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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