7 Tips for Navigating the Troubled Waters of Tax Controversy
Tax controversy can be very unnerving and daunting for businesses and individuals, as most people only hear the worst of the worst and thus view tax notices and audits in a negative light. As a client’s trusted advisor, it is very important for CPAs to take control of the process and work directly with taxing authorities to help keep stress levels at bay. Here are seven tips to help navigate the troubled waters of tax controversy upon receipt of tax notices:
- Obtain a signed Power of Attorney. If a client is in receipt of an IRS notice, be sure to obtain a signed Form 2848 which allows the CPA to speak with the IRS on behalf of the client; without this, a CPA will get nowhere. If the client is married and files a joint tax return, be sure to obtain one Form 2848 for each taxpayer and spouse. Every state is, unfortunately, different, so there is no “one-size-fits-all” approach, but some states are not as strict as others and may not require formal authorization for a CPA to act/speak on behalf of a client.
- Call the Tax Practitioner Hotline. Many tax notices can be resolved quickly and efficiently over the phone, rather than in writing via snail mail. Yes, sometimes written correspondence is necessary; however, there are also a lot of times where a simple phone call does the trick. Here in New Jersey, the Tax Practitioner Hotline is very helpful and responsive; several other states are similar as well. When contacting a taxing jurisdiction over the phone, try calling early in the morning in order to minimize wait times.
- Do not ‘put off’ tax notices. Most notices are auto-generated and will have a response date included. This might sound like a no-brainer, but do not procrastinate. Some jurisdictions move through the tax assessment phase to the collections phase faster than others. If a taxing jurisdiction allows, ask to “place a hold on the account” and notate the account so that it is documented that the issue is being addressed and worked on. This can easily be done over the phone.
- For all things tax controversy-related — do not over-provide information. If a tax notice (or agent) asks for items A, B and C, do not provide them items A, B, C, D and E. Keep it short, sweet, to the point… and organized. Less is more.
- For examinations, establish a relationship with the agent and create a positive first impression. Upon receipt of a “Notice of Examination,” the CPA should contact the agent to let them know who they are and that they will be handling the audit. Open up the lines of communication early on and set the stage so that the examination can progress as efficiently as possible. Don’t make it difficult for an agent to do their job; they are more likely to work with you if a good relationship is established.
- For field examinations, the CPA should ask the agent to come to his or her office instead of the taxpayer’s place of business, if possible. If it is necessary that an agent visits a taxpayer’s place of business, make sure the time and date is conducive for the client and that there is a space for the agent to “set up shop.” As a best practice, the taxpayer representative should be present to essentially serve as the go-between throughout the day.
- Always request penalty abatement. If a taxpayer has a clean filing history and is in good standing, penalty abatement for reasonable cause is likely. The IRS does have a waiver known as the First-Time Penalty Abatement (FTA) which may be granted to relieve taxpayers from several penalties assuming certain criteria are met (e.g., clean compliance and payment history). Individuals and businesses may request an FTA for any failure-to-file, failure-to-pay or failure-to-deposit penalty. Contact the tax practitioner hotline and speak with a representative to see if the client is eligible to utilize this “get out of jail free” card.
This article appeared in the September/October 2020 issue of New Jersey CPA magazine. Read the full issue.