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How Far Can You Push the IRS

Updated on January 13, 2012
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Keith Schroeder writes The Wealthy Accountant blog with 30 years experience in the tax field. He is the tax adviser of Mr. Money Mustache.

Today's topic: How far should you push back on an IRS assessment? There is no hard and fast rule, but there are guidelines. If the assessment is small, it could cost more to fight than to pay. In my opinion, cutting off your nose to spite your face is foolish and a waste of time. This is the first consideration when dealing with an IRS assessment.

When the assessment is meaningful, you have a tough decision to make. If the assessment is due to an audit, appeals is your first defense. Every audit in my office ends up in appeals if the IRS assesses additional taxes, unless it is really small. Auditors look at verifiable facts only. They will deny any deduction due to lost receipts, etc. In most cases, it all comes back in appeals. Even if you played fast and loose, appeals frequently reduces the assessment, depending on the circumstances.

Appeals usually gives you about as much as you'll get in tax court. However, if they don't give that much, file with the tax court. The IRS has people that will work hard to get you off the tax court calendar. Be reasonable when filing, but don't rule out this powerful tool.

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Sometimes it makes sense to file for abatement. If a large part of the assessment is penalties, abatement can help. Unfortunately, it is an all or none proposition; you either get full abatement or none. Fortunately, a lot of abatement requests are granted.

A Due Process Hearing is another option if you feel the IRS took an incorrect position. This requires its own post at a future date. Stay tuned.

And, of course, the Offer in Compromise. You see the ads on TV about IRS debt; that is what they are talking about. I recommend a competent local accountant instead of the TV guys. The TV guys charge a lot, tell you the offer will fly when they haven't followed the formula the IRS will accept, and have a low success rate. Your friendly accountant should have experience in Offers in Compromise and should have a reasonable fee.

It must be noted that federal taxes due have a statute of limitation of 10 years. That means the IRS gets 10 years to swing at you after you file your tax return or the due date of the return, whichever is later. If you own real estate, the IRS will attach it and the statute is less a tool for you.

The Offer in Compromise, tax court filings, and Due Process Hearings stop the statute of limitation clock while your request is considered. If you are approaching the 10 years and don't own real estate, you may wish to sit tight for the tax to expire instead. The clock restarts after the IRS rules on your request.

It is a good idea to get an experienced accountant on your side when dealing with these issues. At least now you can discuss your options with your accountant from a position of knowledge.

Good luck.

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