Question on IRS Audit

[Naveen Mohan from New York]

I had a Sub chapter S corp audit. Auditor volunteered to come to my office. He cam off and on for 15 months examining various documents.

The audit finally finished last week. He has levied a tax bill of$ 10,000.00. He is saying that since the tax bill is more than $5,000.00, he is mandated to impose a 20% negligence penalty because the tax bill is more than $ 5,000.00.

He did not find any violation of the law the only thing he found was that client's records were in poor condition. One visit before Before he levied the penalty, he said that he did not really blame the taxpayer because taxpayer is a high school drop out and taxpayer does nto have an accounting abck ground.

My question is that is there any thing in the tax code that if tax bill is more than $ 5,000.00 then 20% negligence penalty is mandatory?

Should I have client pay the penalty to get the case over with because both client and I are getting tired with Auditor keeping the case open for 15 months. Every couple month auditor just showed up at my office saying that I want to see this document and I want to see that document. He picked up the documents and went away.

also this is the first time, I had an IRS auditor who volunteered to come to my office for at least a dozen time, My office is 50 miles from IRS district office.

Am I asking for trouble in asking for this penalty waiver?

Thanks for your help with this.

Naveen Mohan

[ILLMAS]

He said he didn't blame the taxpayer because of his education, but still tacked on the penalty? I will try to convince the auditor that it was an honest mistake, your client knows nothing about keeping their books but he has now hired you to keep his books etc.....

[Mr. Pencil]

He did not find any violation of the law the only thing he found was that client's records were in poor condition.

Search this forum for "6662" and you will find several intelligent discussions of this penalty. It isn't actually "mandatory." It can be abated for reasonable cause, but that's not easy. Still, your best chance is right now. If you can't convince the auditor or supervisor, you can't directly appeal--you'd have to pay first and then file a claim for refund. And then go to Tax Court. Good luck with that!

Even though you have greater than $5000, there might be an argument if it's less than 10% of total. But your problem is failure to keep adequate records so you have to fight a subjective standard. Your strong point is education level which comes up all the time in tax court (unfortunately rarely in taxpayer's favor). Or maybe just basic fairness since taxpayer rights for speedy resolution were so shamefully abused (use that one very delicately!)

[joelgilb]

I would take it to appeals if you don't get the result you think you should. Appeals Officers are fr more reasonable and want to get cases closed, so more likely to give you more on both expenses and penalty reductions

[michaelmars]

if the client is willing to pay the tax then the penalty becomes a bargaining chip as to whether or not you agree with the audit. It is negotiable. After 15 months, the last thing the agent needs is an unagreeded to audit. Sounds like your office is near his home and he liked having a local place to hang out at. I once had that, the agent even came in floppies and would leave at 1 to go to the beach.

[Mr. Pencil]

After 15 months, the last thing the agent needs is an unagreeded to audit.

Probably the last thing he needs is to come up empty after 15 months! For some reason this particular auditor doesn't seem motivated by the idea of a speedy resolution. After giving the taxpayer so much opportunity to support the deductions, the auditor isn't worried about Appeals finding something he missed.

So refusing to sign is an empty bluff in this case. There is no question about misinterpreting the law, just poor records, so what factual basis is there for appeal? The penalty itself can't be appealed at this point--he has to stop the auditor from imposing it. Now, there is a charmingly novel argument for reasonable cause--he never did his homework back in high school either!

[michaelmars]

You are assuming that he was diligent and actually spent 15 months on the audit, to me it seems like it was a place to hang his hat for a while. We had an audit here that was almost as long since we kept getting more and more doc requests. After we got the report of owing $250k we played lets make a deal. There were 3 shareholders, and a corp involved spanning 3 years. We explained that we would agree to the tax if there were no penalties, and that the tax on one shareholder had to be reduced or she wouldn't agree and go to appeal, her share was under $10k. Also if it were brought down to around $200 it could get paid without instalment agreements etc. Low and behold when we got the papers to sign with all adjustments it came to $198k.

[verbanik]

I am lost on where the auditor did his work, has any thing to do with the audit? I have been through many corporate audits and not once did the audit happen anywhere but in our office.

As for the penalty, request to talk to the manager and if that does not produce anything, kindly let the manager know that you will immediately take it to appeals, I agree with michealmars.

Edited February 4, 2014 by kcjenkins
to correct member name.

[bertrans]

Although the 6662 penalty is arithmetically 'mandatory', as has been observed it may be waived (before assessment) or abated (after assessment.) Your client can sign the report, and make sure to pay the tax and the interest: he is not required to pay this penalty before requesting that it be abated.Given your description of the agent, a request for a waiver would indeed be a fart into a headwind. He can, however, file a claim (form 843) and explain what the agent seems already to have admitted - at least orally: viz., insufficient knowledge of record-keeping, etc. This request does not have to go to Appeals; he can file with the Service Centre where he filed the original return.The request will be handled by someone other than the original agent. Good luck.