Receiving an audit decision from tax authorities can be a daunting experience for any business owner or legal representative. However, understanding your rights and obligations is crucial when this decision arrives at your headquarters. This article will guide you through the process, ensuring you are well-informed and prepared to act appropriately.
Tax audits are a standard procedure used by tax authorities like the IRS or state departments of revenue to verify the accuracy of a taxpayer's reported information. Consequently, an audit decision is the formal communication of the audit's findings.
What is an audit decision?
An audit decision, often delivered as a formal notice or report, outlines the conclusions reached by the tax authority after examining your business's financial records and tax returns. It details whether the auditor found discrepancies, agrees with your filed return, or proposes changes. These changes could result in additional tax owed, penalties, and interest, or sometimes, a refund.
The decision will usually specify the tax periods audited, the items reviewed, and the reasons for any proposed adjustments. Therefore, it's vital to read this document carefully.
Your fundamental taxpayer rights
Before diving into the specifics of an audit decision, it's important to be aware of your fundamental rights as a taxpayer. Many tax authorities, including the IRS, have adopted a Taxpayer Bill of Rights[1]. While specifics may vary by jurisdiction (state or federal), these rights generally include:
- The Right to Be Informed: You have the right to know what you need to do to comply with tax laws and to receive clear explanations of IRS procedures and decisions.
- The Right to Quality Service: You have the right to receive prompt, courteous, and professional assistance.
- The Right to Pay No More than the Correct Amount of Tax: You are responsible only for the tax legally due.
- The Right to Challenge the Tax Authority's Position and Be Heard: You can object to and provide additional documentation in response to formal actions or proposed actions.
- The Right to Appeal an Audit Decision[2] in an Independent Forum: You have the right to a fair and impartial administrative appeal and judicial review.
- The Right to Finality: You have the right to know the maximum time you have to challenge a position and the maximum time the tax authority has to audit a particular tax year.
- The Right to Privacy: You have the right to expect that any information you provide will be kept confidential and not disclosed unless authorized by law.
- The Right to Confidentiality: Information shared with the tax authority will be kept confidential, with limited exceptions as per state confidentiality laws.
- The Right to Retain Representation: You can hire an authorized representative, such as an attorney or accountant, to represent you.
- The Right to a Fair and Just Tax System: You have the right to expect the tax system to consider facts and circumstances that might affect your underlying liabilities, ability to pay, or ability to provide information timely.
These rights are foundational when dealing with tax authorities at any stage, especially after receiving an audit decision.
Receiving the audit decision at your headquarters
When the audit decision is delivered to your business headquarters, it signifies a formal communication point. The delivery method might be mail or, in some cases, hand-delivery by an agent, although mail is more common for the final decision.
Upon receipt, note the date. Many response deadlines are calculated from the date of the notice. Ensure the decision is routed to the correct personnel immediately – the business owner, CFO, legal counsel, or your designated tax representative.
Initial steps
First, carefully review the entire audit report or decision letter. Understand the findings, the amounts involved (tax, penalties, interest), and the reasons provided for any changes. The IRS, for example, is required to explain the specific reasons for disallowing a refund claim, as outlined in IRC § 6402(l).
Compare the decision with your records and the information provided during the audit. Identify any areas where you disagree or require clarification.
Your rights after receiving the decision
You have several key rights at this stage:
The right to be informed and understand
The audit decision should clearly explain the adjustments, the law it's based on, and how any amounts were calculated. If anything is unclear, you have the right to ask for clarification from the tax authority that issued the decision.
The right to representation
You continue to have the right to have a qualified representative, such as a CPA, attorney, or enrolled agent, deal with the tax authority on your behalf. If you haven't already, you might consider engaging one now. To authorize someone to represent you fully, you typically need to file a Power of Attorney[3] form (like IRS Form 2848 or a state-specific form).
