IRS Tax Audits - How can I avoid them?

by M.E. Hansen, All rights reserved. Do not duplicate without permission

The IRS Restructuring Act

For most persons fighting a tax audit, the best news in the new law is that Tax Court's Small Case Division isn't just for "small" cases anymore, it can now hear disputes involving as much as $50,000 of tax and penalties (up from $10,000) excluding interest.

The limit applies per tax year, therefore if the IRS assesses tax for more than one tax year, it is multiplied. The IRS examines three years of your past tax returns and assesses $40,000 of tax and penalties on each. You can contest your full $120,000 tax bill, plus interest that the IRS has added, which may be many thousands of dollars more, as a Small Case (S case). If the tax disputed for a year exceeds the $50,000 limit, you can concede the excess to get under the limit. You may well come out ahead on what you save on attorney's fees alone.

The reality now is that the great majority of all audit disputes involving individuals and small businesses can qualify as S cases.

What's good about an S case;

• No attorneys are needed, but you can use one if you want.
• The procedural rules of formal court cases are waived, the parties just sit and talk to the judge.
• The formal rules of evidence are waived, you can tell your story to the judge as you want.
• The Tax Court judge travels to a city near you to hear the case.
• An entire hearing may take as little as 30 minutes, avoiding the prolonged disputes that formal court cases can turn into.
• The only cost is a $60 filing fee.

Many tax professionals have observed that judges are often more sympathetic toward taxpayers who represent themselves in S cases than those who are represented by high-priced lawyers in formal cases. The only real drawback of filing an S case is that if you lose, you can't appeal to a higher court.

The new S case rules do more than just help you in court, they also help you from the first day that you meet with an IRS auditor. Until now, taxpayers and their tax advisers usually have handled audits settling for the best deal they could get from the IRS, because of the time and trouble of going to court. But bringing an S case to Tax Court is almost free. So now there's no need to feel "beaten" into a settlement that you think is wrong. It's now a perfectly viable audit tactic to say "write me up, I'll see you in Tax Court!" Auditors don't like to have their cases go to court. Their job performance is evaluated in part by how quickly they close their assigned cases, so they'd rather not have a court contest. Thus, an auditor's knowledge that you are willing to go to court may improve your bargaining position with the auditor regarding disputed items on your return.

You'll get another chance to voluntarily settle your case with an IRS agent other than the auditor if you file an S case. Whenever a case is filed in Tax Court, an IRS Appeals Officer or attorney will have a pretrial meeting with you to review the facts and see what they can agree on. In this meeting, you have a chance to present your side of the case to someone senior to the auditor, one who will consider the cost and risk to the IRS of litigation, and has the authority to settle. In fact, about 90% of filed S cases are settled before trial.

You can get the forms from;

The filing must be made within 90 days after the mailing date of a deficiency notice, or the chance to go to Tax Court is forfeited.

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