The IRS will typically request an extension if it is conducting a tax audit and the statute of limitations is close to expiring.
According to Michael Kramarz of Kaufman Rossin, it is probably in the interests of the majority of taxpayers to request an extension of the statute of limitations.
Tax assessments are typically made by the IRS three years after a taxpayer files a return.
In such cases, the government has six years to determine tax liability. Tax may be charged at any time in the case of a false return, an attempt to evade tax, or a failure to file a return.
According to IRC Section 6501(c), the period to assess tax may also be extended with the taxpayer’s consent (4).
Even for minor, inconsequential problems, the IRS will typically request an extension if it is conducting an audit and the statute of limitations is close to expiring.
The taxpayer might naturally want to refuse such a request, but it isn’t always the best course of action. When determining whether to accept an extension, the facts and circumstances of each taxpayer must be taken into account.
Although a specialist can help you make this choice, the average taxpayer is likely to choose to extend the statute of limitations because they wish to avoid the US Tax Court and the Office of Chief Counsel’s participation.
Furthermore, accepting a request for an extension may have benefits for the IRS Independent Office of Appeals.
Involvement of Tax Court and Chief Counsel
In general, the IRS will take action to assess the tax it deems is owed if a person decides not to agree to a statute extension.
At this point, the taxpayer must submit a petition to the tax court if they want to challenge that assessment.
Taxpayers may also pay the required taxes and submit a claim for a refund in district court or before the Court of Federal Claims.
Taxpayers often bear the burden of proof in tax court, giving the IRS an edge.
Furthermore, a failure to extend the statute can be seen as a refusal to cooperate, which could affect one’s ability to shift the burden of evidence under IRC Section 7491 and assert administrative and/or legal expenses under IRC Section 7430.
Taxpayers may want to stay away from tax court for several reasons in addition to the time and stress of litigation. Costly discovery demands and attorney fees are typical costs.
And the Office of Chief Counsel gets engaged after a matter is docketed in tax court.
Attorneys serving as chief counsel are well-resourced and eager to take matters to trial. They are typically the IRS’s strongest advocates because they are accustomed to presenting the IRS’s case in court. The power of chief counsel lawyers to resolve a case may also be limited, in contrast to an appeals officer who is not subject to such restrictions.
Typically, the matter of an appeal docketed in tax court in this way must also be referred for settlement consideration.
However, under some conditions, the matter can be transferred from Appeals to tax court before the taxpayer has had a complete opportunity to be heard there.
Since there are no restrictions on ex parte contacts, the procedure for docketed matters in Appeals often favours the IRS more.
Appeals Benefits of Accepting an Extension
There are a few benefits to appearing in Appeals in this non-docked manner if a taxpayer agrees to prolong the statute of limitations:
Typically, the chief counsel does not participate in the appeals process, particularly for taxpayers who do not fall under the jurisdiction of the Large Business and International Division (LB&I).
Attorneys serving as chief counsel are typically not invited to settlement meetings in appeals.
Employees in the IRS’s examination and other functions, such as appeals, are normally forbidden from communicating ex parte (communication without the taxpayer or their representative present).
This prohibition applies to attorneys from the Office of Chief Counsel and prohibits them from arguing on behalf of the IRS without the taxpayer.
When Refusing to Extend Might Make Sense
The IRS advises taxpayers to consult a professional to determine whether rejecting to extend makes sense for their particular circumstances.
Only LB&I taxpayers or those who can afford to submit a petition in tax court and have a knowledgeable advisor who can handle the docketed appeals process should decline, typically.
Remember that the IRS will be represented by an attorney from the Office of Chief Counsel during the docketed appeals process, which usually works out better for the organisation.
It can make sense to refuse an extension request if an inspection is taking years to complete and the taxpayer is confident they have given the IRS all the information they require.
A specialist might suggest denying a statutory extension if the IRS has all it needs to reach a decision and the taxpayer thinks the IRS is looking for more problems. This will make the IRS responsible for any additional issues it decides to bring up in tax court.
In the case of an incomplete examination, refusing a statute extension may be advantageous to the taxpayer.
Declining the second or third extension request could put the IRS in a tough situation if it is taking an excessively long time to build a case and has so far failed to do so. The IRS must decide whether to abandon its case or continue to pursue it in tax court litigation and discovery.
IRS discovery is limited up until a judge is named or the matter is scheduled for trial.
Even though the IRS may use informal means to request information and supporting materials, if the taxpayer doesn’t answer, the tax court won’t decide on a move to force a response.
The IRS is not permitted to subpoena information from outside parties.
Any third-party depositions require the taxpayer’s permission.
A similar lawsuit will also be filed in Appeals, where settlement options will be considered without waiting for the IRS to build its case.
Additionally, the taxpayer may be able to claim that there is no justification for an adjustment to taxes paid if the IRS is significantly behind in its assessment notwithstanding extensions. This could increase the likelihood of a successful Appeals settlement.
Due to the complexity of the matter, consulting an advisor is advised. However, refusing to extend the statute of limitations for cases that have not yet reached their conclusion can be a wise move for taxpayers who have the means to engage in discovery conflicts with the IRS.
Rejecting an IRS request to extend the statute is rarely advantageous to the taxpayer. It is probably in the best interest of the vast majority of taxpayers to extend the legislation when asked.
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Taxpayer-specific considerations go into deciding whether to accept a request for an extension. Taxpayers who are thinking about making such petitions are recommended to consult with a specialist in federal tax resolution.
