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IRS requests for extension: think before signing.

I need a signed Form 872 to extend the statute so I can complete the audit." How many times have accountants heard that scenario from Internal Revenue agents? This article will highlight information about Form 872 to extend the statute of limitations and will discuss the alternatives to signing a Form 872.

Statute of limitations

Generally, IRS assessments must be made within three years after the return was due or filed, whichever is later |Internal Revenue Code Section 6501~. There is a six-year limitation in cases where the gross income shown on the return or the gross receipts of a trade or business (excluding the cost of sales or services) are understated by 25% or more |Code Section 6501 (e)~.

The most used exception to the rules on assessments and collections is where a written agreement is made between the IRS and the taxpayer to extend the statute of limitations. IRS Form 872 is used for this purpose. Code Section 6501 needs to be reviewed for other situations such as late filing of returns, fraudulent returns, returns filed on behalf of taxpayers by the IRS, etc.

Audit Cycle

The national IRS policies require an audit of a return to be completed well before the expiration of the statute. This will allow sufficient time for the case file to flow through the IRS pipeline, i.e., reviewed by the group manager and the review staff.

As stated in the Internal Revenue Manual at 4111.2, the time frame to complete an audit is 26 months for individuals and 27 months for corporations from the due date of a return.

In agreed audit cases, there should be nine months or more, prior to the expiration of the statute of limitations, to allow for processing of the file. In unagreed audit cases, the IRS needs at least 12 months prior to the expiration of the statute to allow for processing time.

Types of Form 872 to Extend the Statute

When an Internal Revenue Agent discovers the "audit cycle" cannot be complied with, the taxpayer will be asked to extend the statute. This is accomplished by signing Form 872. All agreements to extend the statute of limitations must be in writing between the taxpayer and the IRS.

The two most used agreement forms are:

* 872-Consent to Extend the Time to Assess Tax. This form is used for a fixed period of time extending the statute of limitations.

* 872-A and 872-A(C)-Special Consent to Extend the Time to Assess Tax. This form is used as an open-ended consent extending the statute of limitations for an indefinite period of time.

It is generally used by a Regional Office of Appeals.

Other forms

Extensions of time other than for individuals or C corporations include:

* 872-B-Consent to Extend the Time to Assess Miscellaneous Excise Taxes.

* 872-C-Consent Fixing Period of Limitations upon Assessments of Tax under Section 4940 of the Internal Revenue Code.

* 872-D-Consent to Extend the Time on Assessment of Tax Return Preparer Penalty.

* 872-F-Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership or S Corporation That Have Converted (to non-partnership or S Corporation) under Section 6231 (b) of the Internal Revenue Code.

* 872-N-Notice of Termination of Special Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership.

* 872-O-Special Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership.

* 872-P-Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership.

* 872-Q-Notice of Termination of Special Consent to Extend the Time to Assess Tax Attributable to Items of an S Corporation.

* 872-R-Special Consent to Extend the Time to Assess Tax Attributable to Items of an S Corporation.

* 872-S-Consent to Extend the Time to Assess Tax Attributable to Items of an S Corporation.

* 872-T-Notice of Termination of Special Consent to Extend the Time to Assess Tax.

The circumstances under which the IRS will use a restricted consent are discussed in Revenue Procedure 68-31, 1968-2 C. B. 917 and 77-6, 1977-1 C. B. 539.

Signing Form 872

Generally, the taxpayer should sign an 872. Accountants and other tax professionals may be authorized under the terms of a power of attorney on file with the IRS to sign an 872 on behalf of the taxpayer. In cases of a corporation, a form can be signed by any officer authorized to act on behalf of the corporation (even if the officer did not sign the tax return) |Revenue Ruling 83-41, 1983-1 C. B. 349~.

Parent corporations can extend the statute of limitations for subsidiaries. An officer of the parent who is either an authorized officer of the subsidiary or has authority under the power of attorney by the subsidiary may sign an 872 |Revenue Procedure 72-38, 1972-2 C. B. 813; Rev. Proc. 79-20, 1979-1, C. B. 563; and Rev. Proc. 82-6, 1982-1 C. B. 40~.

Modification of Language to Form 872

While IRS is not favorably disposed to have taxpayers change the official language on its forms, especially to Form 872, the courts have granted approval to do this. The courts have allowed modification to Form 872, provided the changes are made in good faith and the IRS has not been mislead by taxpayer.

In a case where the taxpayer had typed in different language on Form 872-A and the IRS failed to take due diligence when processing the form, the court held the taxpayer had not mislead the IRS. The attempt by the IRS to extend the statute for a deficiency was invalidated |Schwotzer v. Commissioner, 51 TCM 902 (1986)~.

In Huene v. Commissioner, 58 TCM (1989), the court held the taxpayer had misled the IRS when the key words of the Form 872 was changed; the statute was extended. The court held Schenek v. Commissioner |35 TCM 1652 (1976)~ the taxpayer had not mislead the IRS when the Form 872-A was altered, and concluded, the statute had expired. In a situation where the IRS had altered a Form 872 after the taxpayer had signed it, the court held in Piarulle v. Commissioner 80 TC 1035 (1983) that the 872 was not valid to extend the statute.

