By Stephen J. Dunn
Having one or more of your tax returns selected for examination by the Internal Revenue Service is indeed a stoke of misfortune. But there are things you can do to minimize the pain.
Going through a tax audit unrepresented is penny wise and pound foolish. It practically assures the worst possible result of the audit for you.
Unscrupulous tax representatives abound. Using high pressure sales techniques, urging their qualifications, and promising unattainable results, they extract a substantial retainer from t. Once they have the money, they use it up as quickly as possible, and then disappear, claiming that they “are not getting paid.” In truth, they are marginally trained and qualified, and unable to help taxpayers. Once you realize that you have been scammed, you conclude that pursuing the scammer is uneconomic, as they are several states away.
Get referrals to tax representatives. Investigate them. Interview them. Get references from them. Find a representative you like; a representative who will put your interests first, and represent you no matter what. Find out how much they will charge. Enter into an engagement with them.
Once you have retained a representative, follow his or her advice. You should never talk with IRS agents; let your representative do the talking. IRS cannot require you to talk with them. If possible the examination should take place at your representative’s office. IRS is entitled to tour your business premises, at a reasonable time. If IRS exercises its right to tour your business premises, you representative should accompany the agent; you should not be present.
Your representative should provide the IRS agent the documentation he or she requests, and answer the agent’s questions. But you representative should not be in a hurry to conclude the examination. The IRS is under time pressure, and is accountable for his or her time; your representative is not. You want to get it right.
Whatever your representative says to the IRS agent must be truthful. If the agent thinks your representative is lying, it will change the tone of the audit, and prompt the agent to resolve doubts against you.
Contest all issues, factual or legal, for which there is a good faith basis for contesting. Work out the best deal you can with the examining agent, and then appeal. On appeal, the taxpayer should be willing to compromise contested tax issues at 50%, in return for complete waiver of penalties.
The taxpayer should never concede penalties. If penalties are assessed, and the taxpayer seeks relief from them, there is no contested tax in play which the taxpayer can use to leverage waiver of penalties; the penalties must be considered in isolation, and the best the taxpayer can do is persuade IRS to abate some portion of them.
The result in IRS Appeals is final, unless the taxpayer files a timely petition with the U.S. Tax Court. Before the Tax Court, the IRS is represented by its Office of Counsel. IRS Office of Counsel is the taxpayer’s last opportunity to settle the case on favorable terms.
If the case is tried to the Tax Court, the likelihood of a favorable result for the taxpayer is not good. The case is decided not by a jury but a judge. Tax Court judges are appointed not for life but for a 15-year term, and may be eying reappointment. Many the judges were appointed as a reward for faithful service to the U.S. government.