Your IRS Audit – “It Ain’t Over ‘Till It’s Over”
By Robert S. Schriebman
Yogi Berra was right. Things are not always what they appear to be. Just when you think a matter is completed something unexpected comes along, “out of the blue.” When it comes to IRS audits nothing could be more accurate. IRS audits, at their very best, are stressful; some say traumatic. I have been representing clients before the IRS for over 3-1/2 decades, and I can count on the fingers of one hand the number of stress-free encounters. The IRS is not your friend. The best advice I can give you is do not go it alone.
The IRS usually has three years to audit you after you have filed your income tax return. If you file your return before the April 15 deadline, the IRS has three years from April 15th to audit you. The California FTB has four years. But, like Yogi Berra said, “It ain’t over ’till it’s over.”
There is a little known rule in California income tax law and most CPAs and tax return preparers are totally unaware of it. If you are involved in any kind of IRS matter involving the determination of your IRS income tax liabilities, you must be aware of the California rule. Many tax advisors representing their clients in an IRS audit mistakenly believe that if they drag the audit out beyond the FTB’s four-year audit statute, they can forget about reporting any IRS adjustments to the FTB. Not so. The FTB audit statute stays open indefinitely until the conclusion of the IRS income tax audit. This rule does not apply to IRS payroll tax audits and the EDD. The EDD has not unlimited audit statute.
Today, believe it or not, the IRS is still resolving tax shelter issues from the 1980s. Any income tax adjustments subject to those audits are correspondingly assessable by the FTB with its “me too audit.”
California Revenue and Taxation Code Section 18622 is something you should know about. This provision states, in substance, that upon completion of an IRS income tax matter the taxpayer has only 6 months thereafter to notify the FTB that the IRS matter has been concluded. This notice can take the form of a written letter sent by certified or registered mail or by the preparation and submission of an amended FTB income tax return. The taxpayer has the duty to inform the FTB that they agree with the final IRS determination or where they specifically disagree with that determination. If you notify the FTB by a written letter, you must also attach the results of the IRS determination and also inform the FTB who to contact at the IRS and include a phone number whenever possible.
If you notify the FTB within 6 months after the final IRS determination, pursuant to Code Section 18622, the FTB must issue its “me too” assessment within 2 years from the time you notify them. If the FTB waits beyond the 2 year period, any FTB assessment thereafter is null and void.
If you fail to notify the FTB within the 6 month period required by Code Section 18622, the FTB literally has an unlimited time frame in which to issue its assessment against you. Remember the old Johnny Mathis song, “The 12th of Never”? Don’t put yourself in that position.
When notifying the FTB, pursuant to Revenue and Taxation Code Section 18622, always send your correspondence in a way that you can prove that it was sent. If you are going to send it by registered or certified mail, take the envelope to the Post Office and have them stamp your receipt showing it was sent out on a specific day. You may also use a carrier like FedEx or UPS as they track your letter from pick-up to delivery. You can not be to careful and you may have to one day prove that the FTB corresponding assessment is invalid because it is beyond the 2 year period set forth in the statute.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.