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Taxpayers are required to maintain records in sufficient detail to enable the preparation of an accurate tax return. Thus, in the context of an examination, the Internal Revenue Service (“IRS”) has broad authority to examine a taxpayer’s records to ascertain the correctness of any return. Did you know though that the IRS is also permitted to contact third-parties in order to obtain information to assist it with the assessment or collection of tax (IRC §7602(c))? The IRS can, and the only thing worse than being audited by or owing additional money to the IRS is having your employers, colleagues, clients and friends all know about it!
Current rules require the IRS to provide notice of its intent to make contact with persons other than the taxpayer no less than 45 days prior to making such contact. This advance notice generally gives taxpayers an opportunity to volunteer information that would make third party contacts unnecessary. It also gives taxpayers an opportunity to avoid potentially embarrassing and reputationally damaging situations. However, the IRS’s newly proposed Treasury Regulation § 301.7602-2(d)(5)(iii) through (v), if implemented, would permit the IRS to shorten the statutory 45-day notification period to 10 days, when there is a year or less remaining on the statute of limitations for collection and certain other circumstances exist.
National Taxpayer Advocate Erin Collins recently criticized these proposed changes. Remember, the IRS’s authority to make adjustments to a taxpayer’s income tax liability is generally limited by the 3-year statute of limitations set forth in IRC § 6501, with notable exceptions (i.e., where there is a failure to file a return, a gross omission, or fraud). In a recent blog post, Collins wrote that “[g]iven the extremely short ten day timeframe the IRS regulations propose, where one year or less remains on the statute of limitations, it is not unreasonable to believe that some taxpayers will feel pressured to agree to extend the statute of limitations or otherwise settle the underlying issue to avoid the potential embarrassment of the IRS contacting a third party. Furthermore, the ten day timeframe is so short, it is possible some taxpayers may not receive the notice with enough time to reply.”
While it remains to be seen whether these proposed regulations will take effect, they provide a good reminder to taxpayers: always open your mail from the IRS as soon as you receive it. This reminder holds especially true given the continued delays in taxpayers timely receiving mail from the IRS.
Read more about the proposed IRS regulations here:
