Taxpayers are faced with an Internal Revenue Service (IRS) tax audit when the IRS believes it has found an error or an intentional misreporting. The taxpayer then becomes responsible for payment of the recalculated return amount and any interest penalties. Although most taxpayers are not selected by the IRS to undergo a tax audit, those who do get picked by the IRS should seek help understanding the process and possibly consult with a tax professional such as a seasoned tax lawyer who has handled several tax audits. This article is the second in a two-part series intended to provide guidance and outline the steps of the tax litigation process to tax lawyers and their clients from a tax lawyer with extensive experience in all stages of a tax audit.
Background Information on a Tax Audit and How to Prepare
Generally, the IRS has three years to start an audit beginning from the time the tax return is filed or April 15, whichever is later, to access a taxpayer for additional taxes. The IRS can initiate an audit beyond three years if the IRS discovers tax fraud or significant underreporting of income. More information on how to prepare can be found in Part 1.
Conclusion of a Tax Audit and Taxpayer Rights after an Audit
At the end of an audit, the IRS agent submits a report with his or her conclusion based on his or her findings. The end result can be (1) no change proposed; (2) the taxpayer agrees with the IRS’s proposed changes; or (3) the taxpayer disagrees with the IRS’s proposed changes. Once an audit has ended, the taxpayer has several options including the right to administrative appeals, the right to petition to go to U.S. Tax Court, and the right to a trial after the audit. We will explore these options below with tax law expert Mauro P. Colabianchi.
Meet Mauro P. Colabianchi, Esq., LL.M Taxation
Mauro, a licensed attorney in California, is an associate attorney at McLaughlin Legal in San Diego, California, a boutique tax law firm providing legal services in civil and criminal tax disputes such as audits, appeals, and U.S. Tax Court litigation in addition to tax and estate planning services for individuals, families, and businesses.
Hi, Mauro. In your experience, what happens after a tax audit is conducted? Does the taxpayer have options if he or she does not agree with the results of the audit?
After an audit, the taxpayer will receive a 30-day letter from the auditor. This letter will contain the audit report with changes to the taxpayer’s return and information about filing an appeal. If the taxpayer thinks the auditor made a mistake, then he may contact the auditor or the auditor’s manager to try to change the audit report. Otherwise, the taxpayer may file an appeal from the 30-day letter. If he does nothing, the IRS will issue a 90-day letter, in which case the taxpayer may file a petition with the Tax Court.
What is a right to administrative appeals? Can you explain the process? In what situation would you take this route for a client?
Appeals is the intermediate step between the initial audit on the one hand and U.S. Tax Court on the other hand. When a taxpayer appeals the results of his audit, the case is then sent to the IRS Office of Appeals, which is set up as an impartial third party that is supposed to function as a type of mediator between the IRS and the taxpayer. The appeals officer assigned to the case will review all information and determine whether the auditor correctly applied the tax law in the audit. The taxpayer may present new information to the appeals officer, but the officer will hand that information on to the auditor to make any changes to the examination report.
What is a right to petition to go to U.S. Tax Court? In your experience, when would you advise a client to go to U.S. Tax Court? Do you have any advice for solo or small firms when handling a matter in U.S. Tax Court and how to prepare?
The U.S. Tax Court is empowered by Congress to adjudicate tax disputes concerning notices of deficiency arising from IRS audits. After appeals, the Tax Court is another chance for the taxpayer to have his position heard. When a taxpayer has been unsuccessful at the audit level, it is often in his best interest to file a petition with the Tax Court. If the taxpayer ignored the audit, then filing a petition will be his only recourse. The taxpayer will then have a chance to settle with appeals or with the IRS Office of Chief Counsel prior to going to trial. To prepare, it is helpful to be familiar both with your client’s case and exhibits and to have a solid grasp of the Tax Court’s Rules of Practice and Procedure, which are available on the court’s website.
Based on your experience working in smaller firms, do you find it easier or more difficult to represent taxpayers with their tax matters after a tax audit?
Usually, the earlier I can get involved with a case the better. If I begin at the audit level, then it gives me three chances—audit, appeals, and Tax Court—to have a sympathetic ear at the IRS to my client’s case, especially if it involves novel and/or complicated legal arguments. Also, the earlier I am involved in a case, the more time I have to gather all relevant documents and information from the client, which can often be the most difficult part of the process. Many times, we are presented with a taxpayer who has ignored the audit and we come in at the appeals level. In those cases, if the taxpayer had been assigned a sympathetic auditor, then that chance to take advantage of that opportunity may have been missed, and we will be working on tighter deadlines than if we had come in at the earliest stage.
Do you have any other advice to solo or small firm attorneys who handle tax matters?
In an audit, organization and clear legal arguments are the keys to success. The same is also true for appeals and Tax Court cases. However, it is also important to discuss the costs of litigation with your client as early as possible so that he understands that, yes, he has rights to appeal or petition the Tax Court after an audit, but that it comes with a cost. Tax Court litigation can be extremely expensive, so it might not be worth the taxpayer’s time and money to go that route if the result at the audit or appeals level was acceptable, if imperfect.
Taxpayers should be aware that there are qualified tax professionals such as Mauro who can help with the tax litigation process at all stages including tax audits. Experienced enrolled agents, Certified Public Accountants, or tax lawyers can all represent taxpayers who have been selected by the IRS for a tax audit. There are also low-income tax clinics operated by nonprofits such as The Legal Aid Society located throughout the country that can also help taxpayers who cannot afford to hire a tax professional. There are several avenues a taxpayer can take for both representation in a tax matter and tax relief after an audit.