To receive a letter, phone call or visit from a representative from the IRS can be a terrifying experience for the ill-prepared. Although one should always refer any IRS inquiries to a tax attorney, there are several initial steps to prevent a potentially bad situation from becoming worse. Most of the time the IRS will send a taxpayer correspondence. A more serious matter may prompt a visit from the IRS to one’s home or place of employment.
IF YOU RECEIVE A LETTER OR NOTICE FROM THE IRS:
1. Read the notice or letter. I have seen many cases where clients have thrown out the notice/letter, placed it on a desk and forgot about it, or otherwise employed the ostrich approach by putting their heads in the sand and refused to deal with any potential tax issues. To the other extreme, some taxpayers become so fearful that they look at the notice or letter, assume they owe money, and send a check to the IRS without determining whether they actually owe the Service any money! Either path exacerbates the situation, either by paying amounts that are simply not due, or by letting certain deadlines expire, severely limiting taxpayer options for protecting their interests.
The IRS may send a notice to request payment, notify a taxpayer of any changes to a taxpayer account or request additional information. It is important to engage a tax attorney who can tell you whether the correspondence pertains to a request for an audit of your tax return, an examination report disputing the amount of tax due and owing on a return, a 30-day notice for which to file a tax protest, a proposed assessment or penalty, a statutory notice of deficiency, a notice of levy, a federal tax lien or other correspondence requesting a response from a taxpayer.
2. If you receive an audit: Do not panic. Most of the time audits are requests for information. Do not ignore the audit and keep copies of all correspondence for your records. The IRS may request additional information because you took a home office deduction, reported an earned income tax credit, claimed Schedule A medical expenses, or for any reason related to your return. Seek the advice of counsel in responding to an audit request. The IRS generally conducts Correspondence, Office, or Field Audits. Correspondence Audits focus on simple errors that typically are corrected via mail. For example, letters from the IRS ask you to provide documents (such as receipts) that support information you entered on your tax return. In other cases, the letter may inform you that you underpaid your taxes due to errors you made on your return. In such cases, you’ll be asked to send additional money. Once you pay, the matter is over.
In an Office Audit, you are requested to bring documentation to an IRS office at a specific time and date. When you confirm the appointment, and if you have the documents requested, see if the agency will let you resolve the matter by correspondence. In a Field Audit, the IRS auditor will pay you a visit at home or your office. This occurs when the IRS suspects major violations. For example, do you really have a home office? The agent needs to see it in order to allow the deduction. Do not attend any audit proceedings unless you receive an administrative summons. You also have certain audit rights, including but not limited to: the right to counsel; the right to your personal and financial details to be treated confidentially; the right to record the interview if you give ten days notice; the right to courteous treatment from an IRS Agent. IRS Agents should also allow you more time to prepare for your audit if requested, and must communicate with you in non-technical language. Finally, if you have been audited in either of the last two years regarding the same tax question, but did not owe any additional tax, the IRS will usually suspend the audit after you point this out.
3. If you receive a statutory notice of deficiency: The IRS is proposing a tax assessment. You have 90 days to file a petition in Tax Court if you would like to fight the assessment. This is important because the Tax Court is the only venue available to litigate tax liability without requiring the taxpayer to first pay the tax. If you let the 90-day period expire, then the proposed tax liability becomes an assessment and the IRS can commence collection proceedings, including garnishment of wages and social security payments, levying assets, seizing or filing liens on a taxpayer’s property. A taxpayer can satisfy the tax liability and then file a claim for refund with the IRS. This can be a time-consuming and expensive process, however. If the IRS rejects the Claim for Refund, a taxpayer must file suit in the United States Court of Claims or in a United States District Court.
