The Examination Process
The Internal Revenue Service (IRS) accepts most federal returns as filed. Some returns, however, are examined, or audited, to determine if income, expenses, and credits are reported accurately.
This publication discusses general rules and procedures we follow in examinations. It explains what happens before, during, and after an examination. It also explains appeal and payment procedures.
As a taxpayer, you have the right to fair, professional, prompt, and courteous service from IRS employees, as outlined in the Declaration of Taxpayer Rights found on page 3.
We must follow the tax rules set forth by Congress in the
Internal Revenue Code. We also follow Treasury Regulations, court decisions, and other rules and procedures written to administer the tax laws.
If the examination results in a change to your tax liability, you may ask us to reconsider your case. Some reasons why we may reconsider your case include:
You are submitting additional information that could result in a change to the additional amount we have determined that you owe;
You are filing an original delinquent return after we have determined that you owe an additional amount, or;
You are identifying a mathematical or processing error we made.
You must request reconsideration in writing and submit it to your local IRS office.
Before the Examination
The IRS accepts most taxpayers’ returns as filed. If we inquire about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. We may close your case without change or you may receive a refund.
The process of selecting a return for examination usually begins in one of two ways. One way is to use computer programs to identify returns that may have incorrect amounts. The programs may be based on information returns, such as Forms 1099 or W-2, on studies of past examinations, or on certain issues identified by other special projects. Another way is to use information from compliance projects that indicates a return may have incorrect amounts. These sources may include newspapers, public records, and individuals. If we determine the information is accurate and reliable, we may use it to select a return for examination.
Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, explains the rules and procedures that we follow in examinations. The following sections give an overview of how we conduct examinations.
During the Examination
Examinations by Mail
Some examinations are conducted entirely by mail. If the examination is conducted by mail, you’ll receive a letter from us asking for additional information about certain items shown on your return, such as income, expenses, and itemized deductions.
If the examination is conducted by mail, you can:
1. Act on your own behalf. (In the case of a jointly filed return, either spouse can respond or both spouses can send a joint response.)
2. Have someone represent you in correspondence with us. This person must be an attorney, accountant, enrolled agent, an enrolled actuary, or the person who prepared the return and signed it as the preparer.
Examinations in Person
An examination conducted in person begins when we notify you that your return has been selected. We will tell you what information you need to provide at that time. If you gather the information before the examination, we may be able to complete it more easily and in a shorter time.
If the examination is conducted in person, it can take place in your home, your place of business, an IRS office, or the office of your attorney, accountant, or enrolled agent (a person enrolled to practice before the IRS). If the time or place is not convenient for you, the examiner will try to work out something more suitable.
If the examination is conducted in person, you can:
1. Act on your own behalf. (In the case of a jointly filed return, either spouse or both can attend the interview.) If you are acting on your own behalf, you may leave to consult with your representative. We will suspend the interview and reschedule the examination. We cannot suspend the interview if we are conducting it as a result of your receiving an administrative summons.
2. Have someone accompany you, either to support your position or to witness to the proceedings.
3. Accompany someone who will represent you. This person must be an attorney, accountant, enrolled agent, an enrolled actuary, or the person who prepared the return and signed it as the preparer.
4. Have your representative act for you and not be present at the audit yourself. If you choose to have someone represent you in your absence, you must furnish us with written authorization. Make this authorization on Form 2848, Power of Attorney and Declaration of Representative.
How to Stop Interest from Accumulating
During your examination, if you think you will owe additional tax at the end of the examination, you can stop interest from accumulating by paying all or part of the amount you think you will owe. Interest will stop accumulating on the part you pay when the IRS receives your money. Interest will only be charged on the tax, penalties, and interest that are unpaid on the date they are assessed.
Consents to Extend the Statute of
We try to examine tax returns as soon as possible after they are filed, but occasionally we may request that you extend the statute of limitations of your tax return.
A return’s statute of limitation generally limits the time we have to examine it and assess tax. Assessments of tax must be made within 3 years after a return is due or filed, whichever is later. We can’t assess additional tax or make a refund or credit (unless you filed a timely claim) after the statute of limitations has expired. Also, if you disagree with the results of the examination, you can’t appeal the items you disagree with unless sufficient time remains on the statute. Because of these restrictions, if there isn’t much time remaining to examine your return, assess additional taxes, and/or exercise your appeal rights, you have the opportunity to extend the statute of limitations. This will allow you additional time to provide further documentation to support your position, request an appeal if you do not agree with our findings, or to claim a tax refund or credit. It also allows the Service time to complete the examination, make any additional assessment, if necessary, and provide sufficient time for processing.
