Dick Norton Enrolled Agent - Tax Controversy Resolution

If you are notified of an IRS, FTB or other State Tax Agency tax audit or collection action (IRS tax lien or IRS tax levy - or a lien or levy from any state), you need to be very careful what you tell - or don't tell - an IRS (or other tax agency) employee. Taxpayers who represent themselves hoping for a favorable resolution of their IRS tax controversy or state tax controversy, or who are represented by individuals who lack in-depth knowledge of the IRS or State Agency procedures and practices, can find themselves owing more than the professional representation fees they believed they saved.

I would like to break this topic down into a couple of sub-categories - audits and collections. While in the following discussion I primarily focus mostly on IRS representation, please be aware that I do also represent clients before State income tax agencies as well. So, if you faced with an income tax audit or collection action by a State tax agency, I am available to represent you in that matter.

A significant part of my career was spent as a Revenue Agent and a Field Examination Manager in the Examination Division. The training and experience has proven invaluable to me in representing clients caught up in the examination process.

Some of you may be interested in how or why a return was selected for audit. Tax returns are primarily selected for audit by a very sophisticated computer system. When returns are filed, they receive a DIF (discriminant function) score that represents the potential for error in the return. The higher the DIF score, the more likely the IRS will find adjustments if they audit the return. While the DIF scoring system is highly classified, having worked inside the IRS has given me some insight into what types of scenarios can give rise to higher DIF scores. Some examples are the extensive use of round numbers (such as $1000, $500, $750 and the like for expenses). Claiming a high business use of a vehicle, or having year and year losses in a business, or extensive travel expenses are other items that appear questionable. There are other reasons why returns are selected - and I will consider adding another section to the website providing more detail on this subject.

There are different types of audits performed by the IRS. Here is an executive summary of those:

These audits typically are limited to the simpler returns and typically ask for verification of a few items on the return. They are handled by correspondence. The IRS employee (a Tax Examiner) sends out a letter listing the item or items for which they want verification. The taxpayer prepares copies (NEVER SEND ORIGINALS) of the documents requested, and mails them to the IRS function that issued the audit letter. The Tax Examiner reviews the material and either accepts the return as filed, or issues a report proposing to adjust one or more items based upon their review of the supporting material. The taxpayer either agrees with the report, or opts to file an appeal.

These audits are generally for more complex individual returns. The audit is assigned to a Tax Compliance Officer (TCO) in an IRS Office nearest the taxpayer's residence. The TCO sends out a letter to the taxpayer preselecting a time and location (the IRS Office) for the appointment, and lists the items that will be reviewed during the audit. These audit typically take a couple of hours and involve several items on the return. TCO make every effort to resolve the audit with one appointment, but occasionally, a second appointment is needed to give the taxpayer time to present additional evidence. At the end of the audit, the TCO prepares a report and that is present to the taxpayer to sign. Just as with a correspondence audit, the taxpayer can either agree with the report, or opt to file an appeal.

These are the most serious and time-consuming audits. The audit is conducted by an Internal Revenue Agent - the most skilled and experienced auditor in the IRS Audit Division (now called Compliance). The Agents examine all categories of returns - individuals, partnerships, corporations, employment tax, excise tax, extate tax and exempt organizations. There are specialty groups that audit several of those categories.

Revenue Agents generally will look into a number of line items on the return, with a focus on income (or more importantly, unreported income). The also can expand the audit to other entities controled by the taxpayer. For example, an audit of a corporation could expand into further audits of the shareholders, or to other entities controled by the shareholders. These audits are more complex, and taxpayers are generally well advised to retain help from a professional.

Audits can be very challenging for taxpayers and representatives not experienced and familiar with IRS practices and procedures. Knowing what to say - and not to say - to an IRS employee can make a difference between a no change audit or small audit deficiency, or a significant bill due to extensive changes to the original return. Knowing the taxpayer's rights in an audit, and the process of appealing an adverse proposal for changing the return can significantly affect the outcome of the audit.

When it comes to appealing the adverse proposal in an audit, the process becomes even more challenging. Definitely, having a representative with IRS experience can, in my opinion, improve the probability of getting relif from the proposed audit changes to the return. Having managed for 19 years in the Appeals function of the IRS provides me with the requisite knowledge and Appeal's experience to get clients sucessfully through the appeal's process.

Before moving into the area of Collection maters, I would like to mention an important audit AND collection issue that I saw all too often when I was in the IRS. That relates to Joint and several liability when filing a joint return.

