Hi Dale! Thanks for taking my call this morning. As I mentioned on the phone, IRS has been sending me a demand for payment for tax years wherein I did not even file! I’m very certain that the amount demanded are exceptionally high compared to what I actually earned in those years. I’m not sure what I can do (and how did they determine what I owed for those year where I did not even file a return…?!?)
Every year every taxpayer subject to the US Internal Revenue Code are required to file a tax return. Surprisingly, many people fail to abide by this requirement (many for legitimate reasons, by the way). In some cases, IRS will file what is known as a “Substitute Return”. They do this to aid in their efforts to collect taxes they believe are owed to the United States. Just as surprisingly, these Substituted Returns are almost always in favor of the IRS—in other words, few (if any) deductions, credits, or allowances are made to the gross income. There is more than one way to deal with this situation, and one of those methods is to request an “Audit Reconsideration”.
But Dale, I wasn’t “Audited”.
Right, not in the traditional sense. But by filing the Substituted Return, IRS effectively “audited” you—rejected ALL your claims, credits, deductions, and allowances —and determined your income to be something that maybe it was not. These situations happen often in cases where someone was making a lot of money, likely over a period of several years, and then stopped. The next year was miserable in terms of income. In some cases, income was so low that some folks believed (likely erroneously) that they did not need to file a tax return. The IRS, of course, has no idea what is going on or that income has fallen, so they assume that income is in line with what it was last year (not unreasonable to assume this). So they file a Substituted Return showing massive amounts of income, and—because you failed to make any claims on your own behalf—the return shows nothing to reduce that income. This is essentially an audit! So, one of the tools in our arsenal is to request an Audit Reconsideration by IRS.
To request an Audit Reconsideration, we need to show one or more of the following (per IRS pub 3598, rev. 2/15 “The Audit Reconsideration Process”):
1) We have new information about either your income and/or expenses that IRS did not originally consider;
2) We disagree with the assessment from the audit (you disagree with the amount of tax the IRS claims you now owe);
3) We were not present for the original audit;
4) You moved and never got correspondence from IRS about the audit (substituted return).
Audit Reconsideration consists of several processes:
1) The Initial Request. When you request an Audit Reconsideration, IRS takes it under advisement and thinks about it for a while. They are under no obligation whatsoever to grant your request. They will only grant a request to reconsider an audit report only if there is a reasonable belief that the tax assessment may be wrong. After all, IRS is only authorized to collect the actual taxes that you owe and not a penny more! So they want to get it right. This is why it is important to send information in the initial request to show how they may have gotten their initial assessment wrong—the more info and the higher the quality of that info, the more likely it will be that your request will be granted.
Your reconsideration request will be granted if:
1. You submit information that we have not considered previously
2. You filed a return after the IRS submitted one for you
3. You believe the IRS made a computational or processing error in assessing your taxpayer
4. The liability is unpaid or credits denied (more from IRS pub 3598)
2) The Audit Reconsideration. If IRS grants your request to reconsider their audit results, you will be notified via US mail. If IRS needs more information, they will send you mail requesting whatever information they believe that they need to fully determine the issues you are presenting.
3) The Results of the Reconsideration. IRS will send you one of three outcomes: They accept your dispute and have removed the tax or adjusted it downwards in your favor; they have rejected your dispute and you still owe the original amount, or they have agreed with you in part and have adjusted your tax slightly in your favor to the extent that they agree with your dispute.
There is no timeline for an Audit Reconsideration. Because this is purely an administrative remedy (meaning that this is just IRS’ rules, not a law) IRS has only the timeline it sets for itself within which to make these determinations—initially they promise to respond to your initial request within 30 days after you submit it. There is one timeline that you should be aware of, however: if they ask you for more information, you have 30 days to provide that information or they will reject your dispute and send you back to collections.
4) Appeals. You may have thought that their letter telling you how they decided is the end of the story, but it is not. You have the right to appeal the determination. This will not be an appeal to the US Tax Court, but it will be an appeal in front of an Appeals Officer in the Appeals division of IRS, and they have a lot of discretion in how to settle your dispute.
There are a few benefits to requesting an Audit Reconsideration:
1) Collections are Paused. IRS, under its own guidelines (Policy Statement 220.127.116.11.4, not by law) will stop collections actions while they are considering your request. This includes any period within which you may have a case pending for appeal, which can often last several months.
2) Appeals. You can appeal the final determination, which has several benefits listed above. Your dispute can be heard and considered by more than one person or a single division within IRS.
3) Time. It can take anywhere from 30 days to several months (maybe even over a year if appealed) for this to resolve. Having collections paused for that long is quite beneficial, especially if you could end up with an abated tax assessment.
You cannot request (rather, your request will be summarily denied) if:
1) You have already paid the full amount of the tax claimed. In that case, you will be required to request a refund of the overpayment of the tax;
2) Your tax has been determined through litigation, such as in front of the US Tax Court; or
3) You have previously agree to the tax amount, or to pay the tax by signing various IRS forms agreeing to liability and/or payment.
BOTTOM LINE: Audit Reconsideration is not the most powerful tool in your arsenal, but it can be quite effective to achieve certain goals, especially if other tools go away due as a result of procedural deadline expirations. It is a very effective way to get to a place where you can get to a place within IRS where you will have expanded flexibility to resolve and settle disputes.
Your tax problems are solvable, and I know exactly how to help you get the best results for you in your situation. Having the advice and guidance from a seasoned and experienced professional—both as a CPA and as a licensed tax litigator (for decades) could tip the balance in your favor.