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The tax audit environment has changed considerably in the past ten years. That’s why it’s time for a book that talks about audit defense strategy in the modern world. My new book does just that. It’s called, How to Win Your Tax Audit, an Insider’s Guide to Successfully Negotiating with the IRS.

What follows where is an excerpt from the book, which deals with the assessment statute of limitations. This except is taken from chapter 8 of the book, which is entitled “Understanding Essential Tax Audit Rights.” What you see here is just a small taste of the mountain of hard, timely and effective information you’ll get from How to Win Your Tax Audit. This is vital information every taxpayer and tax pro needs to know.  

 

PILLA TALKS TAXES - August 2014  Featured Article

ESSENTIAL TAX AUDIT RIGHTS

The Assessment Statute of Limitations  

The assessment statute of limitations may be suspended if both you and the IRS agree in writing to a suspension. The agreement is formalized on Form 872, Consent to Extend Time to Assess Tax, otherwise known as an assessment statute waiver. Once executed, the waiver extends the assessment statute until the date shown on the form.

It is common for the IRS to ask a person to sign Form 872 while an audit is pending in order for the agency to have more time to assess the tax. The statements agents make when asking for this waiver are almost always wrong and intended to mislead. Let me give you some background.

Suppose you are under audit for tax year 2011. The return was filed on time in April 2012 so the IRS has until April 15, 2015 (three years from the due date) to complete the audit and make an assessment. At some point during the fall of 2014, the agent asks you sign an assessment statute waiver, Form 872. The agent states that the IRS needs at least ninety days to process a closed audit case and since the statute is coming up in April 2015 and the audit is still not complete, they need more time. A signed Form 872 gives them the time needed.

This statement is accurate so far as it goes. The IRS does require a window of time for a completed audit to be reviewed and all the closing paperwork to be processed. The ninety-day timeframe for doing so is common. However, it is the next part of the agent’s presentation that is false and misleading.

In order to pressure you to sign Form 872, the agent tells you that unless you sign it, the IRS must: 1) make its decision based upon the information already in the file, 2) that you will have no further opportunity to present information and arguments, and 3) you will lose your appeal rights. Each element of this statement is flat wrong. Let me explain why.

As to the claim that you lose your appeal rights, the fact is the IRS cannot assess any additional tax without first mailing a Notice of Deficiency. I discussed this earlier, explaining that an NOD is required before any income tax assessment can be made and that the NOD gives you the opportunity to appeal your case to the Tax Court. The Tax Court, not some auditor, then makes the determination as to what you owe, if anything.

Upon filing a petition with the Tax Court, the IRS then involves the Office of Appeals in an attempt to resolve the case without the need of a trial. In 100 percent of the audit cases before the Tax Court, the file is sent back to Appeals with instructions to work with the taxpayer to negotiate a settlement. Moreover, while your case is in Tax Court, you have every right to provide whatever additional information, documents, evidence and arguments are necessary to support your case. There is no limitation on your right to do so. The reality is that 97 percent of all Tax Court audit appeals are settled without a trial. So it is flat not true that you will lose your rights to appeal and to provide more information if you do not sign the assessment statue waiver.

What is true (but not explained) is that the audit appeal path changes if you do not sign the waiver. The usual appeal path is this: IRS issues the final audit determination. You then have thirty days to appeal by filing a protest letter, which causes the case to be sent to the Office of Appeals. If you reach agreement there, the case is closed. If not, the Appeals Office mails a Notice of Deficiency, which then gives you ninety days to file a Tax Court Petition. By filing the petition, the case is resolved through the Tax Court process. Signing Form 872 at the audit level means this appeals path will be followed.

But if you do not sign the Form 872 at the audit level, the IRS will simply mail the Notice of Deficiency to keep the statute of limitations from expiring. Thus, there is no thirty-day letter and there is no intermediate trip to the Appeals Office. However, by timely filing a petition with the Tax Court, your case is sent back to Appeals for full consideration and settlement negotiations, and as stated above, the likely full settlement of the case. While working with the Appeals Office, you have every right to provide all the information, documents, evidence and arguments necessary to support your case. There is simply no restriction on this. Thus, you get an appeal but follow a different route to get there.

So question becomes, “Do I sign Form 872 or not?” I am asked this regularly. The answer is, “It depends.” I have put together a list of factors to consider in determining whether to sign the waiver or not. Let me discuss them here.

Consider signing the waiver if:

Consider not signing the waiver if:

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ALSO FOUND IN August 2014 ISSUE OF PILLA TALKS TAXES:

THE TEN MOST IMPORTANT TAX CASES
(In My Humble Opinion)
by Paul R. Tom

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