TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
INFORMATION PROVIDED TO TAXPAYERS WHEN REQUESTING EXTENSIONS OF THE ASSESSMENT STATUTE OF LIMITATIONS CAN BE IMPROVED
Reference No. 2000-10-142
If the Internal Revenue Service (IRS) audits a tax return and determines there is an additional tax liability, it generally must be assessed within 3 years of the date that a return was due or the date that the return was actually filed, whichever is later. This 3-year assessment statute of limitations normally cannot be extended without the taxpayer’s written agreement. The IRS Restructuring and Reform Act of 1998 (RRA 98) § 3461 requires the IRS to advise taxpayers of their rights whenever requesting an extension of the statute of limitations on assessment of additional tax and penalties. In passing this law, the Congress expressed concern that taxpayers were not being adequately advised of their rights to refuse to extend the statute of limitations or to request that a statute extension be limited to a specific period of time or to only specific issues. This provision became effective on January 1, 2000.
The Congress also required the Treasury Inspector General for Tax Administration to annually evaluate the IRS’ compliance with this statute provision. The overall objective of this audit was to determine whether the IRS provided taxpayers an explanation of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or to specific audit issues. Because the effective date of this law was not until January 1, 2000, we focused our review on the IRS’ readiness to implement the new RRA 98 requirements.
In most of the cases we reviewed with assessment statute extensions, examiners properly advised taxpayers of their right to refuse or restrict the scope of the statute extension. However, in some cases (five percent of our sample) examiners did not indicate in case files whether taxpayers were advised of these rights. As a result, in these cases, we could not determine if the IRS protected the taxpayer’s right to be advised of these statute extension options.
During our review, the IRS distributed guidance to its employees so they would be aware of the new requirements of the law. This guidance should help to ensure that the IRS complies with the law in the future. However, additional information should be provided to taxpayers to adequately explain the potential for additional issues to be audited and the process to limit extensions to specific issues.
Some Examination Case Files Did Not Indicate Whether Taxpayers Had Been Advised of Their Rights
To determine whether the IRS advised taxpayers of their rights when requesting extensions of the assessment statute of limitations, we reviewed a judgmental sample of 203 open examination files that contained a request made after January 1, 2000, to extend the assessment statute of limitations. In most of the cases we reviewed (193 of 203), examiners properly advised taxpayers of their right to refuse or restrict the scope of the statute extension. In 10 cases (5 percent), the examination files did not contain any record that the taxpayers had been advised of their rights to refuse or to restrict the request for an assessment statute extension. An IRS internal survey conducted from March to June 2000 identified that 35 case files did not indicate whether taxpayers had been advised of their rights. It would be a potential violation of taxpayers’ rights if the IRS did not notify taxpayers of their options when requesting assessment statute extensions. If taxpayers were not notified of their rights, extensions granted by taxpayers in these instances may not be valid.
Because revised guidance about the RRA 98 requirements was not distributed timely, some examiners in the district offices were not aware until well after the effective date that new guidance and documentation requirements had been implemented. This guidance included the use of a revised cover letter for examination statute extension requests and a revised publication Extending the Tax Assessment Period (Publication 1035) to advise taxpayers of their rights.
However, the new guidelines do not require Examination group managers to review the case file documentation to ensure examiners had properly advised taxpayers of their rights before approving the statute extension agreement. Because the extension agreement may not be valid if taxpayers have not been notified of their rights, this should be a condition of approval to ensure this requirement is met and there is proper documentation of the notification to the taxpayer.
Extending the Tax Assessment Period (Publication 1035) Can Be Improved to More Adequately Explain the Purpose and Process for Limiting the Assessment Statute
Publication 1035 is the primary source used by the IRS to inform taxpayers about their rights and the procedures for extending the assessment statute of limitations. The IRS made revisions to this Publication in December 1999 to provide additional information on taxpayers’ rights regarding limiting the length or scope of a statute extension. However, the new Publication does not contain certain information that would assist taxpayers in determining whether to request a restricted extension and also what action to take to ensure the restriction is legally binding.
The new Publication does not adequately explain that if a taxpayer consents to an extension that is not restricted to specific issues, the IRS could use the additional time to examine other items on the return which were not previously considered. The Publication also does not completely explain the process for restricting the statute extension to specific issues. It does not explain that the restrictive language must be included on the consent form to ensure that it is legally valid and that the language and terms of the restriction must be approved by IRS Counsel. Both National Headquarters and field Examination managers stated that this information would be helpful to taxpayers in understanding the requirements for inclusion of restrictive language on the consent form.
In addition, after the December 1999 revision of Publication 1035, the Examination Division did not ensure that all examiners were providing taxpayers with the updated Publication and cover letter. It is important that the IRS timely provide updated and complete information to taxpayers about their rights when requesting assessment statute extensions. This information could affect a taxpayer’s decision on whether to ask that the scope of the extension be limited to specific issues.
Summary of Recommendations
We recommend that the Assistant Commissioner (Examination) revise existing guidelines to require group managers to review case documentation to ensure that taxpayers have been notified of their rights before approving statute extension agreements. Publication 1035 should also be revised to more fully explain the terms of restricted and unrestricted assessment statute extension agreements and the process to limit the scope of these agreements. All prior versions of Publication 1035 should be replaced once the revisions are completed.
Management’s Response: IRS management agreed with the issues and recommendations in this report. Guidelines will be revised to require group managers to verify that documentation is present indicating that taxpayers have been advised of their rights before approving statute extension agreements. Management will also revise Publication 1035 to advise taxpayers of the additional information included in our recommendation and will notify all appropriate Operating Divisions to exclusively use the revised Publication 1035.
Management’s complete response to the draft report is included as Appendix V.