take place in the taxpayer’s home, place of business, an IRS office, or the office of the taxpayer’s attorney, accountant, or enrolled agent. The examiner will try to schedule a time and place convenient for the taxpayer (or representative) that is reasonable under the circumstances considering both the convenience of the taxpayer and the requirements of sound and efficient tax administration. During an opening conference, the revenue agent explains the audit plan and the reason the taxpayer has been selected for examination. During a field examination, a taxpayer may:
- Act on his own behalf. In the case of a jointly filed return, either spouse or both may attend the interview. Each of them may leave to consult with his or her representative.
- Have someone accompany him to support his position or as witness to the proceedings.
- Accompany someone who will represent the taxpayer. This person must be an attorney, accountant, enrolled agent, enrolled actuary, or the person who prepared the return and signed it as the preparer.
- Have his representative act for him and not be present at the audit personally. When a taxpayer chooses to have someone represent him in his absence, he must furnish written authorization to the IRS. He must make this authorization on Form 2848.
The IRS generally conducts a field examination where the books and records are located. The IRS will consider a written request to transfer an audit to another location, including an IRS office, on a case-by-case basis. Treasury Regulation 301.7605-1(e) indicates the IRS will take into account the location of the taxpayer’s current residence or principal place of business, and other factors that indicate that conducting the examination at a particular location could pose undue inconvenience to the taxpayer. The IRS also considers the most efficient location for the examination, and the IRS resources available at the location to which the taxpayer has requested a transfer.
Results of the Examination
A field examination typically concludes with a closing conference. If the IRS accepts the return as filed, the taxpayer will receive a letter stating that the examiner proposed no changes to his return. The taxpayer should keep this letter with the other tax records for that year. If the IRS does not accept the return as filed, the IRS will explain any proposed changes. After the examination, if any changes to the tax are proposed, the taxpayer may either agree with those changes and pay any additional tax owed, or disagree with the changes and appeal the decision.
Fast Track Mediation
Most cases that are not docketed in any court qualify for fast track mediation. Mediation can take place at a conference the taxpayer requests with a supervisor, or later. The process involves an Appeals Officer with training in mediation. The IRS offers fast track mediation services to help taxpayers resolve many disputes resulting from the following:
- Examinations (audits)
- Offers in compromise
- Trust fund recovery penalties
- Other collection actions
A few weeks after a closing conference with the examiner, a taxpayer will receive a package containing the following:
- A notice of the right to appeal the proposed changes within 30 days (known as a 30-day letter)
- A copy of the examination report explaining the examiner’s proposed changes
- An agreement or waiver form
- A copy of Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree
A taxpayer has 30 days from the date of the 30-day letter to tell the IRS if he will accept or appeal the proposed changes. The letter explains what steps will be taken, depending on the course of action.
Upon receipt of the 30-day letter, the taxpayer may elect to appeal at a conference with the IRS. The parties can settle most differences within this system without expensive and time-consuming court trials. A taxpayer’s reason for disagreeing must come within the scope of the tax laws. For example, a taxpayer cannot appeal a case based only on moral, religious, political, constitutional, conscientious, or similar grounds. The Appeals Office is the only level of appeal within the IRS. In most instances, a taxpayer is eligible to take the case to court if unable to come to an agreement at the appeals conference, or if he does not want to appeal his case to the IRS Office of Appeals. When requesting an appeals conference, the taxpayer may also need to file a formal written protest or a small case request.
- Written protest– Taxpayers need to file a written protest in the following cases:
1) All employee plan and exempt organization cases without regard to the amount at issue
2) All partnership and S corporation cases without regard to the dollar amount at issue
3) All other cases, unless the taxpayer qualifies for the small case request procedure or other special appeal procedures such as requesting appeals consideration of liens, levies, seizures, or installment agreements
- Small case request– If the total amount for any tax period is not more than $25,000, the taxpayer may make a small case request instead of filing a formal written protest. This is different from the small tax case procedure for tax court cases of $50,000 or less. In figuring the total amount, include a proposed increase or decrease in tax (including penalties) or claimed refund. If making an offer in compromise, include total unpaid tax, penalty, and interest. For a small case request, the taxpayer must send a letter:
1) Requesting appeals consideration,
2) Indicating the changes the taxpayer does not agree with, and
3) Indicating the reasons why the taxpayer does not agree
If the IRS does not receive a response to the 30-day letter, or if the taxpayer and an Appeals Officer cannot reach an agreement, the IRS will send a 90-day letter, also known as a notice of deficiency. The taxpayer will have 90 days (150 days if addressed outside the United States) from the date of this notice to file a petition with the Tax Court. The taxpayer may not file a claim with the Tax Court prior to receipt of the notice of deficiency.