It is important to realize that changes may occur in this area of law. This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney.
In general, the IRS collects taxes and decides whether
taxes are owed to the United States.
The following IRS mission statement describes their role and the public’s expectation about how they should perform that role:
To carrying out its mission, the IRS has authority to:
Your return may be selected for examination on the basis
of computer scoring, information received from third party documentation,
such as Forms 1099 and W-2, or information received from other sources
such as newspapers, public records and individuals suggesting potential
noncompliance with the tax laws or inaccurate filing.
The IRS exercises its right to audit a return within three years from the return’s due date or file date, whichever is later. This limitation does not apply when there is an allegation of fraud, when no return was filed, or when the taxpayer is charged with a substantial omission or concealment of items of gross income.
Act promptly if you are contacted by the IRS. Contact your lawyer, bookkeeper or accountant if you need professional help with IRS inquiries. If you think you are the subject of a criminal investigation, it is advisable not to speak with any IRS representative, even casually, without first getting a lawyer’s advice.
The IRS contacts people either with an office audit or a field audit of tax returns. An office audit involves an inquiry into one or two items on your tax return and is conducted in the local IRS office. You must bring your books and records to the examining agent of the IRS at the IRS office. The IRS will tell you which records you will need. Occasionally, an office audit can be handled entirely by mail.
A field audit usually involves a more detailed examination of your books and records. In most cases, an examining agent of the IRS will come to your home or office to examine your books and records. An alternate location for the examination may be negotiated with the agent.
To determine the accuracy of your return, the IRS may examine relevant books, records or other documents in the possession of other persons or entities such as banks, savings and loan associations, and other companies. The right of the IRS to review your records or the records kept by others is not absolute. A lawyer can advise you when to challenge the IRS demands to examine certain records and witnesses.
When the IRS completes an audit, the examining agent prepares a report proposing ways to adjust your tax return. You sign the report if the adjustments proposed in it are acceptable. In certain circumstances, the IRS will allow you to pay less than the full amount you owe; this is commonly referred to an offer in compromise. If you do not agree with the agent’s conclusions, you or your representative and the IRS agent may try to find a compromise. If settlement is impossible, the IRS local District Director will send you a “30-day letter.” This letter notifies you of your right to appeal the proposed changes within 30 days and outlines the proposed changes to your return. The letter will explain what steps you should take, depending on which action you choose. Be sure to follow the instructions carefully.
If you do not respond to the 30-day letter or if you later do not reach an agreement with an appeals officer who was assigned to make an independent review of the issues in dispute on your return, the IRS will send you a 90-day letter, which is also known as a notice of deficiency. You will have 90 days from the date of the notice to file a petition with the tax court. Ask a lawyer about the merits of your case, burden of proof and the choice of courts (tax court, district court or court of federal claims) that may be available.
An IRS audit may result in a prosecution report that may or may not recommend criminal prosecution of a taxpayer.
Willful violation of the Internal Revenue Code can result in serious criminal and civil penalties. The IRS can analyze any tax year when considering criminal prosecution and penalties. As said earlier, if you think you are or may be the subject of an IRS criminal investigation, do not speak with an IRS agent, even casually, without first getting a lawyer’s advice.
The IRS offers many services to help you resolve disputes, including Fast Track Mediation, the Taxpayer Advocate Service, low income taxpayer clinics, and small tax case procedures. For more information about the Internal Revenue Service and their services, visit their website at www.irs.gov.
Legal Editor: Jill Tanner, January 2009