Steps to take when the IRS makes a mistake

Have you recently been selected for an audit by the IRS? Don’t panic. Although an audit can be scary, an experienced tax attorney can help you manage through your audit with ease. Whether this is regarding an individual tax return, or a business tax return, the tax attorneys at Abajian Law will be able to guide you through this process. They have over 20 years of experience and were founded by a Former IRS Attorney.

Once you have been selected for an audit, the IRS will then notify you by mail. They will not initiate the audit by a phone call. It is highly recommended that a tax attorney be retained during the audit process. We have seen many times, where a simple audit that involves one issue and one year be transformed into multiple issues involving multiple years. In addition, taxpayers tend to make statements to the IRS that are not helpful and it is difficult to later back away from such statements. Therefore, it is really important that you speak to a tax professional prior to speaking with the revenue agent or providing any documentation.

Report of Income Tax Examination Changes

After the examination, the IRS will send you a Report of Income Tax Examination Changes together with Letter 525 or Letter 915 (also referred to as the 30-day letter). This letter and the enclosed report will identify the specific items the examiner is proposing be adjusted and will provide you with an explanation as to why the adjustments are being proposed. The 30-day letter will then give you 30 days to review the changes and determine if you agree or disagree.

This is a crucial moment. If you agree to the changes made to your tax return, you are required to pay the amount due. Therefore, it is important to ensure all the changes are correct; which even includes looking at the computational changes made by the IRS. Many times, we will see that the IRS will make numerous mistakes when it comes to providing a Report of Income Tax Examination Changes. The IRS has had a lack of funding for many years and they have just recently started to hire more individuals. It is likely that a Revenue Agent may not be familiar with all the nuances of conducting an examination. In addition, the tax laws change all the time and new calculations are required to be administered properly into their system.

It is also likely that the IRS software does not catch all the nuances of the new rules. Whether a computerized deduction is available or whether your taxable income is computed correctly requires an analysis of your own.

Example of IRS computational mistake

Recently, the tax attorneys at Abajian Law found mistakes in a tax examination resulting from computational errors made by the IRS. For example, there are certain computations that have been implemented by 2017 Tax Cuts and Jobs Act (TCJA) such as the Qualified Small Business Income deduction (QBI). The QBI deduction allows non-corporate taxpayers to deduct up to 20% of their qualified business income, plus up to 20% of qualified estate investment trust (REIT) dividends and qualified publicly traded partnership income. The calculation requires a mathematical analysis to be administered and correctly applied. Depending on the size of your business, the QBI deduction can substantially decrease the amount of tax owed. If an IRS audit results in increased income or the disallowance of expenses the amount of the QBI deduction may increase depending on the business. Thus, it is very important to review the IRS computations.

Even more importantly, after the examination, the taxpayer should always check on whether taxable income is actually increased. Although the Report of Tax Examination Changes may show an expense that has been disallowed, it is not always the case that taxable income has been increased.

Conclusion: Watch out for IRS mistakes & contact a tax attorney

In short, taxpayers should watch out for mistakes made by the IRS in their calculations. After receiving a Report of Income Tax Examination Changes, you should always review your return and conduct a new calculation as to whether the IRS has reported these changes correctly. If the numbers are not reported correctly, then you may ask the Revenue Agent to double check in order to issue a corrective report or you may disagree with the examination changes and submit a protest letter. Please see IRS Publication 5 on rules governing a protest letter.

Have you received a letter stating that your return has been selected for examination or audit? If so, it’s time for you to consult with an experienced tax attorney about your situation. At Abajian Law, we take pride in protecting the rights of our clients who are dealing with the IRS. Call our office at 818-396-5059 to schedule a consultation with a member of our team. We operate offices in Los Angeles, Glendale, and Irvine to better serve our clients.