Essential Tax Audit Rights

The Assessment Statue of Limitations

The assessment statute of limitations may be suspended if both you and the IRS agree in writing to a suspension. The agreement is formalized on Form 872, Consent to Extend Time to Assess Tax, otherwise known as an assessment statute waiver. Once executed, the waiver extends the assessment statute until the date shown on the form.

It is common for the IRS to ask a person to sign Form 872 while an audit is pending in order for the agency to have more time to assess the tax. The statements agents make when asking for this waiver are almost always wrong and intended to mislead. Let me give you some background.

Suppose you are under audit for tax year 2011. The return was filed on time in April 2012 so the IRS has until April 15, 2015 (three years from the due date) to complete the audit and make an assessment. At some point during the fall of 2014, the agent asks you sign an assessment statute waiver, Form 872. The agent states that the IRS needs at least ninety days to process a closed audit case and since the statute is coming up in April 2015 and the audit is still not complete, they need more time. A signed Form 872 gives them the time needed.

This statement is accurate so far as it goes. The IRS does require a window of time for a completed audit to be reviewed and all the closing paperwork to be processed. The ninety-day time frame for doing so is common. However, it is the next part of the agent’s presentation that is false and misleading.

In order to pressure you to sign Form 872, the agent tells you that unless you sign it, the IRS must: 1) make its decision based upon the information already in the file, 2) that you will have no further opportunity to present information and arguments, and 3) you will lose your appeal rights. Each element of this statement is flat wrong. Let me explain why.

As to the claim that you lose your appeal rights, the fact is the IRS cannot assess any additional tax without first mailing a Notice of Deficiency. I discussed this earlier, explaining that an NOD is required before any income tax assessment can be made and that the NOD gives you the opportunity to appeal your case to the Tax Court. The Tax Court, not some auditor, then makes the determination as to what you owe, if anything.

Upon filing a petition with the Tax Court, the IRS then involves the Office of Appeals in an attempt to resolve the case without the need of a trial. In 100 percent of the audit cases before the Tax Court, the file is sent back to Appeals with instructions to work with the taxpayer to negotiate a settlement. Moreover, while your case is in Tax Court, you have every right to provide whatever additional information, documents, evidence and arguments are necessary to support your case. There is no limitation on your right to do so. The reality is that 97 percent of all Tax Court audit appeals are settled without a trial. So it is flat not true that you will lose your rights to appeal and to provide more information if you do not sign the assessment statue waiver.

What is true (but not explained) is that the audit appeal path changes if you do not sign the waiver.

The usual appeal path is this:

IRS issues the final audit determination. You then have thirty days to appeal by filing a protest letter, which causes the case to be sent to the Office of Appeals. If you reach agreement there, the case is closed. If not, the Appeals Office mails a Notice of Deficiency, which then gives you ninety days to file a Tax Court Petition. By filing the petition, the case is resolved through the Tax Court process. Signing Form 872 at the audit level means this appeals path will be followed.

But if you do not sign the Form 872 at the audit level, the IRS will simply mail the Notice of Deficiency to keep the statute of limitations from expiring. Thus, there is no thirty-day letter and there is no intermediate trip to the Appeals Office. However, by timely filing a petition with the Tax Court, your case is sent back to Appeals for full consideration and settlement negotiations, and as stated above, the likely full settlement of the case. While working with the Appeals Office, you have every right to provide all the information, documents, evidence and arguments necessary to support your case. There is simply no restriction on this. Thus, you get an appeal but follow a different route to get there.

So question becomes, “Do I sign Form 872 or not?” I am asked this regularly. The answer is, “It depends.” I have put together a list of factors to consider in determining whether to sign the waiver or not. Let me discuss them here.

Consider signing the waiver if:

  • Your auditor is reasonable, understanding, appears to be—or in fact is— willing to work with you to arrive at the correct tax liability in your case, rather than simply trying to get more money;
  • You are dealing with simple issues and you have solid evidence to support your case. In that situation, you can expect to resolve the case without having to go to Tax Court or even the Office of Appeals. If you can avoid both of these steps, you considerably shorten the time it takes to ultimately resolve the problem; or
  • You are under audit for multiple years but the IRS wants a wavier on just the earliest year. In that case, you might want to maintain continuity of the audit so that one tax year is not following a different path from the other tax years.

Even if you decide to sign a waiver, understand the difference between Form 872 and Form 872-A. Form 872 is a fixed date waiver. It expires on the date expressed in the form itself. Form 872-A is an open-ended waiver. It remains in effect until you revoke it by submitting Form 872-T, Notice of Termination of Special Consent to Extend Time to Assess Tax. Form 872-A has an advantage in that you can terminate it at any time, whereas Form 872 is good until the date stated in the form.

Signing a waiver does not have to be a “take-it-or-leave-it” proposition. You might consider negotiating the terms of the waiver. For example, suppose there is one year left on the assessment statute and the IRS asks for a waiver. At that point, I would suggest to the agent that we work hard for the next six months to get the audit completed so there would be no need for either a waiver or an appeal. Point out that you are willing to provide whatever documents, etc., are necessary to get the matter resolved. If, after six months, the matter is still not resolved, you will consider signing a waiver at that time. As another example, suppose the IRS asks for a one-year waiver at a time when there are just four months left on the statute. You might suggest that you waive the statue for just six months because you do not want the matter to linger for another year. You want to get it resolved. You can also suggest using Form 872-A rather than Form 872. Recall that with an 872-A, you have the right to terminate the waiver at any time.

Consider not signing the waiver if:

  • The assessment statute expiration date is very close. If there are fewer than six months left on the statute, it is possible the IRS simply cannot get the paperwork done in time to beat the expiration date. And if even they do beat it, you still have your appeal rights as explained above;
  • You are dealing with an auditor that is unreasonable, does not know the law, repeatedly demands documents already provided, or otherwise makes it clear that she is just working to get more money. By not signing a waiver, the case will be taken from the auditor when you file your Tax Court petition
  • You wish to pressure the IRS to settle the case. Most people cringe at the idea of filing a case with the Tax Court, believing that the IRS will go harder on them for filing an appeal then otherwise might be the case. The opposite is true. In the typical audit scenario, the more you fight, the better deal you will likely make for yourself. Once the case is in Tax Court, the pressure is on the IRS to settle. Because there are tens of thousands of cases filed with the Tax Court each year, the IRS simply cannot litigate each one fully through the trial process. They have to settle these cases and they work hard to do it;
  • You wish to speed up the process. Often, the IRS asks for at least an additional year on an assessment statute waiver. By not signing, the case will end up in Tax Court. It is then assigned to an Appeals Officer who must make the case a priority precisely because it is a Tax Court case. This can often speed the process of settlement because you bypass the one-year extension the IRS asks for, the additional time spent with the auditor, and you skip the intermediate appeals step.

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