A written agreement between you and the Service to extend the statutory period of a tax return is called a “consent.” Consents can be used for all types of tax except estate tax.
There are two basic kinds of consent forms. One sets a specific expiration date for the extension, and the other for an indefinite period of time. Either type of consent may be limited by restrictive conditions. The use of a restricted consent is to allow the statute to expire with regard to all items on the return except those covered by the restrictive language.
If the statute of limitations for your tax return is approaching, you may be asked to sign a consent. You may:
Refuse to extend the statute of limitations;
Limit or restrict the consent to particular issues, or
What To Do If You Agree or Disagree with the
If You Agree
If you agree with a proposed increase to tax, you can sign an agreement form and pay any additional tax you may owe. You must pay interest and applicable penalties on any additional balance due. If you pay when you sign the agreement, interest is generally figured from the due date of your return to the date of your payment.
If you do not pay the additional tax and interest, you will receive a bill (See “What To do When You Receive a Bill from the IRS” on page 4.) If the amount due (including interest and applicable penalties) is less than $100,000 and you pay it within 21 business days, we will not charge more interest or penalties. If the amount is $100,000 or more, the period is reduced to 10 calendar days. If you can’t pay the tax due at the end of the examination, you may pay whatever amount you can and request an installment agreement for the balance.
(See “Setting up an Installment Agreement” on page 7.)
If you are entitled to a refund, you will receive it sooner if you sign the agreement form at the end of the examination. You will also be paid interest on the refund.
If You Do Not Agree
If you do not agree with the proposed changes, the examiner will explain your appeal rights. If your examination takes place in an IRS office, you may request an immediate meeting with the examiner’s supervisor to explain your situation. You may also enter into an Agreement to Mediate to help resolve disputes through Fast Track Mediation services. (See next column.) Mediation can take place at this meeting or afterwards. If an agreement is reached, your case will be closed.
If you cannot reach an agreement with the supervisor at this meeting, or if the examination took place outside an IRS office or was conducted through correspondence with an IRS Campus employee, the examiner will prepare a report explaining your position and ours. The examiner will forward your case to the Area office for processing .
You will receive:
A letter (known as a 30-day letter) notifying you of your rights to appeal the proposed changes within 30 days,
A copy of the examiner’s report explaining the proposed changes, and
An agreement or a waiver form.
You generally have 30 days from the date of the 30-day letter to tell us whether you will accept the proposed changes or appeal them. The letter will explain what steps you should take, depending on what action you choose. Be sure to follow the instructions carefully. Appeal rights are explained following this section.
If you do not respond to the 30-day letter, or if you respond but do not reach an agreement with an appeals officer, we will send you a 90-day letter, also known as a Notice of Deficiency. This is a legal document that explains the proposed changes and the amount of the proposed tax increase. You will have 90 days (150 days if it is addressed to you outside the United States) from the date of this notice to file a petition with the Tax Court. If you do not petition the Tax Court you will receive a bill for the amount due.
Fast Track Mediation Services
If you do not agree with any or all of the IRS findings, you may request Fast Track Mediation services to help you resolve disputes resulting from the examination (audits). Fast Track Mediation offers an expedited process with a trained mediator, who will help facilitate communication, in a neutral setting. The mediator will work with you and the IRS to understand the nature of the dispute. The purpose is to help the two of you reach a mutually satisfactory resolution that is consistent with the applicable law. The mediator has no authority to require either party to accept any resolution. You may withdraw from the mediation process anytime. If any issues remain unresolved you will retain all of your usual appeal rights.
Most cases qualify for Fast Track Mediation. To begin the process, you may request the examiner or IRS representative to arrange a mediation meeting. Both you and the IRS representative must sign a simple Agreement to Mediate form. A mediator will then be assigned. Generally, within a week, the mediator will contact you and the IRS representative to schedule a meeting. After a brief explanation of the process, the mediator will discuss with you when and where to hold the mediation session.
