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How does the IRS assess taxes on unfiled business returns?

It is very important for businesses in Southern California to file their tax returns accurately and on time with the Internal Revenue Service. If businesses have an obligation to file and fail to do so, and if the IRS is unsuccessful in procuring the return, the agency is authorized by statute to prepare returns and assess taxes against businesses on the basis of those returns.

The assessment is carried out either by a revenue officer or through an automated procedure. Because the number of assessments conducted by revenue officers has increased in the past few years, the Treasury Inspector General for Tax Administration recently conducted an audit to discover whether IRS employees were following the correct procedures during these assessments.

In a report that may unsettle some business owners, TIGTA revealed that there were procedural flaws in a number of the assessments conducted by the revenue officers. The duties of a revenue officer in assessments are clearly laid out in the Internal Revenue Manual. In 21 percent of cases in the sample group, however, TIGTA discovered that IRS employees did not support the assessment with proper documentation.

It goes without saying that, under these circumstances, a business could be assessed taxes it does not owe. To make matters worse, the IRS currently lacks a framework to oversee and correct potentially erroneous assessments made by revenue officers. TIGTA recommended that the IRS develop a review procedure to cure this flaw, and the IRS agreed to do so.

In addition, TIGTA found that in some cases revenue officers did not give businesses the required time to respond to IRS communications. This has the potential to violate a taxpayer's rights. In this instance too, the IRS has no oversight measure to ensure that revenue officers are following the correct procedure. TIGTA again recommended that the IRS create a framework to ensure employee compliance, and again the IRS agreed.

Businesses that find themselves in tax controversies with the IRS should not hesitate to protect their rights. The TIGTA report shows that IRS employees could be handling a case in a way that is substantially detrimental to the interests of businesses. Companies can solve their tax issues through the services of a tax professional who has experience with complicated business tax cases.

Source: Treasury Inspector General for Tax Administration, "Collection Field Function Procedures Were Not Always Followed When Assessing Taxes on Businesses That Have Not Filed Tax Returns," Reference Number: 2012-30-110, Sept. 17, 2012

• There are a number of solutions available to businesses with tax debts or unfiled returns. You can learn more by visiting my Irvine payroll tax page.

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