Many of you small business owners out there will at some point or another will be audited by the IRS. If your audit concludes with what you believe to be an incorrect application of the law to the facts in your specific case you should have the professional who prepared your tax return file a “protest” with the IRS Appeals Division. What is the IRS Appeals Division you ask? First and foremost IRS Appeals is not in the business of examining your tax return and reviewing for example the cancelled checks to support your expense deductions. The IRS Appeals Division rather is an elite group of experts, who ultimately report directly to the Commissioner. Appeals will very effectively and efficiently look at the results of your field examination audit and based on the “protest” prepared by your tax professional will make a determination as to whether or not the law was properly applied to the facts in your unique case . So if you have IRS examination tax liability stay with us here on TaxView with Chris Moss CPA to learn how to defend your business by skillfully applying the law to your unique facts before the IRS Appeals Division.
IRS promulgated Treasury regulation Section 601.106 provides and sets forth the entire framework for Appellate IRS practice. The IRS says all taxpayers have the “guaranteed right” to appeal as does the Taxpayer Bill of Rights but there is not an IRS Code Section that I can find that guarantees an absolute right to appeal. In fact, as underscored in the Estate of Weiss v IRS 90 Tax Court 566 (2005), while 26 U.S. Code § 7123 Appeals dispute resolution requires the Secretary to prescribe procedures by which any taxpayer may request early referral to the Office of Appeals, Federal law does not guarantee the taxpayer's right to appeal as it does so with the taxpayer's right to appeal to the US Tax Court. See Nina Olson testimony before the House Ways and Means and Joint Committee on Taxation May 19, 2005.
So if the Appeals process is not a guaranteed right, what exactly is Appeals? In my experience, appellate procedure within the IRS can be a positive cordial experience that ultimately saves both the Government and the taxpayer time and money. While the appeals process initially follows a somewhat structured path, there is invariably very informal discussions between your tax attorney, the examination division and ultimately the appeals officer.
You also now have the choice of a Fast Track Settlement by filing Form 14017 along with your written statement to your IRS appeals office detailing your position in writing on disputed issues. You may want to consider Fast Track for a quick easy compromised resolution if your facts are not contemporaneous and your intent years earlier was not easily established by the facts at that time.
Why are contemporaneous facts so valuable in establishing intent to the Courts? Contemporaneous facts, not self-serving testimony given years later, are important in establishing your intent, opines Chief Judge Phillips, in Philhall Corp. v. United States, 546 F.2d 210, 215 (6th Cir. 1976). If whoever prepared your tax return did not include contemporaneous facts in the tax return itself then at least your tax professional who prepared your tax return has a chance to compromise your tax liability through Fast Track.
For those of you who have the contemporaneously established facts that can be applied to Federal law, then you might be better off if your Tax Attorney files a more formal Protest either prepared on Form 12203 or prepared in a US Tax Court Petition type format. For example let’s take a look at a typical audit examination where the IRS agent is focusing on your rather larger than normal “office expense” deductions.
During the examination phase taking place in 2015 of your 2011 Form 1065 partnership return the IRS agent disallowed all your office expense claiming that he found substantial capital assets in office expenses that should have been capitalized. Specifically he found you purchased 20 ink jet printers at $200 each for a total of $4,000. You told the agent you decided to expense all capital purchases under $500 and record them in office expense, but both the agent his group manager declined to concede to you the deduction. All parties agreed the case was ripe for Appeal.
On Appeal your tax attorney argued that Federal law enacted in 2011 allowed for uniform expensing of capital assets for amounts that are less than $500. The Appeals Officer asked if you could establish this fact contemporaneously from 2011 records and did the law in effect at that time support your tax position taken on your tax return? As it turns out you were advised by your tax attorney in 2011 to contemporaneously include in your tax return an explanation of your $500 policy. Your tax attorney said to the Appeals Officer that such a $500 policy was created as a legal and reasonable tax strategy in accordance with Temporary Regulation 1.263(a)-2T(g). In fact, the Appeals Officer acknowledged that you had included this information in the Protest he received from you and that indeed you had a written policy in place as per disclosure in your 2011 tax return that all capital expenses less than $500 would be expensed as office expense. The Appeals Officer then noted that the temporary regulation in effect in 2011 were eventually made permanent by the IRS as fully detailed in Internal Revenue Bulletin 2013-43 issued October 21, 2013. The Appeals Officer looked one more time at your extemporaneous facts as applied to the law in your Protest and agreed that your tax position was justified, legal and reasonable. He recommended to the Commissioner that the Government concede this issue and that the examination agent's report be adjusted with no tax due. You win, IRS losses.
So what does all this mean for you? First, always include extemporaneous evidence or “facts” to support your tax positions in your tax return prior to filing. Second, make sure your tax return preparer stands by her work and agrees in writing to represent you before the IRS all the way up at least the Appeals level to fight and defend the positions she took on your tax return. Finally, if and when there is ever an IRS audit coming your way, make sure your professional tax team has credentials and expertise to battle back and defend against the IRS adverse examination adjustments by either filing for Fast Track or submitting a formal Protest to Appeals. Remember, if you have the facts and law on your side an IRS Appeal may be just what your Tax Attorney ordered for safety and tax free living for many years to come.
Thank you for joining us on TaxView with Chris Moss CPA.
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Chris Moss CPA