What Occurs During an Examination
|What is an Examination?||
There is no statutory or common law definition of the term “examination.” However, an examination, or audit, may be described as the systematic inspection of the books and records of a taxpayer for the purpose of making a determination of the correct tax liability.
In addition, the FSLG Specialist will:
|Scheduling the Opening Interview||
Generally, a telephone call is used to contact the organization to schedule an appointment in the field for an employment tax interview. The FSLG Specialist will contact an authorized individual.
An “authorized individual” is someone who has authority under the applicable state law to legally bind the entity. Usually state law, the government entity's regulations, or its charter specifies who is "authorized" to engage in certain kinds of activities. The mayor, city manager, school superintendent or comptroller/treasurer (or similar positions in other types of government entities) are other individuals who are most likely “authorized” by law to bind the organization.
During the telephone call with the authorized government official, the FSLG Specialist will generally:
The FSLG Specialist will then send the taxpayer an audit confirmation letter with Publication 1 (Your Rights as a Taxpayer), Notice 609 (Privacy Act Notice), and a Form 4564 (Information Document Request (IDR).
Sometimes the initial contact is made by an appointment letter. This general occurs when the FSLG Specialist has difficulty locating a telephone number for an authorized individual.
|Information Document Request (IDR)||
The IDR will include requests for documents needed to support issues the FSLG plans to examine. The IDR will list the specific information and documents the taxpayer should provide to the FSLG Specialist. Although FSLG Specialists strive to phrase items in terms that are understandable to the taxpayer, sometimes terminology is unclear. If you have a question about what is requested, you should contact the Specialist for clarification.
Items frequently requested include:
Generally an IDR is sent with audit appointment letter, which will list the specific information and documents the taxpayer should have available at the initial appointment. Another IDR may be issued to the taxpayer following the initial interview to request information and documents needed to support issues that were discussed during the initial interview but not available at that time. Additional IDRs may be sent to the taxpayer until all compliance questions are resolved. IDRs will always have a deadline for information to be received. The date listed on the IDR should provide the organization a reasonable amount of time to gather and provide the information, generally between two and four weeks. If this is not sufficient, the government entity should contact the FSLG Specialist to discuss a more reasonable date.
Examinations can be completed in a professional and timely manner when the IRS and Taxpayer/POA work cooperatively together. Time is a valuable resource for both parties and open communication will provide the framework for timely completion of the examination.
|Sample Interview Questions||
The following are a sample of questions that might be asked during the opening interview:
Forms 1099 are reviewed to identify potential issues such as:
|Taxability of wages||The determination that a benefit is not “wages” must be based on a provision specifically excluding the payment from wages for employment tax purposes. Exclusion for income tax purposes is not enough.|
We review the organization’s employee handbooks, union contracts, and employment contracts to identify fringe benefits. Then we must determine that all the fringe benefits (cash and non-cash), noted during the review have been:
Those benefits that were “improperly excluded from the employee’s income and not properly subject to all appropriate Federal employment taxes” will be included in the proposed adjustment.
|Employee Pension Plans||The FSLG Specialist will ask whether the organization has employee pension plans. If the organization has a 403(b) and/or 457 plan, Specialists will consider basic eligibility rules, review Forms W-2 for excessive contributions, etc.|
|Results of the Examination||
If we accept your return as filed, you will receive a letter stating that the examiner proposed no changes to your return. You should keep this letter with your tax records.
If we don’t accept your return as filed, we will explain any proposed changes to you and your authorized representative. It is important that you understand the reasons for any proposed changes; don’t hesitate to ask about anything that is unclear to you.
|If You Agree with a Proposed Increase to Tax||
If you agree with a proposed increase to tax, you can sign an agreement form and pay any additional tax you may owe. You must pay interest and applicable penalties on any additional balance due. If you pay when you sign the agreement, interest is generally figured from the due date of your return to the date of your payment.
If you do not pay the additional tax and interest, you will receive a bill
If you are entitled to a refund, you will receive it sooner if you sign the agreement form at the end of the examination. You will also be paid interest on the refund.
|If You Do Not Agree with a Proposed Increase to Tax||
If you do not agree with the proposed changes, the examiner will explain your appeal rights. You may request an immediate meeting with the examiner’s supervisor to explain your situation.
If you cannot reach an agreement with the supervisor, the FSLG Specialist will prepare a report explaining your position and the IRS position. The examiner will forward your case to the Area office for processing.
You will receive:
You generally have 30 days from the date of the 30-day letter to tell us whether you will accept the proposed changes or appeal them. The letter will explain what steps you should take, depending on what action you choose. Be sure to follow the instructions carefully. Appeal rights are explained in the Appeals Process article.
If you do not respond to the 30-day letter, or if you respond but do not reach an agreement with an appeals officer, we will send you a 90-day letter, also known as a Notice of Deficiency. This is a legal document that explains the proposed changes and the amount of the proposed tax increase. You will have 90 days (150 days if it is addressed to you outside the United States) from the date of this notice to file a petition with the Tax Court. If you do not petition the Tax Court you will receive a bill for the amount due.
|Consents to Extend the Statute of Limitations||
We try to examine tax returns as soon as possible after they are filed, but occasionally we may request that you extend the statute of limitations of your tax return.
A return’s statute of limitation generally limits the time we have to examine it and assess tax. Assessments of tax must be made within 3 years after a return is due or filed, whichever is later. We can’t assess additional tax or make a refund or credit (unless you filed a timely claim) after the statute of limitations has expired. Also, if you disagree with the results of the examination, you can’t appeal the items you disagree with unless sufficient time remains on the statute. Because of these restrictions, if there isn’t much time remaining to examine your return, assess additional taxes, and/or exercise your appeal rights, you have the opportunity to extend the statute of limitations. This will allow you additional time to provide further documentation to support your position, request an appeal if you do not agree with our findings, or to claim a tax refund or credit. It also allows the Service time to complete the examination, make any additional assessment, if necessary, and provide sufficient time for processing.
A written agreement between you and the Service to extend the statutory period of a tax return is called a “consent.”
IRS generally utilizes Form SS-10 to extend the statute of limitations on employment tax returns.
If the statute of limitations for your tax return is approaching, you may be asked to sign a consent. You may:
The consent will be sent or presented to you with a letter explaining this process and Publication 1035, Extending the Tax Assessment Period. For further information, refer to this publication.