DO NOT ATTEMPT TO CONTACT IRS CUSTOMER SERVICE OR OTHERWISE “APPEAL” YOUR TAX MATTER! CONTACT A TAX ATTORNEY REGARDING YOUR RIGHTS IN FILING A PETITION IN TAX COURT. IT IS NOT IN THE IRS’ INTEREST TO SETTLE ANY ALLEGED TAX LIABILITY AFTER IT HAS ISSUED YOU A STATUTORY NOTICE OF DEFICIENCY!
4. If you receive a collection notice: Taxpayers may receive collection notices even if the IRS does not dispute the amount of tax due in the return. Although a taxpayer may have timely filed a tax return, a taxpayer may not have made the required payment of the balance due and owing to the IRS. You have several options: Make payment in full; enter into a monthly installment agreement, make an offer-in-compromise or file bankruptcy (under certain conditions). Discuss these options in detail with tax counsel. You may also be eligible for relief through the IRS Taxpayer Advocate Service. THE ONE THING YOU SHOULD NOT DO IS WAIT OR DO NOTHING! THE BALANCE WILL CONTINUE TO INCREASE FROM COMPOUNDED INTEREST AND PENALTIES. YOU MAY ALSO LOSE YOUR RIGHT TO ANY COLLECTION DUE PROCESS HEARINGS!
The IRS will require a taxpayer to complete a Form 433-A, 433-B or 433-F and related forms such as Form 656 Offer-in-Compromise, before agreeing to a collection alternative. The IRS may give you a call. Do not give the IRS any information over the phone. The IRS provides additional conditions before agreeing to such collection alternatives: Proof of attempt to borrow money from a bank; Timely filing or remaining current on required filing of returns, including personal and entity income tax returns, and employment tax returns; All current taxes are paid through tax with-holdings or estimated tax payments. Be advised that the IRS considers only necessary expenses when determining your ability to pay. The IRS also uses tables for national and local standards to determine allowable amounts for housing, automobile expenses and living expenses. The IRS generally does not consider credit card expenses to be a necessary living expense.
IF AN IRS REPRESENTATIVE VISITS YOU AT YOUR HOME OR PLACE OF EMPLOYMENT:
1. Request a business card from the IRS representative or obtain specific contact information from that person, including his or her specific IRS Division. The representative may be a revenue officer, revenue agent or from the Criminal Investigative Division. Although you realize that a visit from the IRS is a serious matter, in the moment it may be difficult to determine what specifically the IRS wants from you. A Revenue Officer will most likely be there to collect unpaid income or payroll taxes. A Revenue Agent will be there to audit you or your business. A Special Agent will be there to investigate you or your business for criminal activity. Special Agents are required to identify themselves and notify you if you are under criminal investigation.
2. Tell the agent as little as possible, but do not lie. The agent will likely want to engage you in discussion as soon as possible. Despite what the agent suggests, he or she is almost never going to go away just because you give them a little information.
3. Tell the agent you wish to consult with counsel. As soon as you tell an agent that you wish to first consult with a representative, he or she should suspend the interview. This will enable you and your representative to determine the correct strategy for dealing with the IRS. An experienced tax lawyer will be better able to explain your position to the IRS.
4. Do not let the agent into nonpublic areas. An IRS agent has the right to come into public spaces such as your business’s waiting room or a public dining room. The agent may not come into private areas such as your home, business office, warehouse, kitchen, or factory without your permission, a warrant, or a court order. Do not invite them in.
There is a rare exception to this rule, however. A Special Agent or Criminal Investigator have a correct Court Order, they may enter your home, confiscate your documents, and force you to come in for questioning. Often, the agents will give a taxpayer Miranda warnings, even in noncustodial settings like home interviews. If they don’t, however, courts will not grant a motion to suppress a taxpayer’s statements.
5. Do not give the agent business records or other documents. The agent may ask to see your business records or other documents, even if you’ve told him or her that you wish to terminate the interview. Repeat your desire to get professional representation, and DO NOT GIVE THEM ANY PAPERWORK!
** This article is intended to be used for solely educational and informational purposes, and is not to be understood as legal advice or any offer to provide legal advice.