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Some people receive tax bills out of the blue. I call these phantom audit notices. While the IRS must send a notice when it starts an audit, the IRS must only mail it to the last known address in its records. The IRS doesn’t have to prove you actually received the notice. The IRS assumes the address on the tax return is the correct one—even if you have since moved three times.
Courts have directed the IRS to update its address files regularly. It must send notices to the address on your most recent tax return or other address that you have provided on IRS Form 8822. (Abeles v.Commissioner of the Internal Revenue,91 U.S.T.C. 1019 (1991).) The IRS is allowed three months to process a change of address after it receives notification.
Let the IRS know when you move. Make sure you get all IRS notices by filing IRS Form 8822, Change of Address, whenever you move. A copy is available on the IRS website at www.irs.gov.
The IRS may or may not recognize a Post Office change of address form. If you didn’t answer an audit letter, the IRS probably proceeded without you. Your exemptions, deductions, and credits were disallowed in whatever manner the auditor so chose.
After the audit—the one you did not participate in—the IRS probably sent an audit report with a letter outlining the appeal process. Or, the IRS sent a notice of deficiency stating you had 90 days to go to tax court. These letters were most likely sent to the same bad address.
But now, finally, the IRS has the right address. And you have a tax bill for an audit about which you knew nothing. Here are two ways to fight a tax bill from a phantom audit.
The first step after you receive a puzzling tax bill is to immediately write or call the IRS at the address or phone number indicated on the bill. State that you do not understand why you’ve received a tax bill. You will be told that the bill is the result of an examination notice to which you did not respond or, if you are really lucky, that the bill is the result of an IRS mistake.
You can contest the bill by writing back to the IRS, stating that you never received notice of the audit and that you want an audit reconsideration. You should hear back from the IRS within 60 days.
If you don’t or the IRS denies your request, call the IRS Customer Service Center at 800-829-1040. If the customer service representative won’t help you, ask to be called back by the taxpayer advocate’s office, or TAO. (See IRS Publication 1546, available at www.irs.gov.)
You should hear from someone within five days. Offer to mail or fax the TAO copies of the tax bill and your letter. Ask the TAO to set up a meeting with an auditor or to help you figure out how to resolve the matter by mail and phone.
Audit reconsideration is a reopening of your audit file. It is discretionary with the IRS, but is usually granted. The IRS should set up an audit reconsideration meeting even if you admit to having received the audit notice but having ignored it. Your chance of winning an audit reconsideration is better if you never received the audit notice in the first place, however.
The IRS goes back to square one and allows you to participate this time around. It’s like a regular audit, but is limited to the items adjusted in the “phantom” audit.
If audit reconsideration doesn’t work, and you never received the notice of deficiency (90-Day Letter) sent by the IRS, you can file a petition in U.S. Tax Court. In your petition, you would allege that the notice of deficiency was not sent to your last known address. If the court agrees, it will set aside the tax assessment.
Very few taxpayers win this issue in tax court.
While the tax code generally requires that the IRS give you notice and the right to contest an audit before issuing and collecting on a tax bill, there is one exception. The IRS has an extraordinary “shoot first, ask questions later” power to assess taxes without an audit under its jeopardy assessment power. Jeopardy assessments must be personally approved by the local IRS director or director of foreign operations, and you do have the right to a hearing—similar to an audit—after the fact.
Jeopardy assessments are authorized only when the IRS believes its right to collect is in danger because of one of the following reasons:
Jeopardy assessments are uncommon and are used mostly against foreigners operating a U.S. business. Other targets are people arrested with large amounts of cash or valuable personal property—often, narcotics traffickers. If your tax bill is from a jeopardy assessment, see a tax pro as soon as possible.
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