For additional information, refer to Publication 3605, Fast Track Mediation-A Process for Prompt Resolution of Tax Issues.
How Do You Appeal a Decision?
Because people sometimes disagree on tax matters, the
Service has an appeal system.Most differences can be settled within this system without going to court.
Your reasons for disagreeing must come within the scope of tax laws, however. For example, you cannot appeal your case based only on moral, religious, political, constitutional, conscientious, or similar grounds.
If you do not want to appeal your case within the IRS, you may take your case directly to tax court.
Appeal Within the IRS
You may appeal our tax decision to a local appeals office, which is separate and independent of the IRS Office taking the action you disagree with. An appeals office is the only level of appeal within the IRS. Conferences with Appeals Office personnel may be conducted in person, through correspondence, or by telephone with you or your authorized representative
If you want to have a conference with an appeals officer, follow the instructions in the letter you received. We will send your conference request letter to the appeals office to arrange for a conference at a convenient time and place. You or your qualified representative should be prepared to discuss all disputed issues at the conference. Most differences are settled at this level. Only attorneys, certified public accountants or enrolled agents are allowed to represent a taxpayer before Appeals. An unenrolled preparer may be a witness at the conference, but not a representative.
If you want to have a conference with an appeals officer, you may also need to file either a small case request or a formal written protest with the contact person named in the letter you receive.
Whether you file a small case request or a formal written protest depends on several factors.
Making a Small Case Request
You may make a small case request if the total amount of tax, penalties, and interest for each tax period involved is $25,000 or less, and you do not meet one of the exceptions below for which a formal protest is required. If more than one tax period is involved and any tax period exceeds the $25,000 threshold, you must file a formal written protest for all periods involved. The total amount includes the proposed increase or decrease in tax and penalties or claimed refund. For an Offer-in-Compromise, include total unpaid tax, penalty, and interest due.
To make a small case request, follow the instructions in our letter to you by sending a brief written statement requesting an appeals conference. Indicate the changes you do not agree with and the reasons you do not agree with them.
You must file a formal written protest y If the total amount of tax, penalties, and interest for any tax period is more than $25,000;
In all partnership and S corporation cases, regardless of the dollar amount;
In all employee plan and exempt organization cases, regardless of the dollar amount;
In all other cases, unless you qualify for other special appeal procedures, such as requesting appeals consideration of liens, levies, seizures, or installment agreements.
(See Publication 1660, Collection Appeal Rights, for more information on special collection appeals procedures.)
Filing a Formal Protest
When a formal protest is required, send it within the time limit specified in the letter you received. Include in your protest: y Your name and address, and a daytime telephone number.
y A statement that you want to appeal the IRS findings to the Appeals Office.
y A copy of the letter showing the proposed changes and
findings you do not agree with (or the date and symbols from the letter.) y The tax periods or years involved.
y A list of the charges that you do not agree with, and why you do not agree.
y The facts supporting your position on any issue that you do not agree with. y The law or authority, if any, on which you are relying.
y You must sign the written protest, stating that it is true, under the penalties of perjury as follows:
“Under the penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete.”
If your representative prepares and signs the protest for you, he or she must substitute a declaration stating:
y That he or she submitted the protest and accompanying documents and;
y Whether he or she knows personally that the facts stated in the protest and accompanying documents are true and correct.
We urge you to provide as much information as you can, as this will help us speed up your appeal. This will save you both time and money.
Additional information about the Appeals process may be found in Publication 5, Your Appeals Rights and How to Prepare a Protest if you Don’t Agree.
After the Examination
You cannot pay all that you owe now
If you cannot pay all your taxes now, pay as much as you can. By paying now, you reduce the amount of interest and penalty you owe. Then immediately call, write, or visit the nearest IRS office to explain your situation. After you explain your situation, we may ask you to fill out a Collection Information Statement. If you are contacting us by mail or by telephone, we will mail the statement to you to complete and return to us. This will help us compare your monthly income with your expenses so we can figure the amount you can pay. We can then help you work out a payment plan that fits your situation. This is known as an installment agreement.
Payment by credit card
Individual taxpayers may make credit (and debit) card payments on tax liabilities (including installment agreement payments) by phone or Internet. Payments may be made to the United States Treasury through authorized credit card service providers.
