Two years before her epic final runway walk at the 2016 Olympics, Gisele Bndchen blamed Forbes for her IRS audit. “I earn plenty,” stated the supermodel and businesswoman, “but not as much as they say.” Bndchen was targeted by the IRS after being listed at first place on the Forbes list of the world’s highest-paid models for seven years in a row – which included its estimates of her earnings each year.
The results of that audit have not been publicized, but the procedure for concluding the audit of the otherwise exceptional Bndchen is the same as with all other U.S. taxpayers. The documentation varies depending on whether or not the taxpayer agrees with the auditor’s proposed adjustments:
- No-change case (aka no-liability case). This is the desired result for a tax attorney, having the IRS auditor agree that there are no tax adjustments warranted. The IRS will issue a letter stating that no changes have been made and that the audit has been closed.
- Agreed case. All of the auditor’s proposed adjustments to the taxpayer’s return are accepted by the taxpayer. The taxpayer and the examining agent complete a form that describes the adjustments to the return and includes an agreement by the taxpayer to the assessment of additional taxes. Following issuance of a notice to the taxpayer and an IRS manager’s review, the taxpayer receives a Letter 987 (income tax), Letter 987-X (excise tax), Letter 3382 (employment tax), or Letter 27 (estate tax) stating that the audit has officially been closed.
- Partially-agreed case. The taxpayer (individual or corporation) agrees to some, but not all, of the auditor’s suggested adjustments. In this case, a Form 886-A Explanation of Items will be completed which explains all adjustments. This is generally reviewed with the assistance of counsel. The closing agreement will specify which adjustments the taxpayer has agreed with, and those issues will be closed. If there are unagreed issues that may result in a proposed tax deficiency, a “30-day letter” (or a 90-day letter as explained below) will be sent to the taxpayer which will give the taxpayer 30 (90) days to submit an appeal.
- Unagreed case. Where none of the auditor’s proposed adjustments are accepted by the taxpayer, a 30-day letter will be issued unless there is insufficient time remaining in the statute of limitations period and the taxpayer refuses to extend it. In that case, a “90-day letter” (statutory notice of deficiency) will be issued to the taxpayer.
The IRS has three years from the date a return was due or is filed to examine a federal tax return, unless the taxpayer agrees to extend the agreement (or if an exception applies as in the case of a fraudulent return or an omission of more than 25% of gross income). The decision to agree or deny an extension is one which requires considerable strategic planning. For example, consent may be given in an unagreed case to stop the running of interest on the proposed deficiency and permit the taxpayer to request further consideration of the issues by the appeals division. It may be denied to prevent the IRS agent time to identify more deficiencies and make additional adjustments to the taxpayer’s return.
The next blog in this series will cover IRS audit appeals.