Friday, January 10, 2014

IRS New Fast Track Settlement Program (Or The Audit From Hell)

We very recently concluded the appeals of a tax audit that had dragged out for years. A CPA friend had begun the audit, and he eventually brought me in as a hired gun to represent on selected issues. He was facing a young examiner who – while bright enough – did not have the accounting background or tax experience to understand the waters he had waded into.

I will give you an example. My friend’s firm did the routine bookkeeping for this client. The routine pretty much consisted of tracking bank accounts and notes payable, with no monthly adjustments to Accounts Receivable or Accounts Payable. Those two accounts put the books on an “accrual basis,” so my friend was essentially maintaining the books on a “cash basis.”

At the end of a period (say year-end), he adjusted the books with the following entries:

            Accounts Receivable                              XXXX
                    Revenues                                                 XXXX
            Some Expense Account                         XXXX
                    Accounts Payable                                    XXXX

When I was a young accountant, I saw this bookkeeping more times than I can count.

The examiner came across one of those interim ledgers without revised Accounts Receivable and Accounts Payable, and he charged the client with maintaining two sets of books.

It was one of the few times I seriously considered running an examiner to ground. And yes, I did discuss the matter with the group manager. A charge like that borders on alleging fraud. The client hated (and hates) the IRS, but at no time was there fraud.

The examiner’s inability to comprehend routine bookkeeping alerted me that the audit was going to be rough. It was. Eventually I took over the audit, and my friend was glad to hand it off. To be fair, he is a general practitioner while I have specialized in tax for years. I guess I am more accustomed to beating my head against a wall.

It was a pain. We had complex tax issues, like methods of accounting and tax credits, and the examiner had already stumbled over prosaic stuff.

We tried to force issues away from the examiner and to the group manager. We appeared to have agreement from the manager, only to see issues reappear like some accounting knock-off of The Living Dead.

So now I am looking at the expanded IRS Fast Track Settlement Program. Fast Track has been around for years, but it has been limited to larger companies. The IRS has now expanded the program to smaller businesses and self-employed taxpayers. The program is an alternative to standard dispute resolution arising from an IRS audit.

There are requirements, of course. The issues must be fully developed, which is a fancy way of saying that both sides have presented their reasoning, with supporting authority and footnotes and all that. The taxpayer, the examiner or the group manager can initiate the request, which will go to IRS Appeals.

NOTE: What makes it “fast track” is the change in administrative procedure. Normally I have to wait for the examiner (that is, Examination) to write-up his/her adjustments and submit it in the form of a 30-day letter. I then appeal the 30-day letter. This program instead hauls one or more issues out of Examination and immediately puts it with Appeals. In effect, Examinations and Appeals are working simultaneously and before any of those 30-day or 90-day letters go out. 

If Appeals accepts the request, its goal is to resolve the matter within 60 days.

            COMMENT: Big improvement over the audit from hell.

To be able to respond so quickly, Appeals will not accept certain cases, such as correspondence audits or where Appeals believes the taxpayer has not worked fairly with the IRS.

If you change your mind, you can withdraw from Fast Track.

And, if Appeals decides against you, you still have the traditional Appeals rights you would have had anyway.

How did the audit from hell turn out? Examination wanted over $310 thousand. We went to Appeals. We just settled the case for around $5 thousand. Not bad, except for the tax fees the client had to pay for an audit that ran off the rails. 

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