An IRS audit is often a losing proposition. It usually means that you may be liable to pay tax and interest and maybe even penalties. If this happens in your case, you probably will not look back fondly on the audit process.
However, the audit process is often not a complete waste. There is an educational benefit to IRS audits. The audit process can help you understand what records are needed and how to improve in the future, including keeping certain records or finding a new accountant or tax attorney. This can help you correct any deficiencies in your processes going forward and help you know how and when and how to engage an outside accountant or tax attorney to avoid future disputes.
Another benefit is that your chances of being audited a second time are very low. It is rare for the IRS to audit a taxpayer again after the audit has closed (there are exceptions for politicians, celebrities, lawyers, and accountants). In fact, if your tax return is pulled for audit again, you may be able to convince the auditor not to examine the return, by explaining that you have already been through this process. This is particularly true, if the prior audit resulted in no change or a slight adjustment.
Pay or Settle the Tax Due
If the IRS made any adjustments, you will have a tax liability that needs to be dealt with. Despite the lengthy audit process, it may turn out that you do not have to immediately pay the tax liability the auditor worked so hard to assess. It may even turn out that you do not have to pay the liability at all.
The IRS will pretty much always agree to take your money. You can pay your tax due online at irs.gov/pay, mail a check via certified mail, or bring funds to your local IRS taxpayer assistance center.
For payments by check, you need to indicate the type of tax (e.g., income tax), your Social Security Number or Employer Identification Number, and tax year on the check memo telling IRS how you want the IRS to apply the payment.
As a general rule, for income taxes, you want to have the payments applied to the most recent years and then work your way to the earlier years. The IRS generally has ten years to collect unpaid taxes. By paying for the more recent years, you are leaving the older years to expire sooner. That is the hope, anyway. This is the general rule for income taxes. If you owe payroll taxes, you may wish first to pay those periods where the IRS could assess trust fund penalties. You may pay those years first and then negotiate with the IRS about the other periods. If you have a payroll tax audit or liability, you should read our other book on that topic, since there are additional rules and options for payroll taxes.
If you cannot afford to make a one-time payment, the IRS will usually let you pay the balance over time. You can do this by merely sending payments to the IRS (as noted above) or entering into a formal installment agreement.
Installment Agreements, Generally
The installment agreement may be preferable, if you cannot pay the balance in a few months. The benefit of the installment agreement is that you do not have to worry about IRS collection actions. The IRS may not automatically take your tax refund each year. The IRS will also reduce the failure to pay penalty by half, which means you will pay less in penalties and interest on the penalties.
For this benefit, you may have to pay a small application fee to the IRS (which can be waived if you cannot afford to pay it) and submit certain financial information to the IRS. The information the IRS requires varies based on the type of tax, size of the tax balance, and type of instalment agreement you are asking for. There are several different types of installment agreements–which are either full-pay or partial-pay installment agreements.
Full-Pay Installment Agreements
There are several types of full-pay installment agreements. This includes guaranteed installment agreements, streamlined installment agreements, and non-streamlined installment agreements.
If you can make full payment and owe less than $10,000, you can apply for the “guaranteed installment agreement.” This is the most basic of the installment agreements. This payment plan results in you paying the total amount within three years.
Most taxpayers who owe less than $50,000 will qualify for the “streamlined installment agreement.” This payment plan merely spreads the payment period over a maximum term of 72 months.
If you owe $50,000 to $250,000, you can enter a “non-streamlined installment agreement.” The IRS is authorized to enter into these payment plans for a maximum of 120 months.
Partial-Pay Installment Agreements
If you owe more than $10,000 in taxes, but you are not in bankruptcy and the IRS never accepted an offer in compromise from you, you may be eligible for the “partial payment installment agreement.”
As its name suggests, this type of installment agreement allows you to pay less than the amount of your tax liability. The monthly payment is not based on the amount of your tax liability. Instead, the IRS applies its collection standards to your facts to determine the amount of the monthly payments.
With these payment plans, you will agree with the IRS on a reasonable monthly payment for a particular term. Any unpaid taxes will be forgiven after that term, if the IRS does not file suit to collect the unpaid taxes. The IRS rarely files suit to collect unpaid taxes.
Settle the Tax Balance
If you can’t pay the tax, you may be able to submit an Offer in Compromise (“OIC”) to settle your taxes for less than the amount of the outstanding balance.
While this can be a viable option for settling back taxes, you have to meet the IRS’s criteria. You generally need to prove that there is no income or assets for the IRS to collect after you account for your basic living expenses and assets needed to maintain this minimal standard.
The IRS applies its collection standards in making this determination. The collection standards can be found on the IRS’s website.
The OIC itself is submitted on Form 656. The form includes instructions for calculating the amount of the offer. The IRS also has an OIC pre-qualifier calculator on its website that you can use to see if you might qualify for an OIC.
The Wait and See Approach
The IRS generally has ten years from the date the IRS audit is closed to collect the tax. There is always a chance that the IRS will not make any attempts to collect your tax liability. This does happen from time to time.
This chapter provides a summary of the IRS collection options. If you have an IRS balance, you should read our book on IRS Collections for a more in-depth explanation of how to deal with the balance.