Clients often come to us after going through an IRS audit and receiving a large tax bill. They either represented themselves or hired someone who did not represent them effectively. This article is not about audit representation, but rather the steps that occur after an audit has concluded, and what taxpayers can do to challenge an audit determination.
After documents have been reviewed in a correspondence, office, or field audit, the examiner will issue a Form 4549, Income Tax Examination Changes, based on their findings. The report will be sent with a Letter 915 also known as the “30 day letter.” The letter states that an examination report has been issued and the taxpayer has 30 days to provide additional information if he or she does not agree with the adjustments. If all the documents have already been provided, then the taxpayer may dispute the examiner’s decision by speaking with the group manager or requesting a conference with an Appeals Officer. If the taxpayer agrees with the changes, they can sign the Form 4549 and return it to the examiner. However, you should never sign the report without having a tax attorney review it first.
Two weeks after the Letter 915, the examiner may also follow up with a Letter 1912 which states that you have 2 weeks left to provide any additional documents or request Appeals. Since the IRS has already informed you of your Appeals rights in the Letter 915, the Letter 1912 isn’t technically required, but is usually sent.
IRS Technical Services, Appeals, and Tax Court
After the 30 days have expired and the taxpayer has not requested Appeals, the case will be reviewed by a group manager and then sent to Technical Services (“Tech Services”). The function of Tech Services is to do a final, thorough review of the case file to ensure that all procedures have been followed, that all documents provided by taxpayer have been considered, and that the calculations on Form 4549 are correct. After this technical review, the IRS will issue a Statutory Notice of Deficiency (SNOD), also known as the “90 day letter.” The SNOD is a very important notice, providing you with your legal right to petition the tax court within 90 days. If you do not exercise your right to petition the tax court, then 90 days after the issuance of the SNOD, the proposed tax changes on Form 4549 will be assessed and become enforceable by the IRS.
There are usually several months in between the issuance of the Letter 915 and the SNOD. During this time, if you do not agree with the changes, you can either request audit reconsideration or Appeals. The option you choose depends on several factors, such as whether you have new information to submit, and the probability of success in dealing with the same examiner and group manager again.
After the SNOD has been issued, you have two options – audit reconsideration or tax court. If you’re represented by a CPA or EA, they may suggest audit reconsideration because they cannot represent you in tax court. I am not a big advocate of audit reconsideration, unless it’s the only choice available, or if the client has new information that was not provided before. For one, the case will be assigned to the same examiner who initially audited the case. Second, examiners have very little discretion and ability to make decisions outside the four corners of their case files.
After you file a tax court petition, the IRS will send your case to Appeals as a docketed case if you have not already been to Appeals. Appeals Officers are well-trained and required to consider the “hazards of litigation” in their review of the case. You may not end up with everything you wanted, but the result will usually be equitable. Unless the appeals officer abuses their discretion or you have a unique tax issue that has never been litigated before in tax court, your best case scenario will be in Appeals.
What Happens if you Don’t File a Tax Court Petition?
If after the 90 days have expired and you have not exercised your right to petition tax court, your options are 1.) audit reconsideration, or 2.) paying the assessed tax in full and filing a claim for refund suit in district court. The second option is rarely a popular one. I’ve had clients come to me several years after an audit because they now have a huge tax debt that they are unable to pay. In many of those cases, the client never even appeared for the audit or provided documents. In such cases, the taxpayer can request an audit reconsideration which provides a second chance to present documents that were not provided previously. Audit reconsideration is an informal process and the IRS is not required to grant an audit reconsideration request. However, in virtually all cases except where the taxpayer has previously requested audit reconsideration, the IRS will grant the request.
In a few cases, I’ve used another strategy where the tax assessment was made several years ago. The client was unable to make payments on a very large tax bill, and their records were lost or unavailable. Rather than having the client incur the legal expense of going through an audit reconsideration and then again pay legal expenses for collections representation, we decided to not dispute the liability and instead filed an Offer in Compromise Doubt as to Collectability. We were able to successfully remove the debt without having to dispute the audit changes.
In conclusion, there are many options to dispute an audit adjustment. While it’s advisable for taxpayers to seek representation immediately after receiving an audit letter, it’s never too late to secure legal help even many years after an audit.