TAX CONTROVERSY: PART I – OVERVIEW
So, you’re having some trouble with the IRS or the Department of Revenue. They are challenging something(s) in your return, and now you are faced with hours of time and energy dealing with one or both of those offices. Depending upon where you are in the process, you will likely work with an accountant, a tax attorney or both. The purpose of this article is to provide an overview of the process, which is referred to as “tax controversy,” so you will have an idea of what to expect and can make wise, cost-effective decisions about how to proceed.
Let’s face it. Once you receive notice of some problem with your return, your first thought is to get the controversy over with as quickly and inexpensively as possible, right?
Of course you do. You don’t have time for this. The tax authorities know you do not have time or patience, and they may give you the quick and easy option, which is to just accept their changes and pay the assessment.
If you are okay with the proposed change(s), you may be better off taking this route. If you are reading this article, however, you likely are unexcited about the price tag and/or you think the tax authority’s position is clearly wrong.
So, now you need to consider putting up some resistance. Here are the stages.
Audit: 30-Day Letter
It starts with the examination phase. The tax agent has flagged your return and sends a letter (i) stating the issues of concern, and (ii) requesting supporting documentation. At this stage, things are ostensibly friendly. You can send in the additional information, you can ask for a office/ phone conference with the reviewing tax agent, and/or you can discuss the matter with the examiner’s supervisor.
This is the first time you will have to consider working with a professional. You definitely should make the accountant who prepared the return aware of the review without delay. The accountant will tell you how much or how little he/she can do and the cost of the extra work.
Now, if the accountant made a mistake with the return, which is what caused the file to be flagged, then you might expect the assistance to be provided at minimal or no expense to you. The question is whether or not you will know if it was the accountant’s mistake . . .
You want to control the expense of this process, so do have that important conversation with your accountant and discuss the most expedient way to get it over with. Just bear in mind some important limitations:
- Your accountant is not an attorney. None of your communications with the accountant are privileged. Whatever you reveal to your accountant is “discoverable,” which means the IRS can force the accountant to disclose documentation you have provided and, even, the contents of discussions you have had. There is no confidentiality.
That is why a lot of accountants are reluctant to give tax advice—which only an attorney can do—or even delve too much into strategy decisions. By and large, accountants prefer to be “bean-counters” who simply put the information you provide them into the correct forms. It just makes sense. They cannot afford to expose themselves to liability.
- Flow of Information. An attorney has the authority and expertise to determine what information can properly be withheld from the tax agent. Naturally, you want to control the costs related to getting through the audit, but you should also give careful consideration to controlling the information provided to the tax authority. Your accountant may want to turn over anything and everything and is probably not going to give you advice about the possible consequences of disclosing the information. Even tax planning attorneys are typically unfamiliar with rules of evidence and procedure. That is fair enough, they are not litigators. They do not deal with that part of tax practice.
The suggestion here is not that you immediately seek out a tax litigator for representation in the tax controversy, but you do need to make a conscious risk-reward analysis.
If it appears you are in for a long haul, or that failing to control the flow of information will broaden the scope of the investigation—thereby opening the door to much greater liability—then you would certainly benefit from an initial consultation with an attorney before you start turning over documents to the tax agent.
In any event, you will go back and forth with the examining agent and either come to an agreement or not. The agent will send you what is commonly referred to as a “30-Day Letter.” If you accept the terms in the letter, then the experience is over—for that year, at least—and you will be a little wiser in the future.
Then again, you may not reach an acceptable resolution. In that case, you have an important decision to make. Here are your options:
- Pay the assessment set forth in the 30-Day Letter, and then file a Claim For Refund;
- File a protest with the Appeals Office; or
- File a petition with the Tax Court.
Each choice has advantages and disadvantages, which will be explored in detail in the upcoming parts to this series. For our purposes today, just be aware of the key stages of tax controversy and the decisions you must take during the examination phase.
 You probably also have the option to speak with an appeals officer, but that may be a bit premature at this stage.
 The document is formerly called the “Revenue Agent’s Report” or “RAR.”