FAQ Tax Law

What are dividends and how are shareholders who receive dividends taxed? How is the basis of property determined for property acquired by gift? What is the generation-skipping tax and how is it calculated? What excise tax is imposed on the early withdrawal from retirement plans and how can it be avoided? How is the gain or loss determined on the sale of a capital asset? What are the tax consequences and reporting requirements upon the sale of a principal residence? What are the rules for deducting home office expenses? How is the source of income determined? What are the reporting requirements with respect to independent contractors? Which taxpayers are exempt from paying real estate taxes?

Can I challenge the IRS if I get audited and don't agree with the result?

Can I challenge the IRS if I get audited and don't agree with the result?

You do not have to accept any audit report; you can appeal it by sending a protest letter to the IRS within 30 days after receiving the audit report. If you request an appeals consideration, you will be granted a meeting with an appeals officer who is not part of the IRS division that performed your audit.

If your appeal fails, you can then file a petition in tax court. This is a fairly inexpensive and simple process, if the audit bill is for less than $50,000. If it's for more, you will most likely need the help of a tax attorney.

Generally, it pays to contest an audit report by appealing and going to court. About half the people who challenge their audit report are successful in partially lowering their tax bill.

What are my chances of getting through an audit without owing additional taxes?

Fewer than 25% of audit victims make a clean getaway. The IRS audits half as many taxpayers today as five years ago, but the take per audit has increased. The IRS, thanks to its sophisticated computer selection process, audits only those returns in which adjustments are almost a certainty. Realize the odds are against you and focus on limiting the damage from an audit.

I am being audited and the deadline for filing this year's return is fast approaching. Should I file?

Not if you can help it. The danger in filing is that the new return is fair game for the auditor, and she may get permission from her manager to expand the audit to include that return.

Instead of filing, file for an automatic extension until August 15. To do this, get IRS Form 4868, Application for Automatic Extension of Time, and send it to the IRS by April 15. But be sure to pay all taxes due on April 15. If the audit is still going on in August, request a second extension by filing IRS Form 2688, Application for Additional Extension of Time, by August 15. If the second extension is granted, you will have until October 15 to file your return.

If the audit is still alive on October 15, don't file until the audit is completed. As long as you have paid all the taxes due and have no fraudulent intent, you won't incur any penalties or interest for not meeting the deadline. If you owe additional money, send in your payment with a letter stating that the payment is to be applied to the unfiled tax year. The auditor can't make you file your return; if she asks you about it, simply say, "I am not yet ready to file."

Copyright 2006 Nolo

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