Most taxpayers dread the thought
of receiving a letter in the mail
from the IRS or the state taxing authority. If it happens to you, the first
thing not to do is throw it in a pile.
“Address the letter immediately,” advises Walter M. McGrail, JD, CPA, senior
manager at Cendrowski Selecky PC.
“Failure to respond before the given deadline can have serious consequences.”
There is a specific process to follow,
and if you adhere to it, the matter should
be able to be resolved in a reasonable
amount of time. There are instances,
however, when professionals are better
suited to reply to and handle inquiries
than the average taxpayer. The key is to
know when you need help.
Smart Business asked McGrail to
provide guidance on responding to such
letters.
What should a recipient do first?
First, open the letter. Confirm that it is
indeed meant for you. Does it state your
name, taxpayer identification number,
the tax year and type of tax in question?
Does the matter look like something you
can resolve quickly? Next, look at the
deadline for responding. If you know
you can’t comply with the deadline, call
anyway to acknowledge the letter. In
almost every instance, the taxing authority will place a hold on collection activity and grant you an extension if you ask
for more time. At all times, don’t ever
voluntary give more information than
you are asked for. Taxing authorities can
and will use anything they hear or see to
expand the scope of the inquiry if they
think it is warranted.
When is professional assistance required?
Unless you’re dealing with a simple
1040 personal return, it’s generally recommended that you seek professional
help. If you’re dealing with any type of
business return (partnership, LLC, corporation), find an expert. First, contact
the person who prepared the returns. If
you aren’t comfortable with them or
have disengaged them, find another
expert the same way you’d seek any
other service provider — do an Internet
search, go by word-of-mouth, contact
your local accounting societies (e.g.,
Michigan Association of CPAs).
How do I designate a representative to
assist me with the taxing authority?
Filing a Form 2848, Designation of a
Representative, will give your CPA
power of attorney and grant him or her
the power to contact the tax authority
and try to resolve the issue. When you
first show your letter to a CPA, he or she
can determine whether the matter can
be responded to quickly or whether it is
worth pursuing. If it needs to be pursued, the power of attorney will authorize the CPA to meet with the taxing
authority and enter into agreements that
may become binding.
What will the CPA do?
If it involves a quick response, the CPA
will restate the issue as to how he or she
sees it on the notice and provide some
type of response, be it factual or in reference to a law, etc., and reply with a letter. The letter will ask for a remedy. For
example, ‘We agree we owe the tax; can
the penalty be eliminated?’ If the matter
is more complicated, the CPA may ask
the taxing authority to come to his or her
office for an in-person meeting.
If the taxing authority is right, will I have to
pay taxes, interest and penalties?
Again, this is where a professional can
help. He or she will help define if the taxing authority is ‘wholly’ right or ‘partially’ right. This is where negotiation
comes in. While there is very little anyone can do about interest, experienced
professionals generally have a fairly high
success rate of getting penalties eliminated if they can demonstrate that a taxpayer qualifies for penalty abatement.
How is the process finalized?
Make sure you’ve asked for a specific
remedy and bring the process to a close.
For example, if you go through an audit,
make sure everyone signs off on the resolution. Get a letter stating ‘no change,’
or if some type of tax is owed, make sure
it is specified.
If you can’t resolve issues with the IRS
in more or less informal ways, there are
certain administrative steps you have to
move through, involving specific timing
and procedures in more of a court and
legal environment. Most of these cases
are motivated to settle, not go to trial. If
you do end up going to trial, CPAs can
represent you, but more likely, you’ll
want to seek counsel.
WALTER M. McGRAIL, JD, CPA, is senior manager at Cendrowski Selecky PC. Reach him at (866) 717-1607 or [email protected] or
visit the company’s Web site at www.cendsel.com.