DURING A TAX AUDIT, SHOULD YOU AGREE TO EXTEND THE TIME THE I.R.S. CAN CHARGE ADDITIONAL TAX?

The answer is almost always NO! Generally, the I.R.S has three years from the due date of an income tax return to charge (assess) additional tax. Because income tax audits usually do not begin until 1.5 to 2 years after the income tax return is filed, the I.R.S. will usually ask for "an extension on the statute of limitations on assessment" which if signed, gives the I.R.S. more time to continue the audit. The prevailing though flawed view is to grant the I.R.S. additional time. I routinely advise my clients not to sign an extension.

Many lawyers argue, incorrectly, that a taxpayer should extend the statute of limitations on

assessment or the I.R.S. will be forced into serving a Notice of Deficiency that additional tax is due. When this happens, the taxpayer has either 90 days to pay, settle for a lesser amount, or file a U.S. Tax Court petition (here no payment is necessary until the matter is concluded). I think this is good, not bad.

Why prolong the pain of an audit - the sooner it is over the better. More importantly, the I.R.S. is forced into taking a position on all audit issues raised when it serves a Notice of Deficiency rather than having the audit continue with the possibility of new issues being raised. Then each audit issue can be attacked at the I..R.S. administrative appeals level - and most often settled for considerably less tax due. At this appeals level the taxpayer gets to deal with a different, more reasonable, more experienced I.R.S. employee. The appeals division's marching orders are to "settle case" which usually happens.

Even if a tapayer sues in U.S. Tax Court, there will be many more changes to settle long before the trial and its costs would be necessary. IRS lawyers hate to litigate and usually settle. It pays to fight the system!

THE IRS IS PROHIBITED FROM CONTACTING THIRD PARTIES WITHOUT FIRST GIVING YOU REASONABLE NOTICE

Every taxpayer hates it when the I.R.S. contacts business customers, banks, and others about their taxes. This can have a chilling effect on a taxpayer's business and personal life by damaging the taxpayer's reputation. Prior to January 18, 1999, the I.R.S. could issue a summons to any person who has information or records that may be relevant to an I.R.S. inquiry without first notifying the taxpayer.

Effective January 18, 1999, the

I.R.S. Restructuring and Reform Act of 1998 prohibits third party contact without first giving the taxpayer reasonable notice. Furthermore, the I.R.S. must now provide a taxpayer with a record of all persons contacted concerning the tax matter.

How to Use this new Law to Your Advantage
Let's assume you are unlucky enough to have been chosen for an I.R.S. audit. This new law can go a long way towards keeping your and/or your business's income tax matters private. Once the I.R.S. gives notice it plans to contact third parties, it may be persuaded the information sought is readily available from other "non-third party sources" (i.e. from the taxpayer or from another source other than a third party). If persuaded, you and/or your business would be spared

the embarrassment, or worse, of having the I.R.S. contact your bank, your customers, your suppliers, etc.

This new law does not apply if (a) you authorize the I.R.S. to contact a third party, (b) if notice would jeopardize the lawful collection of tax, (c) involve retaliation against anyone, or (d) in pending criminal investigations.