Tax Audit

Question 1

Audit Selection

Answer 1

Three Year Rule
- assess taxes on taxpayer 3 years after due date of return or filed (whatever is later)

Six Year Rule
- extended to 6 years if there is a substantial omission (more than 25%) of gross income
- self employed Sched C line 1 of $100,000 but IRS determines gross income should be 25% higher, IRS has 6 years to assess the additional tax and penalties

Fraud:
- no statute of limitations even after 6 years
- IRS can send a deficiency letter

Question 2

Audit Process

Answer 2

• Randomly selected
• past errors
• obvious errors (matching W-2 and 1099 forms)
• taxpayer can hire any CPA, attorney, enrolled agent to represent them in front of IRS
• taxpayer and IRS will negotiate during the audit until all outstanding issues are resolved
• IRS will rely on treasury regulations, revenue rulings, tax court cases, primary authority

IRS powers:
- power to summon taxpayers records and witnesses to testify
- after completion, taxpayer will get a Income Tax Return examination changes report
– if taxpayer does not agree, they go to appeals (US district court or US federal claims in Washington DC)
– if agrees, taxpayer signs it - this binds IRS and taxpayer in regard to specific items mentioned
- once settled it can’t be reopened

If an agreement is not reached, taxpayer is given a copy of the revenue agent’s report
- 30 day letter will accompany revenue agent’s report - 30 days to reach a settlement with IRS or start IRS appeals process
– if you ignore the letter, you will get a 90 day letter - statutory notice of deficiency (tax court)

Question 3

IRS Appeals process

Answer 3

• IRS usually grants appeal
• if granted, taxpayer will file a protest letter for each disputed item
• taxpayer must state the primary authority behind the position that is contrary to the IRS agent’s examination report
• if agreement is reached on appeal, taxpayer pays agreed amount, case is settles and IRS cannot re-open case

Question 4

Tax Court

Answer 4

• only if you haven’t paid a tax yet
• once petition is filed, IRS cannot enforce assessment until tax court reached final decision
• no garnishment of wages or liens while court considers case
• if taxpayer does not go to court after 90 day notice letter, they must pay deficiency and then go to district court of federal claims in Washington DC

Question 5

Regulations Governing Tax Preparers

Answer 5

• AICPA Code of Conduct
• Circular 230
• AICPA’s statements on standards for tax services
• client records have to be returned, when contingent fees are allowed