Five must-know areas of post-filing practice and procedure
Knowing how to address these essential topics will cover the majority of issues your clients will encounter after filing.
November 25, 2013
According to the latest IRS study measuring 2006 tax return data, the U.S. Treasury loses $450 billion annually due to taxpayer noncompliance, including underreporting income, overstating deductions and credits, nonfiling, and nonpayment. This amount is called the tax gap.
The IRS has stepped up its efforts to reduce the tax gap by scrutinizing tax returns, collecting back taxes, and finding nonfilers. For tax professionals and their clients, the increased IRS compliance activity over the past decade translated into more post-filing (or “tax controversy”) work, including:
More taxpayers are seeing IRS compliance activity. Notices, audits, collection, appeals, and other post-filing incidents are increasing at a disproportionately higher rate than the total increase in taxpayers. There has been an 11% increase in the number of individual and business taxpayers from 2001 to 2012, compared with a 570% increase in the number of notices issued to taxpayers. Most of the increase in compliance activity is attributable to better information and information systems that can generate notices. These systems allow the IRS to ramp up compliance activity despite budget cuts.
The increase in IRS compliance activity comes at a time when tax professionals already have their hands full keeping up with the expanding tax code, which saw 4,680 changes from 2001 to 2012.
Providing assistance to your clients on IRS issues and notices does not require that you become an expert in the dozens of areas of practice and procedure. Data show that if you know the essentials of the following five areas, you can help your clients with most of their post-filing issues.
Although your clients only have a 0.9% overall chance of being audited, most clients expect that you will be able to provide them with expert assistance in an audit. Essential practice knowledge would include a good understanding of audit procedures, including how to appeal an audit decision.
Most audits are correspondence audits, in which you provide documentation to prove your client’s deductions and credits. However, the IRS conducts more than a half million field audits every year, and a large majority of those involve a small business. These audits can be comprehensive. To represent your client effectively, you will need to know the essential components of an audit:
Clients often need help with penalty relief. There are about 140 IRS penalties. Excluding the estimated tax penalty (which is almost always self-assessed at tax preparation), four penalties make up more than 98% of all the remaining penalties assessed on individuals, businesses, and employers. These are the failure to file, failure to pay, failure to deposit, and accuracy penalties. There are five reasons the IRS abates penalties, but the two most often used are first-time penalty abatement and reasonable cause arguments. Having a good understanding of how to abate the four most common penalties using the most common methods is the essential knowledge you need to cover most client problems when it comes to IRS penalties.
The IRS sends many of these notices annually, and, for your client, they might look like an audit. Even though these underreporter inquiries follow similar deficiency procedures as audits, they are not audits; they are automated discrepancies between information on file with the IRS and a filed tax return. Efficiently submitting timely, streamlined responses to these notices is an essential part of every tax practice.
On occasion, clients get into financial trouble and can’t pay their tax bill. Several collection alternatives are available for clients, including installment agreements, offers in compromise (OIC), and currently not collectible status. However, most collection agreements with the IRS involve the simplest alternatives: the guaranteed or streamlined installment agreement, or the extension of time to pay. In fact, guaranteed and streamlined agreements make up 95% of all installment agreements.
CPAs should have a good understanding of how to execute these simple alternatives. Save your efforts on understanding the OIC program and complex ability to pay installment agreement determinations until you recognize the need for these options for the financially distressed client.
This is a growing area of concern for tax pros and their clients. Issues such as identity theft, payment postings, refund holds, and other tax return adjustments can be a headache for tax professionals. In most instances, you need to contact the IRS to discover the facts that led to the unexpected notice. The essential practice knowledge needed here is the ability to get accurate and relevant information most effectively from the IRS. Usually, this involves interviewing IRS personnel, asking the right questions, and responding with corrective action. This process can become complicated as practitioners are often routed among multiple IRS functions as they try to rectify their clients’ seemingly simple issue. After several unsuccessful attempts, it’s a good idea to contact the Taxpayer Advocate for help resolving your client’s issue.
With increased IRS compliance activity, it is inevitable that you will need to help your clients with a post-filing issue. Knowing how to execute the essentials of these five areas of practice and procedure will allow you to assist your client with most of the issues they see after filing.