Factors to Consider

Whenever the IRS requests a Form 872 to extend the statute of limitations, you need to know:

* Why the IRS is asking to extend the limitation period. Some possible reasons are:

(a) compliance with local or national policies; (b) delays by the revenue agent; (c) delays by the taxpayer or the representative; (d) expansion of the audit to include other issues, either civil or criminal; and (e) other compelling reasons agreed to by the taxpayer or representative and the IRS.

* Which year(s) the extension is requested for.

* Extension should only be for a specific tax, such as income tax.

You should question whether a request for an extension of the statute is appropriate in view of the facts and circumstances of the situation. At times this determination may have to be made between an agent's group manager and the representative.

When to Sign

An 872 should be signed when it is indicated the audit will be closed at the agent's level; additional time may be needed by the agent to complete the paperwork. In cases where additional time is needed to develop challenged issues during the audit, an 872 should be signed.

Accountants should protect appeal rights of their clients. When the audit discloses unagreed items of adjustments, an 872 should be signed. In this way, settlement of disputed items may be resolved at the appeals level or, if need be, via the Tax Courts.

In cases when similar issue(s) are pending before the courts, an 872 should be signed. There is the possibility that the courts may hold against the taxpayer. On occasion, a complex issue developed during the audit needs to be clarified by technical advice from the national office. In such cases, the 872 should be signed with an understanding that the advice may be held against the taxpayer.

When Not To Sign

It is always risky not to sign an 872 because the IRS has the advantage. Some, if not all, deductions claimed on a return could be disallowed, forcing the taxpayer to either pay the deficiency or take the matter to the Tax Court. On the other hand, not signing an 872 is a strategy that could work for the benefit of the taxpayer. In this way an IRS commitment will be made as to the direction of an audit.

How many times have accountants encountered agents who seem to be "looking under every pebble on the beach" or engaged in a "disappearing act" that prolonged the audit. A possible reason for this activity is that the agent has started to develop a criminal fraud case on the taxpayer. The agent should be asked directly if a Special Agent is involved with the audit. If so, an 872 should not be signed. This will force the IRS to decide whether or not to proceed with a criminal investigation; if so, an 872 is not needed.

If there is disagreement with the agent's proposed adjustments, by signing an 872 the case file is elevated to the Appeals Division for resolution. On the other hand, by not signing the 872 the disputed issues can be directly taken to Tax Court. Once a case is docketed in the Court, the period of limitations is suspended until 60 days after the Court's decision becomes final.

Termination of Form 872

The assessment period automatically ceases when the specified time frame has expired. When an 872-A is used, the assessment period is extended to a date 90 days after the earliest of:

* a valid notice of deficiency is mailed to the taxpayer by the IRS;

* a termination notice is mailed to the taxpayer by the IRS; and

* a termination notice is mailed to the IRS by the taxpayer.

When using 872-A, a completed form 872-T (872-N for partnership, 872-Q for S corporations) must be submitted to the IRS by the taxpayer or one will be issued to the taxpayer by the IRS.

Be Cautious

Circumstances of a situation will determine when it is appropriate to extend the statute of limitations by signing an 872. Regardless of what reasons the IRS is given to extend the statute, it's best to have a realistic discussion with the agent about the matter. If compelling reasons are not given for the extension, it should be further discussed with the agent's group manager.

It is important for accountants to search out a strategy most favorable to clients, even if that includes not signing an 872.

Highlights

* Caution needs to be exercised by accountants when the IRS requests a Form 872 to extend the statute of limitations.

* The IRS should give compelling reasons for the need to extend the statute of limitations. Is the request appropriate under the facts and circumstances? Meeting to discuss the matter with the IRS group manager may be necessary.

* Accountants need to plan a strategy beneficial to clients. Consider appropriate factors for extending or not extending the limitations period.

* When a prolonged delay takes place with the audit, be alert to possible criminal investigation. If so, Form 872 is not needed to extend the statute.

* The time period agreed to in Form 872 should be reasonable. The time frame can be negotiated with the IRS.

* Terminating a Form 872 is automatic when the agreed time period has expired. Notification to end the extension of the limitation period can be made by either the IRS or the taxpayer on Form 872-T (872-N for partnerships, 872-Q for S corporations).

Neiland Cohen is a self-employed tax consultant in Milwaukee, Wisconsin. He is a retired Internal Revenue Agent. Cohen has a degree in accounting from the University of Wisconsin. He is an Accredited Tax Advisor|sm~, an Accredited Tax Preparer|sm~, and an Enrolled Agent. Cohen is a member of the National Society of Public Accountants, the Wisconsin Association of Accountants and the University of Wisconsin-Milwaukee Tax Association.
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Title Annotation:Internal Revenue Service
Author:Cohen, Neiland
Publication:The National Public Accountant
Date:Feb 1, 1993
Words:1999
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