HOW TO MAKE A DEAL WITH THE IRS…YES THE IRS
By: Marvin Michelman
Contrary to popular opinion, the IRS is frequently willing to bargain with taxpayers who are being audited.
Key: Knowing the rules of the game greatly increases the odds in your favor.
DURING AN AUDIT
At the typical desk audit–which takes place in an IRS office–you must provide proof about specific items on your tax return. Ordinarily, the examiner’s decision is clear-cut. . .
Audit items that you are able to prove with documents, receipts, checks or other information will not be changed by the examiner.
Items that you are not able to prove will be disallowed.
Bargaining point: You may be able to negotiate allowance of a particular audit item, even if you are not able to prove it, by using the substantial compliance rule.
This permits the IRS examiner to rule in your favor on an item you can’t prove, if you have shown proof for all of your other audited items and they have all been allowed in your favor.
Strategy: The best way to persuade the examiner to allow your deduction is to state very clearly and concisely why your position regarding the item is correct. Caution: Be courteous, no matter what.
If the examiner disallows a deduction that you know you are entitled to, immediately (but politely) request to speak with the supervisor. Don’t wait until the end of the audit. The supervisor can change the examiner’s findings right then and there.
Bonus: Knowing that you may request intervention from the supervisor during the rest of the audit typically makes the examiner more lenient.
AFTER AN AUDIT
After you’ve been audited, you’ll get an official copy of the audit report. This will show the final disposition of the audit–either that there are no changes or what the proposed changes are.
If you disagree with the findings, send a letter stating so to the district director according to the instructions that will accompany the report. Your case will automatically be moved to the IRS Appeals Division.
Bargaining point: Appeals officers, who are accountants or attorneys, have a better understanding of tax law than examiners. They’re eager to avoid the time, effort and cost of a court battle.
Unlike examiners, appeals officers are allowed to consider the hazards of litigation–the true chance for success at trial–along with the merits of your case. If the IRS only has a 40% chance of winning in court, appeals officers have the authority to settle with you and allow you 60% of the disputed item.
Strategy: Prepare negotiation points for the a peals officer thoroughly. Gather ail facts and evidence that could possibly convince the IRS that it won’t succeed in court.
Point out any new developments in the tax law that have occurred since the audit if this will help prove your point.
AFTER AN APPEAL
If you lose the appeal, a statutory notice of deficiency, known as a 90-day letter, will be mailed to you. If you still think that the IRS decision is wrong and you want to continue your fight, you have two options…
Continue not to pay the disputed tax and file a petition with the US Tax Court.
Pay the disputed tax and sue in US District Court or Claims Court.
It may be preferable to go to Tax Court. Reason: You don’t have to pay the tax before trial, so the government doesn’t have your money…which it will quickly begin to consider its money. However, this is a complex decision based on prior judicial history and your circumstances. This decision should be made after consulting an attorney who is skilled in this area.
Bargaining point: Once again, an IRS appeals officer will try to negotiate with you prior to the trial. This officer will again weigh the merits of your case against the hazards of litigation.
Strategy: Plan carefully. This is your last chance–if the case isn’t settled during pre-trial discussions, full-fledged litigation will follow… and it will be expensive and time-consuming.
(The above material was published by the Tax Hotline in New York.)
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