For most people, when their income tax returns are being selected for examination by the IRS, their first reaction is panic. No need to worry. In such a situation, you should know what to do next, what to expect next, and your rights. This article provides a brief description of the steps taken during a tax return examination and your protected rights.
First, your return may be examined by the IRS for a variety of reasons. Being selected for examination does not necessarily suggest that something is wrong with your return. The examination generally begins with the IRS sending you a notice letting you know that your return is being examined. The notice should contain some explanation of proposed changes to your return.
At this point, you may decide to deal with the IRS by yourself, or you may decide to hire someone, such as an attorney or a CPA, to represent you.
If you agree with the proposed adjustments in the notice, then you generally can sign an agreement, pay the additional amount due (or receive a refund), and you are done.
If you do not agree with the proposed adjustments, then generally, the IRS examiner will write up your case. In the write-up, the examiner will explain your position and the examiner’s position. Your case will be submitted for processing.
Within a few weeks, you will receive a so called “30 day letter” from the IRS. This letter tells you that you have the right to appeal your case within 30 days from the date of the letter. There is an appeals’ system within the IRS itself. You can appeal your case to an Appeals Office which is independent to the IRS office that took the initial examination.
If an agreement is reached on the appeals’ level, then you are done.
However, if an agreement is not reached, then the IRS will send you a “90-day letter,” which is also called a Notice of Deficiency. Usually, within 90 days of receipt of the letter, you can take your case to the United States Tax Court. The Tax Court will ultimately resolve your tax issue.
More information of the examination procedures can be found in the IRS Publication 556: http://www.irs.gov/publications/p556/ar02.html
As you can imagine, each of the steps might involve analyzing highly complex tax laws. You should consider engaging tax counsel if your return is being selected to be examined.