October, 2021 | Tax Expert Blog

In our August 25 blog post, we discussed how the IRS selects returns for an audit exam. In this post, we discuss your rights as a taxpayer and how to appeal the IRS’s findings.

Your Rights as a Taxpayer

IRS Publication #1 outlines the rights every taxpayer has when dealing with the IRS. These rights include:

Understand the Audit Process – IDRs

It is important that taxpayers thoroughly understand the audit exam process. The IRS will request information from a taxpayer to support an income item, tax deduction or claimed tax credit that was reported on a tax return. If the request is made verbally, ask for the agent to put the request in writing using IRS Form 4564, Information Document Request (IDR). When dealing with the IRS, it is best practice that all communications be in writing to minimize any miscommunications. When responding to IDRs, keep the response short and direct. If the answer calls for a yes or no response, that is all that you need to state in your response. One of the dangers of a taxpayer dealing directly with the IRS without having proper tax representation is that they do not understand their rights and have a tendency to offer more information than necessary. Volunteering information is not recommended.

Self-Representation

Most experienced tax representation professionals will inform the IRS that its request to have the taxpayer present at the audit will not be honored. Why? As stated above, taxpayers have a tendency to talk too much and that can lead to a less favorable outcome when dealing with the IRS. Once a taxpayer makes a statement, it becomes part of the IRS case files as testimony by the taxpayer. The tax professional will remind the IRS that one of the taxpayer’s bill of rights includes the right to representation. Can the IRS force a taxpayer to attend? Yes, but a subpoena would be required, signed off by the case manager, and subpoenas are seldom issued by the IRS. If an experienced tax professional realizes the dangers of having a taxpayer attend the audit sitting alongside the tax pro, imagine the perils of self-representation.

Preparation for IRS Audit

To prepare for an IRS audit, the return(s) that are being audited need to be reviewed to identify potential audit issues. The support for those identified items needs to be reviewed prior to the audit exam to determine if the taxpayer will need additional support to substantiate the amounts reported on the tax return. The most effective way to end an IRS inquiry into any amount shown on the tax return is to “bury” the IRS agent with support documentation. The IRS agent will not want to challenge an item if the agent believes the taxpayer has the necessary support.

If the support is missing because the item reported was without merit, depending upon the circumstances, a voluntary disclosure may be an option if criminal activity is expected.

IRS What Happens if You and the IRS Agent Disagree?

Disagreements between the taxpayer and the IRS are best resolved at the lowest administrative level at the IRS. If the taxpayer and the IRS exam agent disagree, and the taxpayer believes they are correct, ask to speak with the case manager. Case managers are more experienced than the exam agents and may understand why your position should be acceptable.

30-Day Letter

If you and the IRS cannot agree on any of the items being examined by the IRS, the IRS will issue you its 30-day letter. IRS Form 4549, Report of Income Tax Examination Changes, a report showing the proposed adjustments to your tax return, will be enclosed with the letter. Generally, Letter 525 is issued if your audit was conducted by mail and Letter 915 is issued if your audit was conducted in person. These letters and the enclosed reports should identify the specific items the examiner is proposing be adjusted and provide an explanation as to why these adjustments are being proposed. The examiner’s proposed changes will affect the amount of tax you owe or, perhaps, the credits you claimed. The 30-day letter is your opportunity to review these changes and determine if you agree or disagree with the changes proposed.

Tax Tip #1

Do NOT ignore the IRS’s 30-day letter. If you represented yourself during the audit and still disagree with the IRS’s exam findings, immediately consult with an experienced tax representation professional. The IRS will not extend this 30-day period in which you can appeal the IRS’s findings. A tax professional, if s/he agrees with your tax return, will likely advise you to request a Collection Due Process (CDP) hearing. The CDP filing will put your case before the IRS’s Independent Office of Appeals who has more discretion in accepting a taxpayer’s position because it is required to consider the hazards of litigation.

If you missed the 30-day period to file for a CDP hearing, you can request an Equivalent Hearing with the IRS. The negative of the Equivalent Hearing is that you cannot go to Tax Court if you do not prevail at the Appeals hearing, something that is available to a taxpayer who timely files a CDP hearing request.

90-Day Letter

If after attending a CDP hearing and the IRS insists that its position is correct, it will issue what is often referred to as a 90-day letter, which is a statutory notice of deficiency. During this 90-day period, the taxpayer can file a petition with the U.S. Tax Court to hear its argument as to why the IRS position is not correct.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Taxpayers are always asking “How many years do I need to maintain my tax records before I can dispose of them?”

What Tax Records Must be Maintained?

You must keep records such as receipts, cancelled checks and other documents that support an item of income, a deduction or a credit appearing on a return. They may be needed to back up everything you put on your tax return, generally until the period of limitations for that return expires.

The Statute of Limitations (SOL) Determines How Long to Maintain Tax Records

The statutes of limitations are different for assessments of different types of tax. Tax cannot be assessed after:

Three years for tax you owe. This is counted from the date you filed the return.

Any period of time if you file a fraudulent return or fail to file a return. In such cases, there is no period of limitations.

Six years from the date you filed a flawed return. This applies if you fail to report reportable income of more than 25% of the gross income shown on the return, or income attributable to foreign financial assets that is more than $5,000.

Property Records

The SOL involving property makes the year of disposition more challenging. For example, if you are depreciating real estate say with a 33-year life, your support documentation for reporting the gain or loss on disposition could require you to prove to the IRS the date of acquisition, the cost of acquisition, improvements made over the life of that property, and annual depreciation claimed. Thus if you only retained those records for three years, you may have an audit issue if your return is selected for an examination. Thus, it is best to maintain those real estate property cost basis support papers until three years after the date of disposition.

When you dispose of stocks or bonds, you need to report the cost basis of the security sold to compute the taxable gain or loss. Thus if you purchased stock in year 1 and sold it 5 years later, you will need to provide the year 1 documentation to show what you paid for that stock.

Health Care Insurance

You should keep records of your health care insurance coverage and your family members. If you’re claiming the premium tax credit, you’ll need information about any advance credit payments you received through the Health Insurance Marketplace and the premiums you paid.

Business Income & Expenses

The IRS requires you to keep records so you have a backup to prove everything you put on your tax return. Insurance companies and creditors may require you to keep records longer, so you may want to verify that before you start discarding paperwork.

Claims for Refunds & Overpayments

For filing a claim for credit or refund, the deadline to make the claim is three years from the date you filed the original return or two years from the date the tax was paid, whichever is later.
The deadline for filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities is seven years from when the return was due.

How Must Your Tax Records Be Maintained?

As long as you can provide documentation when needed, it doesn’t matter how you keep records, but the IRS suggests you keep them in an orderly fashion and in a safe place.

If you’re in business, there’s no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. If you have employees, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later.

Tax Tip #1

Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination or if you receive an IRS notice.

Tax Tip #2

If you use an investment advisor who provides you with periodic statements, look at those statements very carefully. If you transferred securities from one advisor to another, the current advisor may not know what you paid for some of your investment holdings. The advisor’s statements will show that there is no unrealized gain or loss being reported. You want to begin to document what your tax basis is for that security now and not wait until the security is sold. Due to company mergers and reorganizations, pay out of dividends that get reinvested in your account rather than being distributed to you, stock splits, etc., it is much easier to determine tax basis early in the process rather than over a several year span.

Tax Tip #3

Consider backing up your tax records in an electronic format. Hard disks crash and files can inadvertently be deleted. Accordingly, keep at least one copy of your tax records off-site, such as in a safe deposit box.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Archives for October 2021