As part of our ongoing series covering the audit process, this article focuses on the payment stage of the exam and the courses of action available to taxpayers. Whether an audit is big or small, the fundamental procedures are the same.
IRS will request information from the taxpayer and based on the responses provided, IRS will:
Claim that additional tax is owed by the taxpayer; Determine that a refund is due to the taxpayer; or Issue a "no change" letter. In the case where a refund is due or there is no change, the taxpayer will exit the audit process. However, when the audit concludes and additional tax is owed, the taxpayer can choose to appeal the determination or pay the tax. Even if a taxpayer disagrees with IRS' determination, there may be reasons why a taxpayer would choose to pay the balance owed versus appealing. The amount owed may be immaterial relative to the cost of an appeal. Also, a high-profile taxpayer, who continues on to Appeals but without success, might choose to pay the tax rather than moving to the next level where the dispute will become part of the public record. As mentioned in our previous article, once the dispute reaches the Tax Court, the taxpayer's identity will become part of the public record and many high-profile taxpayers may wish to retain anonymity with respect to their private tax matters. A taxpayer has a number of options to consider when paying a balance due. This article will focus on those options.
Option #1 - Write a Check
The most obvious and easiest method to pay a balance due is simply to write a check. An audit determination will usually contain a remittance advice with instructions on how to pay IRS. The taxpayer merely needs to attach a check made payable to the "United States Treasury" and mail it to the address indicated. IRS will credit the taxpayers account for the year, or years, in question and this will complete the audit. However, not all taxpayers have the funds to pay a balance due resulting from an audit. In this situation, IRS does provide alternative payment methods.
Option #2 - Request an "Installment Agreement"
The Installment Agreement is the method of choice for a taxpayer who has the assets to pay the audit assessment, but due to illiquidity, they cannot be easily converted into cash. This agreement allows the taxpayer to pay the balance due over time. IRS generally has 10 years to collect a liability and will not enter into an agreement that lasts beyond this limit...