Taxpayers filing an amended return generally do not increase their chance of being audited, an IRS manager said on October 19. Russell Renwick, IRS group manager (exempt organizations), Baltimore, said it depends on what item is being amended but, that, in his experience, an amended return does not automatically trigger an audit. Virginia Puddister, IRS revenue agent (exempt organizations), Baltimore, said that the IRS probably does not have the resources to audit every amended return.
Renwick and Puddister spoke at an American Law Institute-Continuing Legal Education conference on Tax-Exempt Organizations. Celia Roady, partner, Morgan, Lewis & Bockius LLP, Washington, D.C., moderated the panel discussion.
If a taxpayer is chosen for an audit, Renwick explained, it is better not to file an amended return after the audit starts. Chances are that the audit group will not get the amended return, and the filing will create confusion, he said. It is better to discuss any proposed change with the revenue agent conducting the audit, Puddister said.
Most audits come through referrals or projects, according to Puddister. The IRS does not conduct many random audits, Renwick added. Referrals are reviewed by a group of managers, who decide whether an audit is appropriate, Puddister said. Renwick indicated that the IRS conducts additional research when it receives a referral before opening an audit and does not take referrals at face value.
The most common issues that come up in audits include unrelated business income, employment taxes, intermediate sanctions, unfiled returns, revocation of the exemption and termination cases, Puddister and Renwick said. The office conducts a lot of employment tax audits, Renwick noted, and may request an IRS specialist to help out.
Renwick primarily deals with large case audits, involving taxpayers with $250 million or more in assets. An audit team of several agents will conduct the audit. The team may include specialists in areas such as employment taxes or tax-exempt bonds. In a large case audit, the IRS issues a Notice of Proposed Adjustment (NOPA) for every issue that it is contesting. Roady said it is helpful to get a NOPA and that it gives a taxpayer an opportunity to respond to the IRS’s concerns.
General program audits are conducted by a single agent, Renwick said. Roady pointed out that, in these audits, the IRS provides a revenue agent’s report (RAR), rather than a NOPA. Roady indicated that some matters may show up in a NOPA that would not make it into an RAR.
Puddister said that revenue agents prepare for an audit by looking at what triggered the audit, looking at the taxpayer’s website, conducting Internet research to look for articles on the taxpayer, and studying the organization’s Form 990 information return. The agent will focus on what the organization does and whether its activities have changed since it began and will scrutinize the numbers on the form.
Roady noted that an organization’s general counsel periodically will peruse its website to check on the accuracy of information provided and claims being made. Particularly for advocacy organizations, such as Code Secs. 501(c)(3) and 501(c)(4) organizations, it matters what is on the website, and the organization needs to take responsibility for it, she said.
The IRS issues information document requests (IDRs) to obtain information and documents from a taxpayer under audit. Roady said that some IDRs are clear; others may be overly broad; and responding comprehensively may be burdensome. She suggested talking to the IRS if the taxpayer has a problem with the IDR.
Puddister said that open communication between the IRS agent and the taxpayer is important; if the taxpayer has a problem, talk to the agent or the group manager. Puddister pointed out that, if she requests a particular document, there is probably an issue lurking behind the request and that, eventually, she will want to discuss that issue with the taxpayer. Roady asked about standardized IDRs. Renwick replied that he stays away from that. His IDRs are very focused, with one issue per IDR.
In a team exam, taxpayers and the IRS attempt to resolve issues as the audit is being conducted, according to Puddister. In a general program audit, attempted resolution may not come until the end, at a closing conference, she indicated. Renwick said that an issue should not be a surprise. A taxpayer who is unclear about the issues should ask the agent, and the agent should identify the issues.
The IRS will generally assess penalties if the taxpayer owes additional taxes, Renwick said. The IRS puts the taxpayer on notice, and gives the taxpayer an opportunity to argue good faith and reasonable cause. He added that the IRS tries to be reasonable and noted that, if a taxpayer makes an error and confesses, the IRS may be more lenient on penalties.
Some audits terminate with a closing agreement, but these can be time-consuming, Renwick said. The IRS will try to resolve the audit through the revenue agent’s report, rather than a closing agreement. However, fast-track mediation is faster than the normal process and may involve an expedited closing agreement.
If the issues are not resolved, the taxpayer can file a protest and ask IRS Appeals to look at the case, Roady said. The IRS agent will read the protest and may file a rebuttal, Puddister added. Roady said that the taxpayer should get a copy of the rebuttal, but the IRS does not always provide it.
Renwick said that, if the IRS has enough information on an issue, it will take an aggressive position in the audit. Issues do not just go away.