Question

The IRS is disputing a deduction reported on your Year 1 tax return, which you filed on April 12 of Year 2. On April 4 of Year 5, the IRS audit agent asks you to waive the statute of limitations for the entire return so as to give her additional time to obtain a Technical Advice Memorandum. The agent proposes in return for the waiver a “carrot”—the prospect of an offer in compromise—and a “stick”—the possibility of a higher penalty. Although you have substantial authority for the deduction, you consider the following alternatives: (1) waive the statute of limitations for the entire return, (2) waive the statute of limitations for the deduction only, or (3) do not waive the statute of limitations in any way, shape, or form. Which alternative should you choose, and why?

Answer 1

ANSWER

In the given problem, alternative 2 that is to relinquish deduction for statute of limitations only (and for a reasonable period of time) is beneficial. Waiving the statute of limitations for entire return as in alternative 1 will give IRS time to audit other items on the return. An individual has duty to report these items appropriately and to pay fair share of the tax burden. Also, IRS also has a duty to bring conclusiveness in matters related with taxpayer affairs within the timeframe set by Congress.

Refusing to waive the statute of limitations in some way, form or shape as in option 3 not only will speed up the audit agent to evaluate a higher fine at the last minute, but also impede the prospect of alluring the assessment to IRS Appeals Office or the courts. As an individual have substantial authority for the deduction, Alternative 2 relieves him/her of possibility of precision-related fine. It also gives him time to appeal any adversarial audit conclusion and opens the door for a probable offer in negotiation.

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