Financial: Fast Track…and Tax Audits that Ain’t

By Mark E. Battersby / Published April 2014

 

The IRS recently rolled out a streamlined program designed to enable small pressure cleaning businesses undergoing audits to more quickly settle their differences with the IRS. The Fast Track Settlement (FTS) program is designed to help small manufacturers, distributors, and self-employed pressure cleaning contractors who are being examined by the Small Business/Self-Employed (SB/SE) Division of the IRS.

This program launched by the IRS reportedly provides a customer-driven approach to resolving tax  disputes at the earliest possible stages of the examination process. Unfortunately, however, it doesn’t help the thousands of small business owners who have received letters questioning whether they are underreporting their business income.

The letters are the latest move in the agency’s efforts to combat what it sees as a widespread problem: failure by businesses, including mom-and-pops, to report all cash sales in order to minimize tax bills. According to the IRS, the letters are not the same as an audit but rather are simply requests for more information, but that remains to be seen.

Fast Tracking Audits

Modeled on a similar program that has long been available to large and mid-sized businesses (those with more than $10 million in assets), FTS uses so-called alternative dispute resolution techniques to help taxpayers save time and avoid a formal administrative appeal or lengthy litigation. As a result, audit issues can usually be resolved within 60 days, rather than the usual months or years.

Surprisingly, pressure cleaning business owners choosing this option lose none of their rights. They still have the right to appeal even if the FTS process is unsuccessful. FTS is designed to expedite case resolution. Under FTS, taxpayers with disputed issues who are being audited work directly with IRS representatives from SB/SE’s Examination Division and the Appeals Section of the IRS to resolve those issues, with the Appeals representative typically serving as mediator. Either the pressure washer or the IRS auditor may initiate Fast Track for eligible cases, usually before a 30-day letter is issued. The goal is to complete cases within 60 days of acceptance of the application in Appeals.

The new FTS is generally available for cases under the jurisdiction of the SB/SE Division if:
• Issues are fully developed;
• The taxpayer has stated a position in writing (or filed a small case request in situations where the total amount for any tax period is less than $25,000); and
• There are a limited number of issues that have not been agreed to.

The small business FTS is not available for:
• Collection appeals program, collection due process—offer-in-compromise, and trust fund recovery cases, except as the IRS sees fit;
• Correspondence examination cases worked solely in a Service Center site;
• Cases in which the taxpayer has failed to respond to IRS communications and no documentation has been previously submitted for consideration by the IRS;
• Issues outside SB/SE jurisdiction, except as provided below;
• Issues designated for litigation;
• Issues for which the taxpayer has submitted a request for competent authority assistance;
• Frivolous issues;
• “Whipsaw” issues, i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party; or
• Issues that have been identified in a Chief Counsel Notice, or equivalent publication, as excluded from the small business FTS process.

Obviously, FTS may not be the appropriate dispute resolution process for all cases involving small businesses or the self-employed. The SB/SE group manager or designee and the taxpayer will evaluate the individual circumstances to determine if this process meets everyone’s needs. If an issue is determined not to be eligible for the FTS program, all issues in the case are not eligible for the SB/SE FTS program.

FTS As We Know It

According to the IRS, the small business FTS employs various alternative dispute resolution techniques to promote case resolution. An appeals officer, trained in mediation, will serve as a neutral party (the FTS appeals official). The FTS Appeals Official will not perform in a traditional appeals role, but will use dispute resolution techniques to facilitate settlement between the parties.

During FTS, the taxpayer and SB/SE representatives usually hold a conference with the FTS appeals official (the FTS session). The taxpayer and SB/SE representatives at the FTS session normally include someone with decision-making authority and the information and expertise necessary to assist the parties and the FTS appeals official during the settlement process.

Although a taxpayer is not required to have a representative to participate in FTS, if the taxpayer is represented by a person engaged in practice before the IRS, this individual must have a power of attorney from the taxpayer (Form 2848, Power of Attorney and Declaration of Representative) in addition to the FTS agreement.

A taxpayer who is interested in participating in FTS, or who has questions about the program and its suitability for their case, can contact the Examination or Specialty Program group manager. To apply for the FTS program, the taxpayer and the group manager need to submit Form 14017, Application for Fast Track Settlement, and the taxpayer’s “brief, concise, and soundly written” response to IRS’s position.

If the case is not accepted for inclusion in the Small Business, Self-Employed FTS program, the SB/SE or appeals representative must inform the taxpayer of the basis for this decision and discuss other dispute resolution opportunities, including 30-day letter procedures contained in the IRS’s Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree. All rejections for inclusion are final since the decision not to accept a particular case into the FTS program is not subject to administrative appeal or judicial review.

Audits That Ain’t

On another front, the IRS’s most recent letter-writing campaign stems from a 2008 change in the law that gave the IRS broader access to merchants’ credit- and debit-card transaction records. The IRS has been comparing the data to information that small businesses report on their tax returns. If the data suggest an unusually large percentage of a business’s receipts come from credit card transactions, the IRS might send a letter asking the business owner to explain why cash receipts seem relatively low.

A typical letter to a small-business owner is usually headlined, “Notification of Possible Income Underreporting.” It begins, “Your gross receipts may be underreported,” and goes on to instruct the business owner to complete a form “to explain why the portion of your gross receipts from non-card payments appears unusually low.”

Rights and Strategies

Among the more important rights given any business—or business owner—whose returns are targeted is whether to be represented by a tax professional, or whether to attempt to answer the IRS’s questions alone. Another important consideration for everyone in business who is being audited is where to hold that meeting.

Should the meeting be in the accountant’s office where all of the working documents are easily accessible? Should it be at the manufacturer, distributor, or contractor’s place of business, the place where all the records are kept, to demonstrate to the IRS auditor that there is nothing to hide and that the pressure cleaning operation is a legitimate one? Or, should the business’s owner or manager and/or the operation’s representative trudge down to the IRS office armed only with the specific documents and information requested by the IRS auditor? There is no one right answer.

What happens if, despite your best efforts, the IRS requests your presence to review the tax returns for your business—or you? It goes without saying the worst thing that any business owner can do if they receive an audit notice is to ignore it.

A contractor or business that has kept organized records, including bills, receipts, and cancelled checks and one that has in place the proper internal controls, has little need to worry. The IRS may interpret the operation’s situation differently, but there is no crime in having differences of opinion.

Making Nice With the IRS

The IRS has defended its letter writing program as “measured and equitable in several ways, including giving taxpayers the opportunity to explain and fix errors.” It adds: “An important component of this project is [to] help ensure that people who are non-compliant don’t get an unfair advantage over those that play by the rules and follow the law.”

Honesty and clarity can go a long way toward avoiding and dealing with an IRS audit—and the potential consequences. After all, the audit of a business’s income tax return need not be the end of the world. There is the recently introduced Fast Track Settlement (FTS) program.

Whether a pressure cleaning business qualifies for FTS or not, if an audit does result in an assessment of additional taxes, appeal after appeal is possible until at some stage compromise is reached, or the business owner or manager satisfied. As for the IRS letters questioning the amount of income reported, they are not audits—at least according to the IRS.