After an audit is completed, you will receive a notice of proposed assessment. It tells you the amount you owe, not including interest and penalties. There's no standard requirement for when the notice must go out; it just needs to go out far enough ahead for the Internal Revenue Service ("IRS") to assess the tax owed before the statute of limitations runs out.
Apart from that, it really just depends on your auditor and the kind of work load that he or she has. Since the IRS is putting an emphasis on quick turnover of audit cases, most auditors should get the notice out pretty quickly once they have all the information they need. This typically takes about 30 to 45 days.
The Notice of Proposed Assessment
Although the auditor has a computer program that crunches the numbers and prepares the notice, usually manager approval is needed before sending it out. In some cases, there may be additional reviews performed as well. And, if an issue is novel or is one that the auditor does not deal with a lot, he or she may need to talk to IRS counsel about how to handle it and what wording to use in the notice.
If you're eager to resolve things and think you'll be able to pay the amount due after the auditor tallies up the numbers, let him or her know. That will probably help speed up the process.
The notice of proposed assessment traditionally does not include the interest computation. This confuses some taxpayers as they think the amount on the notice is the total they must pay. If the notice doesn't specifically include an interest computation, you can expect the actual amount due to be more because of interest. If the notice doesn't include interest, you can ask the auditor to compute the interest to a certain date if you're going to pay it. The interest compounds daily, so the amount changes every day. The auditor must figure this amount separately. The IRS is working toward including interest computations on these notices, but they aren't completely there yet due to the old technology that the IRS uses.
The Post-Audit Process
The following is a typical sequence of events following an audit:
A Notice of Proposed Assessment gives you 30 days to appeal the assessment to the IRS appeals office.
If you don't appeal within the 30 days, or you appeal and lose, then you get a "Notice of Deficiency." This notice gives you 90 days to file a protest with the United States Tax Court (it's an independent federal court, not part of the IRS). This is your last chance to protest the assessment before you have to pay the amount the IRS says you owe.
If you file a protest with the Tax Court and lose, you can appeal to the United States Court of Appeals for the circuit that covers your state. If you lose there, your next appeal is to the United States Supreme Court.
If you don't go to court, or if you go to court and lose, the IRS will assess the tax liability against you and send you a bill for the amount you owe. This bill traditionally is the first one that actually includes an interest computation. The notice will suspend interest for 10 or 21 days to give you a chance to pay it. The IRS can file a notice of federal tax lien after that period expires.
If you don't pay the tax owed after the 10 or 21 days expires, then the IRS will send you between one to four additional notices, each about one month apart. Each letter is more strongly worded than the last. The last notice comes by certified mail and gives you 30 days to pay what you owe or the IRS will start levying assets and income to collect. You have the opportunity to appeal the collection determination if you have not yet made arrangements to pay.
Once you pay the liability, if you didn't go to court earlier and you want to dispute the liability, you have two years from the date of payment to file a refund claim. If the IRS denies your refund claim, you can file a refund suit in either United States District Court (which entitles you to a jury) or the United States Court of Federal Claims (this is a special court that hears only monetary disputes against the government). If you went to Tax Court earlier, then you have had your chance for court review and cannot file a refund claim.
Throughout this entire process, interest continues to accrue on the liability until you pay off the tax. Once the assessment is made, a late payment penalty will be added to the liability if you don't pay within the 10 or 21 day period following the first billing notice. As you can see, dragging out the process before being forced to pay can get expensive.
Questions for Your Attorney
- I received a notice of proposed assessment, should I appeal?
- If I appeal and win, can I recover my attorney's fees?
- If I am entitled to a refund, can I recover interest for the time that the IRS had my money?