Selected Tax Litigation, IRS Estate and Gift Tax Controversies
No one likes an audit. Whether it is the audit of a gift tax return (IRS Form 709) or an estate tax return (IRS Form 706), audits are stressful and time consuming. Estate tax audits can feel especially burdensome and overwhelming as they usually involve the estate of a loved one.
IRS Review. The IRS' review of estate and gift tax returns differs significantly from its review of income tax returns. While income tax returns are initially analyzed using computer scoring and may never be reviewed by a person, all estate and gift tax returns are reviewed by an actual person who determines whether the return appears in order or should be audited. In addition, the auditor in the case of estate and gift tax returns is usually an attorney (referred to as an "Estate Tax Attorney").
Odds of an Audit. We are often asked whether we think an audit is likely for a particular estate or gift tax return. Our response is always the same. It is pure speculation as to whether an audit will occur. We have seen audits of cases we thought were very clean while more "interesting" cases have gone through without a question. Consequently, the best approach is to treat every case as though it may become the target of an audit.
Benefit of Knowing Your Rights. Often disagreements with the IRS occur during an audit. In such cases, it is important that you know your rights. Just because the IRS takes a certain position does not mean it is the correct position. An understanding of your rights before the IRS, the strength and weaknesses of a particular position taken by the IRS, and common IRS negotiation strategies, allows for a more informed response to an audit. Your rights as a taxpayer are to be respected.
Responsiveness is Key. If you have received notice of an audit by the IRS, you should notify your tax professional immediately as it is vital that you timely respond to all requests concerning the audit. Aside from the obvious benefits of treating the auditor with respect, should you later find yourself in court, evidence of your cooperation throughout the audit process is one of the elements necessary to shift the burden of proof onto the IRS (the other elements being the offering of credible evidence and compliance with substantiation and record maintenance requirements). This is important because it means that instead of you having to prove that the IRS position is wrong (which is the usual case), the IRS will have to prove that your position is wrong.
30-Day Letter. If you and the auditor are ultimately unable to come to an agreement, you will normally receive what is called a "30-day letter." This letter in essence gives you thirty days in which to decide to either accept the auditor's position or appeal to the IRS Office of Appeals (often referred to simply as "Appeals"). This is a firm deadline and failure to respond means you forfeit your right to go to Appeals (though your case may be referred to Appeals if you file a petition in Tax Court).
IRS Office of Appeals. The Office of Appeals is an administrative arm of the IRS where you are given the ability to have your case reviewed by an Appeals Officer who was not involved in the audit. Contact between the auditor and Appeals is restricted in an effort to make Appeals more independent. We have found that taking a case to Appeals is often a cost effective approach as the Appeals Officers generally have more flexibility in settlement than do the initial auditors. Of course there are no guarantees.
90-Day Letter. If you do not request a conference with Appeals, or if the matter is not resolved at Appeals, the IRS will issue a statutory notice of deficiency based on the auditor's findings. The statutory notice of deficiency is often called "the 90-day letter" because you have ninety days to decide to accept the deficiency or file a petition in United States Tax Court challenging the notice of deficiency. Failure to file a petition in Tax Court within the 90-day period forever bars you from challenging the deficiency in Tax Court.
Tax Court. The United States Tax Court is a federal court where your case is heard by a federal judge (there are no juries). You may represent yourself or be represented by counsel of your choice. The IRS is represented by an attorney from the IRS Office of Chief Counsel. A benefit to filing a tax court petition is that the case is normally referred back to the IRS Office of Appeals. This provides an opportunity to settle the matter without the expense of taking your case to trial. If settlement negotiations are unsuccessful, your case will proceed to trial before the Tax Court judge. If you are unhappy with the result, it is possible to appeal to the United States Court of Appeals.
Claim for Refund. If you miss the deadline to file in Tax Court, or choose not to file, you will be required to pay the tax asserted in the notice of deficiency; however, you will have the option to pursue a claim for refund with the IRS. If the IRS disallows your refund claim (or if you hear nothing within six months of filing your claim), you may file a petition in United States District Court. Keep in mind the petition must be filed within two years of receiving a notice disallowing your claim.