IRS Tax Audit Resulted In A Large Tax Debt

TH Content Area 2.1 Taxes Due

An IRS tax audit notice starts this mysterious and often overwhelming process.

Computer randomly picks most audits. Some tax returns are specifically flagged by categories, industries, income level and unusual income and deduction items.   Your audit notice should tell you why you have been selected.  Most examinations are done by mail.  However, you may need to meet with an IRS agent at the IRS office, your home or business.   Field or office audits are more involved and difficult, with greater possibility of the IRS raising additional issues and looking into other years.  You should get prepared for the audit.  Try to figure our and understand what the IRS is questioning or investigating.   Gather all available records to support your position.

Bad Results From A Tax Audit

Assuming the IRS suspects no fraud or other criminal violations, you will have a chance to discuss the audit results with the supervisor, and possibly an appeals officer.  If you can’t come to a resolution, you will have 90 days file a tax court petition to protest the IRS’ Notice of Deficiency.    Once the 90-day tax court deadline runs out, you will only be able to contest the assessment thorough the IRS’ internal administrative process (if you find new evidence). If you pay the tax bill, which you believe is wrong, you can sue the IRS for a refund within a specified time.

I Missed The Audit

If you did not know or failed to show up to the exam, you may be able to contest the audit result through IRS’ administrative review or appeal process, even after the time for a tax court petition has elapsed.   If you owe money to the IRS based on an audit, you may be able to request that the IRS look at additional facts and documents to reduce your bill through audit reconsideration.  If you can’t defeat the assessment, other government programs such as the Fresh Start Initiative or Offer in Compromise, may help alleviate your tax problem.

How Do I Protest An Old IRS Audit?

Audit reconsideration allows a taxpayer to reopen an audit dispute that has not been previously litigated in court.   So, if you still owe money based on an IRS examination, you may be able to request audit reconsideration.

IRS may reopen the audit if the taxpayer:

  • Was unable to defend themselves in the audit;
  • Did not know about the audit;
  • Provided evidence that were ignored or not properly considered; or
  • Found new substantiation.

Audit reconsideration would be applicable in the following situations:

    • New information is found
    • IRS prepared a tax return for a non-filer based on available information. The taxpayer may file their own tax return to include deductions and reduce or zero out the tax bill.
    • IRS made a calculation or processing mistake.

What Additional Information Should I Provide?

Prepare a written statement requesting that the IRS review your audit.  Include the following information:

    • Items you want reconsidered;
    • Proof to support your position.
    • Other information and facts that may help your case
    • Copy of audit reports.

It may take some time for the IRS to open and review your case (if at all). At this point it is entirely at the IRS’ discretion whether they want to reopen your file.  To avoid levies and garnishments during the pending reconsideration, you should inform the collection division about your attempt to get the audit findings reversed. It may be prudent to enter into some form of installment agreement while the reconsideration is pending.   

How Can I Reduce Tax Debt?

Tax Deductions

The tax code actually allows various deductions that will save you money.  If the IRS files on your behalf, you are not going to get these deductions and will pay more than you actually owe.  Here is a list of some very valuable tax deductions:

Business Deductions  (Schedule C)

If you are an independent contractor, self-employed, or operate as a sole proprietor, you are allowed to take deductions for business expenses.  You can deduct expenses directly related to your trade of business.  Here are some of the main categories for business deductions:

    • Advertising
    • Car/Truck expense
    • Commissions/Fees
    • Contract Labor
    • Depletion
    • Depreciation and section 179 expense deduction
    • Employee Benefits
    • Insurance
    • Interest
    • Legal/Professional Services
    • Office Expenses
    • Pensions/profit-sharing Plans
    • Rent or Lease
    • Repairs and Maintenance
    • Supplies
    • Taxes
    • Travel, Meals, Entertainment
    • Utilities Wages
    • Other Expenses

Itemized Deductions  (Schedule A)

IRS also allows limited personal deductions (Itemized Deductions):

    • Medical expenses,
    • State and local taxes paid
    • Investment interest,
    • Charitable contributions
    • Casualty and theft losses,
    • Gambling losses (to the extent of winnings)

This list does not include all available deductions.  Each claim has specific rules and limits, and needs to be researched prior to including it on your tax return. You need solid records if the IRS questions your deduction.

IRS Hardship Status

If you can’t reduce the audit bill, you will need to figure out how to pay the balance.  If paying the tax bill causes a current financial hardship, the IRS may grant you temporary hardship status and hold off on collecting the tax.

Uncollectible status won’t forgive the tax debt. It will just delay collection of the taxes, penalties and interest. Penalties and interest will run.  The IRS will temporarily stop levies but may record a Notice of Federal Tax Lien.

You will need to present financial information to show hardship.  The hardship status is temporary, and may be revoked at any time.  The IRS may receive some income information from your employer or other sources and decide that your hardship status needs to be reviewed.   The IRS may periodically ask for additional information to prove that hardship still exists.  The IRS may also get more aggressive as the collections statute expiration date approaches.

A hardship status may be converted to an installment plan as your situation improves.  Payments will be based on your financial ability within the IRS allowable expenses guidelines.

Offer in Compromise

You can also dispute results of an audit by submitting an Offer in Compromise based on “doubt to liability”.  Under this program, the analysis focuses on any errors made by the IRS, rather than your inability to repay the taxes.  This type of compromise allows the taxpayer to reduce the balance down to the correct tax, rather than reducing the debt based on the taxpayer’s financial inability to repay the taxes.

If you cannot reduce the audit bill, you may consider an IRS Offer in Compromise based on “doubt to collectibility”.  Your assets and your future income potential determine the compromise.  The IRS will review your financial condition to determine if you can pay off the back taxes in the next 10 years or within the IRS’ statute of limitation. Recently, the IRS Fresh Start Program improved and expanded the Offer in Compromise process, allowing more offers to be accepted at more favorable terms.

Our lawyers get involved at various stages of the tax audit process. Many clients come to us immediately upon getting contacted by the taxing agencies (early intervention). Others start the IRS audit on their own, or with their accountant, and turn to our tax attorneys when they feel that that the process is starting to overwhelm them. Often, we are asked to step in once a taxing agency has made an unfavorable adjustment to the taxpayer’s tax liability.

Please Call Our Office to discuss your IRS or State audit.

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