The right to appeal
If you disagree with the audit findings, you have the right to appeal the decision. The decision notice will explain your appeal rights and the deadline for filing an appeal. This is a critical right, allowing for an independent review of your case, often within the tax agency's appeals division first, and then potentially in court.
The right to privacy and confidentiality
The information from your audit and the decision itself should be kept confidential by the tax authority, protected by law from unauthorized disclosure.
Your obligations after receiving the decision
Alongside your rights, you also have obligations:
Timely response
You must respond to the audit decision within the timeframe specified in the notice. This is crucial whether you agree, disagree, or need more time. Missing deadlines can limit your options, especially regarding appeals.
Payment of undisputed amounts
If you agree with some or all of the additional tax assessed, you are obligated to pay it by the due date to avoid further interest and potential penalties. If you cannot pay the full amount, you may have options like an installment agreement.
Providing further information
If you are appealing or disputing the decision, you are obligated to provide clear explanations and supporting documentation for your position in a timely manner.
Maintaining records
You are obligated to maintain adequate records to support your tax return filings. Even after an audit, you should keep these records for the period required by law, as they might be needed for an appeal or other purposes.
Disagreeing with the audit decision: The appeals process
If you disagree with the findings, you generally have the right to an administrative appeal. The audit decision notice should provide instructions on how to file a protest or appeal. This usually involves submitting a written protest within a specific timeframe (e.g., 30 or 60 days).
The Appeals Process[4] is designed to be an independent review within the tax agency. The appeals officer will review the case file, your protest, and any new information provided. They aim to resolve tax disputes without litigation.
In your written protest, you should clearly state:
- Which findings you disagree with.
- The reasons for your disagreement, citing laws or facts.
- The evidence supporting your position.
If you cannot reach an agreement with the Appeals office, you may have the right to take your case to tax court or another appropriate judicial forum.
What if you owe additional tax?
If the audit decision results in additional tax, penalties, and interest, and you agree (or have exhausted your appeals and still owe), you need to make payment arrangements. If you can't pay in full, contact the tax authority to discuss options like:
- Installment Agreement: Allows you to make monthly payments.
- Offer in Compromise: May allow you to settle your tax debt for less than the full amount owed, under specific circumstances.
Ignoring a tax bill will lead to more significant problems, including further penalties, interest, and collection actions.
What if the audit results in a refund?
Sometimes, an audit may find that you overpaid your taxes, resulting in a refund. The audit decision will explain this, and the refund will typically be processed automatically. However, be aware of the Statute of Limitations[5] for claiming refunds.
The importance of record-keeping
Throughout this process, accurate and organized records are your best asset. You were required to have them for the audit, and they are just as important if you decide to appeal. Keep copies of all correspondence with the tax authority, the audit decision, your protest, and any supporting documents.
Conclusion: Be proactive
Receiving an audit decision at your headquarters requires careful attention. Understand the findings, know your rights, meet your obligations, and act within the specified deadlines. Whether you agree or disagree, a proactive and informed response is always the best approach. Consult with a tax professional if you need guidance, especially when considering an appeal or dealing with complex tax issues. Many state tax departments, like the New York State Department of Taxation and Finance, provide publications outlining taxpayer rights during an audit.
More Information
- Taxpayer Bill of Rights: A set of fundamental rights that taxpayers have when dealing with the Internal Revenue Service (IRS) and many state tax authorities, ensuring fair and just treatment.
- Audit Decision: The formal communication from a tax authority detailing the findings of an audit, including any adjustments to tax liability, penalties, interest, or refunds due.
- Power of Attorney (in tax context): A legal document authorizing a qualified individual (like a CPA, attorney, or enrolled agent) to represent a taxpayer before the tax authority and make decisions on their behalf.
- Appeals Process: A formal procedure allowing taxpayers who disagree with an audit decision to have their case reviewed by an independent office within the tax agency, before resorting to court.
- Statute of Limitations: The legally defined period within which a tax authority can audit a return and assess additional taxes, or a taxpayer can claim a refund for overpaid taxes.