IRS Notices Are on Their Way — Here’s What to Consider
August 17, 2020 by Joshua Smeltzer
In the wake of the COVID-19 pandemic the IRS instituted the Taxpayer First Initiative which put a hold on many enforcement activities (e.g. liens, levies, and audits) until July 15, 2020. Although some taxpayers, because of priorities or statutory concerns, did not experience any pause in enforcement many taxpayers did receive some relief. Even though the pandemic is still keeping many government and private employees away from their offices, the previous initiative is over and taxpayers are starting to see correspondence from the IRS again. If you receive a notice from the IRS, follow these guidelines in evaluating how to respond:
- Pay Attention to Deadlines. Almost all notices from the IRS come with deadlines to respond. Failure to respond by the deadline usually has consequences. If you need more time, the deadlines can often be extended with a call or letter to the IRS. However, if you miss the deadline, a call after the deadline will be much less effective or ignored. In fact, in some situations, the deadline is statutory and cannot be extended (e.g. Statutory Notice of Deficiency — response due in 90 days). Therefore, make sure you provide the notice to your tax advisor, if necessary, before the deadline. Otherwise, there may be little or no time to discuss options.
- Determine the Potential Threat. Unfortunately, most IRS notices are sent to indicate a potential problem with a taxpayer’s current tax reporting. Even an unexpected refund could have issues if the IRS later determines the refund was erroneous and requests a return of those funds. Many times, the proposed IRS action is indicated in the title of the IRS notice (e.g. Notice of Intent to Levy, Notice of Unreported Income, Notice of Amount Due) or in the body of the letter sent to a taxpayer. The IRS may be requesting information, an interview of the taxpayer, or proposing collection or other enforcement actions. Regardless of the IRS proposal, there is usually an option to respond before the IRS takes action.
- Gather Relevant Documents. Many audits at the IRS are correspondence audits — meaning that they are resolved by exchanging correspondence. For example, perhaps you realize a transposition of numbers or some other minor error that can be quickly explained or corrected. If a taxpayer has documentation, explaining the alleged issue, then a letter detailing the situation and providing relevant documents may resolve the IRS notice. Unfortunately, the Tax Court is filled with taxpayers who have lost their cases by failing to gather and produce the required documentation supporting their claims. Therefore, retaining information in the first instance or gathering the documents before responding is key. Once you have the relevant documents, they may clarify whether the response will require a factual, legal, or mixed explanation.
- Decide on a Response. Although a tax issue may only require a simple explanation, many times the response is more complicated. Tax advisors, either accountants or lawyers, can help explain both the risks and options for resolving the issues raised in the IRS notice. Not every response requires a tax lawyer; however, some issues will require a tax lawyer to protect the taxpayer during the discussions and ensure legal arguments are fully developed. Legal interpretations of tax provisions and doctrines are usually better addressed by tax attorneys with experience presenting tax arguments in court. IRS appeals will evaluate litigation hazards and, if a subsequent legal proceeding is required, then having a tax attorney involved in developing the case at the IRS level can set the case up for its best chance for success. Also, although there is a tax practitioner privilege, that privilege is narrower than the attorney client privilege and specifically excludes some communications. For example, the tax practitioner privilege specifically excludes protections for anything criminal. The IRS has announced a plan to increase criminal referrals from civil audits; therefore, this issue is more important in the current audit environment.
- Consider Payment or Other Offers. If an issue does not involve a particularly high amount, or important issue, it may be more cost effective to pay the proposed additional tax liabilities. Fighting the IRS, unfortunately, can be a lengthy process and certainly involves costs for any professional help. A tax advisor is a good resource for explanations of the potential timeline and estimated costs of pursuing a challenge. Also, a qualified tax advisor can assist in requesting alternatives to the IRS proposals or assert penalty defenses — if penalties are proposed — to reduce amounts allegedly owed. Many of these arguments can be made at the beginning of the dispute and may avoid a more costly challenge if asserted later in the process.
Receiving an IRS notice is usually an anxiety inducing event. Taking some time to assess the situation, using the guidelines above, can both help with concerns and put any dispute in the best possible position for success. Every situation is dependent on the specific facts and circumstances. If you have a question about your specific IRS notice, please contact a Brown Fox attorney.