Tax accountants and tax attorneys have many skills in common, and clients can often choose one or the other for audit representation. In many situations, the combination of both an accountant and a tax attorney can pack a particularly powerful punch. This is particularly so in the typical unagreed income tax audit, which occurs when the taxpayer and IRS revenue agent cannot agree on audit adjustments at the conclusion of an audit.
Internal revenue agents and their managers like to close out their audits as “agreed cases” where adjustments are proposed, the taxpayer provides some additional argument or information, and the adjustment is reduced in some way or the taxpayer concedes certain adjustments entirely. The audit ends with an agreement between the IRS and the taxpayer to any proposed adjustments.
Where the representative is unable to convince the agent to agree to the “returned position” on all issues (in which case the matter would be classified as a “no change audit”), or where the IRS agent refuses to budge at all, the taxpayer has some choices to make -- and it is here where the participation of a tax attorney may make a difference.
Winding down the audit
As the audit in an unagreed case closes down, the practitioner and the examining agent may have a conversation about the next steps. It is up to the taxpayer, again in consultation with the accountant, to say whether or not they want to meet with the agent and the manager or go straight to Appeals. The strength and weaknesses of the client’s case will determine whether or not the client’s money is well-spent visiting with the manager.
Consulting with a tax attorney at this juncture allows the accountant to have an objective discussion on the taxpayer’s “hazards of litigation” by filing a protest letter, which is key because it is generally illegal for the IRS to demand payment, file liens or issue levies against the taxpayer for the tax years under audit while an audit and protest are pending. This is because, in part, the exact amount of the assessment, if any, has yet to be determined.
A decision to protest and stay in the game usually adds a year or more of uncertainty, at the very least, At this point, some clients are so drained by the ordeal of the audit itself they are more than happy to run toward an exit.
Assuming the client wants to go to the next level, the IRS will send the taxpayer and their power of attorney an audit report in the form of a 30-Day Letter. The 30-Day Letter is essentially the agent’s report (and sometimes it isn’t even captioned “this is a 30-Day Letter”) along with paperwork that advises the taxpayer how to concede and how to appeal by filing a protest letter within 30 days (the reason the letter is called a 30-Day Letter) if the adjustments are unagreed.
The obvious first step is the drafting of the protest letter itself. The protest letter is simply a letter to the IRS revenue agent that states the basis for the taxpayer’s disagreement and requests a conference with the Office of Appeals. Often, an attorney is in a better position than the accountant to research the law and come up with legal authorities to support the taxpayer’s position. Attorneys are trained in law school to thoroughly research the law and make sure that any authorities relied upon are up-to-date, relevant, and have not been superseded by some new law. They can also detect errors in the IRS reports where the agent may be relying on outdated or inapplicable case law or inadvertently failed to follow some procedure in the Internal Revenue Manual. Sometimes the attorney may locate a case or ruling that is directly on point facilitating a quicker conclusion.
Extension of time to file a protest
Although the 30-Day Letter says the IRS would like to hear from the taxpayer within 30 days, in practice the 30 days is a soft date and a reasonable extension is often granted.
At times, the agent will agree to an extension simply because the accountant has added a tax attorney to the team and he needs time to get up to speed. Conversely, in the instances where the government refuses to grant an extension of time to respond to the 30-Day Letter, or where the accountant has to rush through a writing on which he wishes he had more time, a newly hired tax lawyer can write a letter and simply call it a supplemental protest letter, which the government will make part of the file for consideration by the Appeals Officer. The tax attorney may recommend a supplemental letter in advance of the conference with the Appeals officer since it is almost always better for a client to resolve an unagreed case in Appeals before the IRS must issue the statutory notice of deficiency. The statutory notice of deficiency, also known as a “90-Day Letter” or “stat notice,” is the taxpayer’s ticket to the Tax Court. A taxpayer must file a petition with the Tax Court within 90 days (or 150 if living abroad) to contest IRS proposed tax adjustments. A supplemental writing may ultimately have an impact on the case and obviate the need for the IRS to issue 90-Day Letter.
Between the issuance of the 30-Day Letter and the 90-Day Letter, the case is in a kind of suspended animation. If the taxpayer defaults and doesn’t respond to the 30-Day Letter, the result is the issuance of a 90-Day Letter, and a whole new dynamic takes over because the case will be moving to the Tax Court and the case is governed almost entirely by the Tax Court’s rules, calendars, customs and practices.
As noted above, the IRS is usually flexible about extending the 30 days to file the protest (but the due date of a 90-Day Letter can never be extended). Once the protest letter is filed, it is incumbent on the government to offer the taxpayer at least a telephone conference, which in turn presents the tax attorney with an opportunity to bring all their resources and abilities to bear, to resolve the matter for the client who may very well be experiencing the most trying time of their entire economic life.
Protest letter as team work
A large number of non-lawyer tax practitioners are entirely capable of writing a good protest letter; however, teamwork with an attorney may produce the best product. The tax attorney can focus on the legal research and writing, while the accountant or tax pro can assemble tables and tax computations for inclusion in the protest. A good protest will serve as a roadmap for the Appeals Officer to write-up a conclusion to the case in favor of the taxpayer, and serve as the spring board for negotiation of a settlement.
Even where the agent and the practitioner disagree as to the facts, it is best to disclose the disagreement in the protest and explain why the agent is wrong. The protest should present the best case and present a solid legal argument why the government should concede. The objective, of course, is to conclude the matter as quickly and efficiently as possible for the taxpayer.
Back in action
Even after a 90-Day Letter is issued either by Appeals or the appropriate compliance office, the accountant and the tax attorney continue to have opportunities to better serve the client by working together.
Once the 90-Day Letter is issued and the taxpayer follows the instructions and files a petition in the Tax Court, IRS Counsel usually has sole jurisdiction of a case. That said, even when the notice is issued by Appeals and current procedures state that cases are generally not sent back to Appeals when they become docketed in the Tax Court, IRS Counsel has the option of getting Appeals back involved in the case. Sometimes a 90-Day Letter is issued solely because the parties did not have sufficient time under the statute of limitations to resolve the case. In such a case, experienced tax practitioners know that once the tax attorney files the petition and the government files its answer, previous settlement talks can be revived with either Appeals and/or Counsel.
As noted, the 90-Day Letter is one of the few “drop dead” IRS notices, the default of which has serious consequences because the taxpayer loses the ability to challenge the IRS pre-assessment. Once the “drop dead” date is defaulted, the IRS is then authorized to bill the taxpayer and take action to collect the assessed tax (including penalties and interest).
The filing of a petition in the Tax Court marks the next opportunity to resolve a case with the possible addition of some new players from the IRS Office of Chief Counsel. One of the first things the IRS docket attorney does with the admin file after the answer is filed is to determine whether or not the case should be referred to Appeals. If Appeals is the office that issued the 90-Day Letter in the first place, the rules provide that Appeals does not have to take the case back, in which case settlement discussions are taken up directly with IRS Counsel.
Whether the case proceeds with IRS Appeals or with IRS Counsel, the accountant or tax pro plays a critical role in working with the tax attorney to formulate a settlement position, in evaluating any IRS settlement offers or counter-offers, and in running tax computations to make sure the dollar impact of any proposed settlement is fully known.
The combination of tax attorney and an accountant or tax practitioner make for an effective team to bring about resolution in an unagreed audit because each brings to the table their respective skills to resolving an IRS controversy. In the end, the client is better served by teamwork.