If you and your spouse file a joint return, you may not be aware that you both are jointly and severally liable for any delinquency (non-payment) of tax. That is not always the case, however. There are Innocent Spouse provisions of the IRS Tax Code that, if specific requirements are met, could relieve the "innocent spouse" of part or all of the deficiency. This is a very challenging position to successfully advocate before the IRS, so having a representative familiar with the rules and requirements relating to innocent spouse will improve the potential outcome.

IMPORTANT TIP! If you filed joint returns during marriage, and are now contemplating a separation or divorce, be sure to talk with an attorney about ensuring your separate maintenance or divorce decree addresses how you and your ex-spouse will split or allocate unpaid taxes from previously filed (or delinquent) joint returns. In addition, you need to address how you and your ex will pay any deficiency that arises in the future from an audit of your prior joint returns.

By the way, the tax agencies are NOT bound by your agreement on how you will allocate the deficiency or liability. The tax agency will get the money from either taxpayer - usually from whoever they can get it from the easiest. The language in the decree of divorce simply enables one party to recover from the other - in a civil action - whatever amount they were forced to pay that was in excess of what they should have paid per their agreement or decree.

With my prior experience as an IRS Revenue Officer, and from my review of hundreds of Collection cases in IRS Appeals, I have a solid understanding of IRS Collection procedures. I can anticipate how the ACS (Automated Collection System) or an IRS Revenue Officer will most likely proceed against you to collect a tax deficiency. Fortunately, Congress enacted the 'Due Process" provisions of the Internal Revenue Code (Sections 6320 and 6330) to enable most collection actions to be reviewed by Appeals. These sections require the IRS to issue taxpayers a special notice (referred to as the CDP Notice) and provide taxpayers with important procedural rights when the Internal Revenue Service files a Notice of Federal Tax Lien and when it sends a notice (Letter 1058) that they intend to levy upon the taxpayer's property or right to property

Employees at the several service centers can contact taxpayers and attempt to get them to pay what is owed by either full payment or an installment agreement (payment plan). These employees generally are assigned the simplere cases.

This is the most common method used by the IRS to collect money from delinquents. The system issues a series of notices to the taxpayer - each one more serious than the last, and eventually if the taxpayer has not responded, the ACS system will locate assets of the taxpayer and send out levies (attachments) to get money from the taxpayer or third parties (such as banks or employers).

These are field employees who actually visit taxpayer's homes and businesses with the focus of collecting what is due on the delinquent account. They generally handle the larger cases, including businesses that have income, employment or excise tax liabilities.

In a tax controversy collection situation, you can file an IRS appeal to any of the following IRS collection enforcement actions:

As your advocate and a tax resolution specialist, I can advise you on the choice of appeal (CAP or CDP - the difference is discussed later) and represent you t onegotiate the best deal in the resolution of your tax controversy.

If the taxpayer timely requests a CDP hearing, IRS Appeals will consider the case and render a written determination concerning the appropriateness of the IRS tax lien filing or proposed IRS levy. In filing the appeal, it is critical that you or your representative identify all of your reasons for disagreement with the IRS Collection action as you generally cannot raise additional arguments later. If the taxpayer does not agree with the IRS Appeals Officer's or IRS Settlement Officer's determination, the taxpayer has the opportunity to seek judicial review in the United States Tax Court.

The timing of your IRS appeal is critical! If a taxpayer does not request a CDP hearing within the statutory 30-day period, (from the date of the 1058 letter), a taxpayer can still request a hearing at a later date. In this circumstance, the IRS provides a hearing equivalent to a CDP hearing. However, if the Appeals' determination in the "Equivalent Hearing" is unfavorable to the taxpayer, the taxpayer will not be entitled to judicial review. This illustrates the need to retain a tax resolution specialist familiar with the IRS appeal procedures to handle your tax controversy resolution.

There is another appeal procedure available for Collection cases called Collection Appeals Program (CAP). CAP is generally much quicker than CDP (which can take several months to resolve in Appeals) and available for a broader range of IRS collection actions. CAP appeals are initiated by the completion of Form 9423. One significant difference between CDP and CAP is that you cannot go to Court if you disagree with the CAP decision.

I have the three-decades of income and employment tax administration experience inside-the-IRS and two decades post-retirement experience to effectively represent you in your tax controversy before the Internal Revenue Service, the Franchise Tax Board or the EDD. The following are just some of the areas where I can help you get through the process:

If any of the above terms are unfamiliar and you would like to learn more about any of them, please click on the following link to the Specific Topics page where these topics and many more are discussed in more depth.