There are quite a few avenues available to resolve tax disputes with the IRS. We have previously considered these options for resolving tax cases in a prior article. The number of avenues available can make it difficult to navigate the IRS bureaucracy.
This plus the slow pace at which the IRS works makes it very difficult to resolve tax matters. The decision to pursue one avenue would not be as problematic if the IRS was able to work cases faster. Unfortunately, it often is not able to process cases fast. Tax cases can take several years to resolve. Even an experienced tax attorney can’t change this fact in every case.
But this is where hiring an experienced tax attorney can really help. They can often help get the case processed faster by getting the case before the IRS employee who has the power to decide the case. They may also be able to convince the IRS employees to take action to process the case quicker.
The recent Spain v. Commissioner, T.C. Memo. 2021-58, case provides an opportunity to consider this timing issue. The taxpayer’s goal was simply to get the IRS to reconsider its prior audit findings. This involves an IRS audit reconsideration request, a collection due process hearing request, and a U.S. Tax Court hearing–none of which resulted in the IRS reconsidering its prior audit findings.
Facts & Procedural History
The taxpayers had an IRS audit adjustment they did not agree with. They submitted an audit reconsideration request to the IRS. The IRS had not yet considered the audit reconsideration request before it started its tax collection efforts.
When the IRS started its collection efforts, the accountant submitted a collection due process hearing (“CDP hearing”) request.
The IRS Office of Appeals conducted the CDP hearing. During the hearing, it concluded that the taxpayers could not challenge the underlying liability during the hearing as they had already received a notice of deficiency for the audit. The taxpayers didn’t respond to the notice by timely filing a petition in the U.S. Tax Court for the audit.
The taxpayer filed a petition with the U.S. Tax Court, but failed to file the petition timely. The court went on to dismiss the court case given the late filing.
The Notice of Deficiency
The IRS generally has to send a notice of deficiency to the taxpayer prior to assessing additional tax. This notice starts several deadlines. One deadline is the time period for filing a petition with the U.S. Tax Court to challenge the tax liability. You can read more about this in the context of why you should never sign the IRS’s audit reports.
If the taxpayer does not respond by filing the petition with the U.S. Tax Court, the IRS will assess the tax liability. This means that the IRS records the tax as due and owing. If the taxpayer does not pay the tax liability, the IRS may take action to collect the taxes.
That is what happened in this case.
About Audit Reconsideration Requests
The audit reconsideration request is just what its name implies. It is a written request send to the IRS to ask it to reconsider its prior audit determinations.
The IRS generally will consider reconsideration requests. The criteria is that the taxpayer provides new information that was not considered by the IRS previously.
If this information shows that the IRS adjustment should be changed, the IRS very well may change the prior adjustment.
The problem with audit reconsideration requests is that the IRS will often take a long time to get to the requests. These requests are often not treated as high priority cases by the IRS.
This presents a collection problem for taxpayers. What do you do to buy time for the IRS to get to the audit reconsideration request? The answer is usually to file a CDP hearing request as in this case.
The hope is that either the IRS Appeals Office will actually consider the merits of the dispute, hold the case open long enough for the IRS exam function to consider the merits of the dispute, or afford a second opportunity to challenge the dispute in the U.S. Tax Court.
When the CDP Hearing Option Fails
While it apparently did not do so in this case, the IRS Office of Appeals will usually hold the CDP hearing request open pending the IRS exam function evaluating the audit reconsideration request. The IRS Office of Appeals might even be willing to help expedite the request with the IRS exam function. This requires a helpful appeals officer, which can be hard to come by.
If the IRS Office of Appeals will not help, the taxpayer may have other options:
- The Taxpayer Advocate Service can enter a taxpayer advocate order staying collections if there is a hardship due to the IRS not timely processing the audit reconsideration request.
- The taxpayer can file an amended return or refund claim and get the refund claim before the IRS Office of Appeals.
- The taxpayer can submit an offer in compromise based on doubt as to liability and/or effective tax administration.
All three of these options can get the IRS to consider the merits of the dispute and stay collection actions with the right circumstances.
Petitioning the U.S. Tax Court
We did not include filing a petition with the U.S. Tax Court on the CDP hearing denial in the list above. The reason is that filing the petition puts a hold on the IRS exam function’s efforts. This includes a tax court petition that was filed late–as in this case.
This litigation hold by the IRS includes putting a hold on processing the taxpayer’s audit reconsideration request. If the taxpayer wanted the IRS to process his request, he should have tried one of the other options noted above.
This case shows that one has to carefully consider their options when working with the IRS. This can help speed up the time the IRS takes in resolving tax cases. An experienced tax attorney can help with this.