What Are Your Options After An Audit?
May 5, 2016
It was one of the worst experiences of your life. You were audited. You had to go into a Federal Building with all your books, records and receipts, and your livelihood, business and privacy was intruded upon. The IRS examiner may even have inspected your home if you have a home office.
The examination was terrible, and now its done. Four weeks later, you receive a report in the mail saying you understated your tax liability by $24,000. The examiner does not believe that the office in your home is really used for business, or that your car and truck expenses were valid.
What are your options? You could of course pay the balance. Bite the bullet and end this nightmare. (The financial nightmare does not end, because you still have to pay the balance, including penalties and interest). Your other option is to pay the balance, and sue the IRS in Federal District court. A valid option, but what if you don’t have $31,000 ( what?! I thought it was $24,000?? No, you forgot about the penalties and interest) to pay the balance? Your other option is filing a petition with the United States tax court.
Once the IRS issues you a notice of deficiency, you have 90 days to file a petition in the United States tax court. Be sure to meet this deadline, because if you miss the deadline, the tax court will no longer have jurisdiction over your case, and the balance will be assessed against you.
In your petition you state that you disagree with the IRS report disallowing your home office and your vehicle expenses. And tell them you don’t agree with those penalties either!
Once you file your petition, the IRS has 60 days to provide you with an answer. In true IRS fashion, their answer will just deny that they are wrong. Your case will then be docketed, and a trial date will be set.
The IRS does not really want to go to court either. It costs them money, and they like to take money, not spend money.(The spending is for all the other government branches). Also, if they lose the case, it sets a precedent which other taxpayers may follow.
You then receive a letter from the IRS Office of Appeal. They tell you they are fair and impartial and want to setup a conference to try and settle the case. You meet with the appeals officer, who seems slightly nicer than the examiner who was checking out the wardrobe in your home. She decides the office in your home is possibly valid, and you may have had a few business miles, you potentially only owe $14,000. And maybe those penalties are a little unreasonable. If you pay the tax liability and the interest, for a total liability of $16,000, they will be willing to settle the case.
Do you keep fighting? Depending on your circumstances, maybe you feel like you do not owe the IRS anything, and you get ready for your court date. Or maybe you think this is a good deal, better than losing in court and having to pay the larger tax liability. The important thing to know is that as a taxpayer you have options if you choose to dispute a proposed increase to your tax liability.