Part II – “Resolution Efforts” is the second of a 3-Part Series on “Federal Tax Procedure- Audit, Dispute, Resolution for the Cannabis Industry for years 2021 and Onward.” Please subscribe to our newsletter to be notified of future publications in this series, live webinars, and other relevant tax topics for the cannabis industry written by cannabis accountants and tax professionals at www.420cpa.com.
By Simon Menkes CPA, Rachel Wright CPA, and Abraham Finberg CPA of AB FinWright LLP (www.abfinwright.com) and 420CPA (www.420cpa.com)
Part 2 – Resolution Efforts
So, you and your accountant or tax attorney have met with an IRS examining agent at your location, or perhaps at their office, and you’ve presented solid proof that they’re barking up the wrong tree. And instead of leaving your tree alone, they start barking louder and longer and standing firm in their position. What can you do now? How do you resolve matters?
Keep Your Cool
The first and most important tactic to take is to KEEP YOUR COOL. Resolving any situation with a government agency like the IRS has a strong mental component to it. As unfair as your situation may be, if you become combative, then you become the bad guy in the agent’s eyes. This will make it difficult to resolve the issues the IRS agent is impowered to resolve, because now it becomes a matter of principal to them: “holding the line against the abusive taxpayer”. Also, the agent can pass on this negative impression of you to anyone they talk with up the chain of command, further tainting the possibility of a peaceful resolution of your case. Keeping your cool means being respectful in both verbal and written discussions. Understanding that you have other avenues of resolution and people you can speak to beyond this one “myopic” agent may help you to stay calm – you are not at his or her mercy!
Step One – Resolve As Much As Possible Now
Step one in the Resolution Process is to resolve as much as possible at this lower level. This will save time and money (for both you and the IRS) and emotional stress (for both you and the agent!), so everyone is motivated to find solutions. The agent also has an incentive to obtain a quick and peaceful resolution to your case because it makes them look better to their superiors.
Are Matters Factual or Legal?
It’s important to start by understanding whether the issues involved in your case are factual or legal. For example, if the audit revolves around issues of fact, like the actual amount of sales you had or the reasonableness of the items listed in Cost of Goods Sold, the agent may have substantial authority to resolve the dispute.
Agents have resolution authority, but their settlement authority is much more limited, since settlement involves settling disputes so as to avoid “the hazards of litigation”, which are heavily influenced by legal issues. Lower-level agents don’t usually have much ability to resolve legal issues. If a legal matter arises, this often quickly leads to an impasse, and it’s best to respectfully acknowledge this to the agent and move on to the next topic. Generally, legal issues are dealt with during the appeal process, which happens later.
If your case involves both legal and factual issues, the best course is to clarify those factual issues, making sure that the differences between your position and the IRS’s is stated clearly in the examiner’s notes, because their statement of facts and points-of-difference will be relied upon by the IRS in all future settlement discussions.
Full or Partial Resolutions
If a full resolution is reached, the agent will prepare Form 4549, Income Tax Examination Changes, which summarizes the adjustments made as a result of the audit. If there is a partial agreement, then the agent may have you sign Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. This will result on an immediate assessment of tax on agreed issues without the need to issue a formal Notice of Deficiency.
Does Technical Services Approve?
It’s important to note that any agreement you reach with the IRS is not binding on the IRS until it has been reviewed by their Technical Services department (TS). TS reviews the agent’s paperwork to make sure it covers all the raised issues and conforms with IRS rules. Once TS passes the agreement, the local office will issue a report confirming the agent’s findings; then, any resolution you’ve reached with the agent becomes final.
Unagreed Cases – the 30-Day Letter
If a complete resolution with the examiner cannot be reached, Form 870 is sent with a transmittal letter known as the 30-Day Letter. The 30-Day Letter gives you the following options:
- You can accept the findings of the agent as listed in Form 870, or,
- You can request a conference with the locals IRS Appeals office. Your request must, of course, be received within 30 days of the issuance date of the transmittal letter. If your dispute is over $25,000, your request for a conference must include a formal written protest, prepared by your accountant or lawyer, setting forth your position, or,
- You can do nothing, in which case you’ll receive a Statutory Notice of Deficiency.
Statutory Notice of Deficiency and the 90-Day Letter
If you receive the Notice of Deficiency, also known as the 90-Day Letter, you have 90 days to file a petition with the Tax Court of the United States, or the tax will be assessed.
Time is Critical!
With both the 30-Day and 90-Day, timing is critical. You must respond within these time periods or you’ll lose the ability to appeal.
Please stay tuned for Part III of “Federal Tax Procedure- Audit, Dispute, Resolution for the Cannabis Industry for years 2021 and Onward” where we will discuss “The IRS Appeals Process.”
We are licensed California CPA’s who serve clients throughout the state and in all legalized cannabis states in the US. Please feel free to reach out to our office at 420CPA in conjunction with ABFinWright LLP at (310) 237-3070.