Accounting and Consulting

A taxing authority

By Lisa Murton Beets

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Walter M. McGrail, JD, CPA
Senior manager
Cendrowski Selecky PC

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Most taxpayers dread the thought of receiving a letter in the mail from the IRS or the state taxing authority. If it happens to you, the first thing not to do is throw it in a pile.

“Address the letter immediately,” advises Walter M. McGrail, JD, CPA, senior manager at Cendrowski Selecky PC. “Failure to respond before the given deadline can have serious consequences.”

There is a specific process to follow, and if you adhere to it, the matter should be able to be resolved in a reasonable amount of time. There are instances, however, when professionals are better suited to reply to and handle inquiries than the average taxpayer. The key is to know when you need help.

Smart Business asked McGrail to provide guidance on responding to such letters.

What should a recipient do first?

First, open the letter. Confirm that it is indeed meant for you. Does it state your name, taxpayer identification number, the tax year and type of tax in question? Does the matter look like something you can resolve quickly? Next, look at the deadline for responding. If you know you can’t comply with the deadline, call anyway to acknowledge the letter. In almost every instance, the taxing authority will place a hold on collection activity and grant you an extension if you ask for more time. At all times, don’t ever voluntary give more information than you are asked for. Taxing authorities can and will use anything they hear or see to expand the scope of the inquiry if they think it is warranted.

When is professional assistance required?

Unless you’re dealing with a simple 1040 personal return, it’s generally recommended that you seek professional help. If you’re dealing with any type of business return (partnership, LLC, corporation), find an expert. First, contact the person who prepared the returns. If you aren’t comfortable with them or have disengaged them, find another expert the same way you’d seek any other service provider — do an Internet search, go by word-of-mouth, contact your local accounting societies (e.g., Michigan Association of CPAs).

How do I designate a representative to assist me with the taxing authority?

Filing a Form 2848, Designation of a Representative, will give your CPA power of attorney and grant him or her the power to contact the tax authority and try to resolve the issue. When you first show your letter to a CPA, he or she can determine whether the matter can be responded to quickly or whether it is worth pursuing. If it needs to be pursued, the power of attorney will authorize the CPA to meet with the taxing authority and enter into agreements that may become binding.

What will the CPA do?

If it involves a quick response, the CPA will restate the issue as to how he or she sees it on the notice and provide some type of response, be it factual or in reference to a law, etc., and reply with a letter. The letter will ask for a remedy. For example, ‘We agree we owe the tax; can the penalty be eliminated?’ If the matter is more complicated, the CPA may ask the taxing authority to come to his or her office for an in-person meeting.

If the taxing authority is right, will I have to pay taxes, interest and penalties?

Again, this is where a professional can help. He or she will help define if the taxing authority is ‘wholly’ right or ‘partially’ right. This is where negotiation comes in. While there is very little anyone can do about interest, experienced professionals generally have a fairly high success rate of getting penalties eliminated if they can demonstrate that a taxpayer qualifies for penalty abatement.

How is the process finalized?

Make sure you’ve asked for a specific remedy and bring the process to a close. For example, if you go through an audit, make sure everyone signs off on the resolution. Get a letter stating ‘no change,’ or if some type of tax is owed, make sure it is specified.

If you can’t resolve issues with the IRS in more or less informal ways, there are certain administrative steps you have to move through, involving specific timing and procedures in more of a court and legal environment. Most of these cases are motivated to settle, not go to trial. If you do end up going to trial, CPAs can represent you, but more likely, you’ll want to seek counsel.

WALTER M. McGRAIL, JD, CPA, is senior manager at Cendrowski Selecky PC. Reach him at (866) 717-1607 or cs@cendsel.com or visit the company’s Web site at www.cendsel.com.