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Audits and Audit Reconsideration


An IRS audit can be conducted for a variety of reasons. Tax returns may be selected for audit for a variety of reasons, including certain items or a random sample. Regardless of the reason for auditing, the unrepresented taxpayer faces a lot of risks in this process. A tax audit examines a taxpayer’s return in detail and is lengthy and in-depth. It may be necessary to examine additional years and provide detailed explanations.

Tax returns are generally audited and additional tax is assessed three years after filing. Tax returns that omit gross income (25 or more percent) are subject to a six-year IRS audit after they have been filed, and more tax may be assessed. Last, the IRS is entitled to assess tax whether a return was filed or not, or whether there was fraud or an attempt to evade tax.

Audited Taxpayer Has Questionable Items on Tax Return In this case study, our taxpayer had a farm in a neighboring state that was mainly used for recreational purposes. However, on his tax return the taxpayer listed the farm as income property which generated significant losses. Further, the taxpayer also claimed business expenses on his tax return that he did not actually incur. The tax return was selected for audit by the IRS. The taxpayer was initially represented in the audit by the CPA who prepared the tax return. The taxpayer then retained IRS Trouble Solvers, LLC who immediately realized that the problem was much larger than the taxpayer realized. In a typical audit situation, any changes made by the IRS typically results in the assessment of additional tax, penalties and interest. However, if the taxpayer claims expenses to which he is not entitled or underreports income, not only is the taxpayer exposed to additional tax liability, but he is also exposed to the fraud penalty and/or criminal prosecution. Because the taxpayer and his representative had met with the IRS prior to retaining tax lawyer the IRS Trouble Solvers™, much damaging information had already been provided to the IRS. Case Study

If you have been notified by the IRS that you are going to be audited, and if there are any questionable items on your tax returns, it is strongly advisable that you seek the advice of counsel before you speak with the IRS. Contacting the IRS without the advice of counsel may make things substantially worse. At the conclusion of the audit, the IRS may propose additional tax, penalties and interest. However, the taxpayer may still have an opportunity to contest the audit deficiency at IRS Appeals or in the United States Tax Court.

Taxpayer Promised Large Tax Refund by AccountantIn this case study, our taxpayer went to an accountant who promised huge refunds on everyone’s tax returns. Our taxpayer then received substantial refunds for several years. Our taxpayer then recommended the accountant to his friends and family and was paid a finder’s fee. The IRS later contacted the taxpayer and notified him that the tax returns contained significant errors and included a business that did not exist. The taxpayer did not understand the complexity of the tax return and did not closely review it before signing it. However, the taxpayer did enjoy the large refunds. Unfortunately, the taxpayer’s accountant intentionally inflated expenses on the tax return and made up a business that did not exist. Beware of tax return preparers that promise a refund on every return. If your tax return has been selected for audit, please immediately contact the IRS Trouble Solvers™ to assist you. Case Study

How Audit Reconsideration Can Help You Resolve IRS Disputes

According to the Internal Revenue Manual (IRM), an audit reconsideration is defined as:

Tax credits that have been reversed or additional tax assessed and unpaid in a previous audit are reevaluated. During the original examination, if the taxpayer disagreed with the determination, they would then have to submit information that had not been previously considered. As well as the procedure used by the IRS when the taxpayer files a delinquent original return in response to a Substitute for Return (SFR) determination. [IRM §4.13.1.2(1)]

IRS audit reconsideration is not explicitly authorized by the Internal Revenue Code, but in general terms the IRS is empowered to abate an assessment of any tax or liability with respect to it that is (1) excessive in amount, (2) assessed after expiration of the applicable period of limitation, or (3) erroneously or illegally assessed (Sec. 6404(a)).

Accordingly, the IRS can evaluate previous audits conducted by its employees at its discretion. A previous audit remains unresolved in this evaluation, which represents a re-work. Typically, a taxpayer requesting a reconsideration against an audit believes that an increased tax liability resulted from the audit and, as a result, refuses to pay that additional tax. Many taxpayers didn’t attend an audit because they were unaware of it (didn’t receive the notice) or simply didn’t respond. It may be necessary to have the IRS evaluate the previous audit findings regardless of the circumstances of the dispute.

Practitioners can use audit reconsideration when clients are not satisfied with the results of a prior audit or when clients have not filed tax returns and the IRS has done it for them.

If taxpayers fail to file returns or file (willfully or otherwise) false or fraudulent returns, the IRS can file returns on their behalf. Accordingly, Section 6020(b), the IRS has the authority to request any and all information (e.g., Forms 1099s series) gathered through the mandatory reporting processes. In addition, Section 6020 (b) (2) states that a return prepared by the IRS “shall be prima facie valid and sufficient for all legal purposes.”

When pursuing audit reconsideration, practitioners need to take note of a few important things. During an original IRS examination, audit reconsideration is not available. Second, audit reconsiderations are discretionary administrative processes. IRS has the authority to approve audit reconsideration in certain cases. A taxpayer can generally appeal to an independent IRS representative through the Appeals function within the IRS, whereas the Executive Branch does not. Third, the IRS tax assessment must remain unpaid; otherwise, the taxpayer may have to consider other options for receiving a refund. Moreover, the taxpayer must provide something “new” to the IRS, which is usually in the form of supporting documentation that was not previously considered by the examining agent.

Reconsideration of audits is intended to ensure:

  • Taxes have been assessed correctly;
  • As a result of the reconsideration request, the collection process has been suspended;
  • Inappropriate assessments can be abated by appropriate procedures;
  • A consistent approach is used to handle cases.

Could these goals provide lessons for the future? A taxpayer’s tax dispute can be resolved in a timely and cost-efficient manner if the IRS is willing to work with them. A second concern for the IRS is that the amount of taxes assessed are correct. Thirdly, the IRS is able to consider taxpayers’ requests while the tax collection process is suspended. Lastly, the IRS should be fair and consistent when responding to audit reconsideration requests by following the goals.

If the taxpayer did not attend the audit or was poorly represented at the audit, IRS Trouble Solvers™ will contact the IRS and attempt to establish a basis for an audit reconsideration. If the IRS grants an audit reconsideration, the taxpayer will be given the opportunity to present the necessary documentation to substantiate the items contained on his or her tax return. If successful, the IRS will abate all or part of the prior audit deficiency, including penalties and interest.

The IRS Trouble Solvers™ Seattle has successfully represented many taxpayers in audits and has been able to obtain an audit reconsideration in many cases since its inception in 1991. If you have been notified that you will be audited or have been audited, please call us. The IRS Trouble Solvers™ Seattle can help. Your BEST bet to resolve your IRS Debt!®

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