Over the summer and until now, we have observed a higher number of Notices of Deficiencies from the IRS in forums, colleagues discussions and through clients’ consultations. This trend seems in line with other tax authorities at the State and Local levels (i.e. Philadelphia) were they put on hold the automatic notices and some collection notice during the pandemic and gave a little break to the taxpayers, but now they are slowly going back to normal.
For some of these notices of deficiencies, the instructions are:
- if you agree, then sign and return the Form 4089, Notice of Deficiency waiver and proceed to the payment
- if you disagree with their analysis is to “… challenge this determination in U.S. Tax Court”.
Unfortunately, in some of these instances, the taxpayer should seek professional representation and defend themselves even if that implies going to the U.S. Tax Court. In many of the U.S. Tax Court cases, there is a mediation before going in front of the U.S. Tax court, so the case might be settled before. Otherwise, an attorney or special representative authorized by the U.S. Tax Court will be required.
One example of potential disagrement with the IRS notice of deficiency is when a restaurant might have not received all the 1099-k from his merchant providers and has reported the net income of the sales (amounts deposited in the business bank account by these third party merchant providers). However, the tax payer should have reported the gross income (total sales in the 1099k) and offset that number against the numerous fees up to 20% in some cases (commission fee, processing fee, etc.) and sales tax paid by the merchant provider on behalf of the business. Note that the net income amount is the same but the gross income amount has been understated (the expenses have been understated for that same amount).
Another example when the taxpayer might disagree with the IRS notice of deficiency is when there was an audit or examination and there was no agreement, so the IRS agent releases the notice of deficiency. The taxpayer or representative on the examination should have presented their facts during the examination, but we had cases where the taxpayer was not even sure on what was going on until the previous preparer / representative presented a report of income tax examination changes with values not disclosed or agreed. As a result, the taxpayer did not sign the examination documents and the next step is to go to U.S. Tax Court to fight on the IRS to reach a fair decision.
Each case is different but a professional set off eyes can make a difference of several thousands or hundred of thousands of dollars plus peace of mind that the strategy is more appropriate dealing with tax authorities when disclosing the relevant facts and circumstances.