The service providers charge a convenience fee based on the payment amount. You will be informed of the convenience fee amount before the credit card payment is authorized. This fee is in addition to any charges, such as interest, that may be assessed by the credit card issuer. Visit www.irs.gov to obtain a list of authorized service providers and to obtain updated information on credit card payment options.
Note: You can use debit cards issued by VISA and MasterCard when making tax payments through the participating service providers. However, the service providers and card issuers treat debit cards and credit cards equally for the purpose of processing electronic tax payments. Therefore, debit card users are charged the same fee traditionally associated with credit card transactions
Payment by Electronic Federal Tax Payment System (EFTPS)
EFTPS is an Electronic Federal Tax Payment System developed by the Internal Revenue Service and Financial Management Service (FMS).
The system allows federal taxes to be paid electronically. The system allows the use of the Internet at www.eftps.gov or telephone to initiate tax payments directly. EFTPS payments may also be made through your local financial institution. The service is convenient, secure and saves time.
You may enroll in EFTPS through the website at www.eftps.gov or by completing a form available from EFTPS customer service at (800) 555-4477 or (800) 945-8400.
Setting up an installment agreement
Installment agreements allow you to pay your full debt in smaller, more manageable amounts. Installment agreements generally require equal monthly payments. The amount and number of your installment payments will be based on the amount you owe and your ability to pay that amount within the time we can legally collect payment from you.
You should be aware, however, that an installment agreement is more costly than paying all the taxes you owe now. Like revolving credit arrangements, we charge interest on the unpaid portion of the debt. Penalties also continue to accumulate on installment agreements.
If you want to pay off your tax debt through an installment agreement, call the number shown on your bill. If you owe:
y $25,000 or less in tax, we will tell you what you need to do
to set up the agreement;
y More than $25,000, we may still be able to set up an installment agreement for you, but we may also ask for financial information to help us determine your ability to pay.
Even if you set up an installment agreement, we may still file a Notice of Federal Tax Lien to secure the government’s interest until you make your final payment.
Note: We cannot take any collection actions affecting your property while we consider your request for an installment agreement, while your agreement is in effect, for 30 days after we reject your request for an agreement, or for any period while you appeal the rejection.
If you arrange for an installment agreement, you may pay with:
y Personal or business checks, money orders, or certified
funds (all made payable to the U.S. Treasury),
y Credit and debit cards,
y Payroll deductions your employer takes from your salary and regularly sends to IRS, or
y Electronic transfers from your bank account or other similar
Apply for an Offer-in-Compromise
In some cases, we may accept an Offer-in-Compromise to settle an unpaid tax account, including any penalties and interest. With this kind of arrangement, we can accept less than the full amount you owe when it is doubtful we will be able to collect the entire amount due.
Offers in compromise are also possible if collection action would create an economic hardship. You may want to discuss these options with your examiner.
Temporarily Delay the Collection Process
If we determine that you can’t pay any of your tax debt, we may temporarily delay collection until your financial condition improves. You should know that if we delay collecting from you, your debt will increase because penalties and interest are charged until you pay the full amount. During a temporary delay, we will again review your ability to pay. We may also file a Notice of Federal Tax Lien, to protect the government’s interest in your assets. See Publication 594, The IRS Collection Process.
After the Examination (cont.)
Innocent Spouse Relief
If you filed a joint tax return, you are jointly and individually responsible for the tax and any interest or penalty due on the joint return, even if you later divorce. In some cases, a spouse may be relieved of the tax, interest, and penalties on a joint return.
You can ask for relief no matter how small the liability.
Three types of relief are available.
Innocent spouse relief - may apply to all joint filers;
Separation of liability - may apply to joint filers who are divorced, widowed, legally separated, or have not lived together for the past 12 months;
Equitable relief - applies to all joint filers.
Innocent spouse relief and separation of liability apply only to items incorrectly reported on the return. If a spouse does not qualify for innocent spouse relief or separation of liability, the IRS may grant equitable relief.
Each type of relief is different and each has different requirements. You must file Form 8857, Request for Innocent Spouse Relief, to request any of these methods of relief. Publication 971, Innocent Spouse Relief, explains each type of relief, who may qualify, and how to request relief.