Taxation Basics
Every taxpayer in the United States faces the possibility of being audited by the Internal Revenue Service. The IRS has the right to conduct an audit within three years of a return's due date or filing date, whichever is later. The IRS can also audit a taxpayer beyond the three year period when no return was filed, there are allegations of fraud, or if the IRS charges the taxpayer with substantially omitting or concealing income.
A lawyer can provide professional help when a taxpayer is contacted by the IRS about an audit. This is especially important when the taxpayer is not only being audited, but may be the target of a criminal investigation.
When auditing a return, the IRS may seek to examine books, papers, and other records or documents, including those in the possession of financial services institutions such as banks or savings and loan associations.
What Rules Apply to IRS Audits?
There are limits to the authority of the IRS to examine a taxpayer's financial records during an audit. Though the IRS has the ability to issue a summons to witnesses (both taxpayers and others), it must seek a court order to enforce it. A lawyer can assist in deciding whether to challenge the attempt by the IRS to question certain people or obtain certain information.
During an audit, the taxpayer has the opportunity for an informal conference. If, after this conference, the taxpayer is still not prepared to accept the amount of tax claimed by the IRS, the taxpayer can initiate an independent review by the Appeals Division of the IRS. This appeal must be filed within 30 days after receipt of the "30-day letter" from the IRS notifying the taxpayer of the right to appeal the IRS's proposed changes to the taxpayer's return.
If the taxpayer does not respond to the 30-day letter, or if independent review by the appeals division did not yield a settlement, the IRS will send a "90-day" letter, which is also called a deficiency notice. The taxpayer also has the right to request this letter earlier, if they decide to bypass further administrative review in the Appeals Division. In any case, once this letter is received, a taxpayer has 90 days to file a petition with the U.S. Tax Court challenging the IRS's proposed changes to the tax return. (The time is 150 days if the taxpayer is outside of the United States.) A lawyer can provided valuable counsel to the taxpayer on the likelihood of success with this petition.
Who Has the Burden of Proof in Tax Controversies?
In the U.S. Tax Court, the burden of proof is on the IRS, not the taxpayer, due to a law passed by Congress in 1988. For the burden of proof to shift from the taxpayer to the IRS, however, the taxpayer must meet certain requirements. The taxpayer must:
- Substantiate all claimed items
- Maintain adequate records (receipts, journals, etc.)
- Cooperate with the IRS at all stages
A lawyer can help the taxpayer understand what qualifies as credible evidence in order to meet these requirements and shift the burden of proof to the IRS.
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