Accountant or Attorney? The IRS 30-Day Letter and Appeals
Following a Federal income tax audit in which changes are proposed but not accepted by the taxpayer, the IRS agent examining will generally send a letter with a computation and a Revenue Agent’s Report (RAR) outlining the proposed changes (an exception to this procedure applies when there is insufficient time remaining on the statute of limitations, in which case a 90-day letter may be issued by the IRS. See below). The letter outlines the taxpayers’ options if they do not agree with the changes, which options include the right to protest/appeal the proposed adjustments within thirty days. Because of the 30-day time period in which to appeal the proposed adjustments, the letter is commonly referred to as a “30-day letter.” Upon receipt of the 30-day latter, a taxpayer has a few options:
- Accept and Pay the Proposed Liability: The taxpayer may accept the changes and pay any resulting deficiency. In most cases, the taxpayer may still contest the changes after paying, by filing and pursuing a claim for refund.
- Appeal the Findings: The taxpayer may file a protest within the 30-day period allowed, and have the matter reviewed by the IRS Appeals Division, where the matter will generally be assigned to an Appeals Officer.
- Do Nothing & Receive a Statutory Notice of Deficiency (“the 90–Day Letter”): The taxpayer may do nothing, in which case, after the 30 days allowed for a protest has passed, the taxpayer will receive a formal Notice of Deficiency, also known as a 90-day letter. The taxpayer then has 90 days to file a petition in the United States Tax Court seeking a redetermination of the deficiency. If the taxpayer fails to timely file a petition with the Court, either intentionally or by mistake, even if a petition is only 1 day late, the Tax Court will not be able to hear the case, and the IRS may assess and collect the tax set forth in the 90-day letter (although the taxpayer may still file and pursue a refund claim, after paying the deficiency).
How should taxpayers decide what to do, and what professional(s) they need to advise them? The answer, of course, depends on the reason(s) for the proposed adjustments and the bases available to challenge those adjustments. And to answer the question, one must also understand the difference between accountants and tax lawyers.
Accountants are trained and experienced in the recording and reporting of financial transactions, the cumulative financial results of those transactions over time, and the financial position of people and businesses. For that reason, accountants are (appropriately) the professionals most often sought for assistance in preparing tax returns. Because an examination of a tax return generally involves how and why specific numbers were reported on the return, accountants are usually the professional of choice to assist taxpayers undergoing an audit of their tax return(s)—at least initially.
Tax litigation lawyers are specifically trained and experienced in the analysis and interpretation of tax law (such as tax statutes, regulations and judicial decisions), the application of those authorities to different facts, the methods of proving facts after they occurred, the presentation of both factual and legal arguments in administrative and judicial proceedings, and the processes and procedures by which your rights as a taxpayer will be determined and can be best protected.
So who does the client need after a 30-day letter? If the sole issues require explanations of what was reported, or understanding the financial transactions and substantiating records on which the tax return (or parts thereof) was based, the accountant may be fully capable of addressing the issue. Normally, however, such issues will have been addressed prior to the 30-day letter. If, however, the issues include disagreement over applicable law, the sufficiency of evidence, the weight of evidence, the manner of proving facts, or institutional stubbornness for no discernable reason, then a tax litigation lawyer should be involved. Tax litigation lawyers also understand and can explain the advantages and disadvantages to alternative approaches, such as going to Tax Court or paying and seeking a refund, and can reduce the risks of a statement made in a protest undermining the taxpayer’s position in later litigation. Not infrequently, a good tax lawyer and accountant will work together, combining their skills to best serve the client’s needs. Finally, agents conducting a tax exam have very limited authority to resolve issues that are in a “gray” area, and may not settle a case based on perceived risks of losing in court. However, once an appeal is filed, a settlement based on the Government’s perceived hazards of litigation becomes a possibility. Because of his or her trial experience, a tax litigation attorney can address those hazards with the assigned Appeals Officer, and can help a taxpayer-client appreciate possible outcomes, assess the risks and opportunities in going to court, negotiate a settlement, and assess settlement opportunities.
Although this discussion has focused on the IRS, similar procedures and options must be addressed in state tax disputes as well. No matter what situation you find yourself in, sound, experienced advice is needed when seeking to resolve a dispute with the tax agencies. Determining how to proceed and which professional is best suited to your needs is an important decision and can mean the difference between achieving a good and fair resolution, and barely surviving a costly ordeal.