What to Do If You Receive an IDR During an Audit
If you or your business is being audited, the IRS may request information with Form 4564 (Information Document Request). The IRS uses this form during audits on tax returns filed by large businesses, international organizations and exempt organizations. You may receive this form more than once during the audit process, and to ensure you’re prepared, you need to know how to respond.
To help you out, this guide explains what to expect if you receive this form and how to respond. Then, it looks at what happens if you ignore the IRS’s request. Need help now? Then, contact us at Damiens Law today. We are a boutique tax resolution firm committed to providing our clients with personalized services tailored to their unique situations.
What Is IRS Form 4564?
Form 4564 is an information document request (IDR). The IRS uses this form to request documents during tax audits. The form explains the issue being audited and the type of documents you need to provide. It can be paper or electronic.
For example, if the IRS is auditing your payroll returns, the agency may request copies of W2 and W3 forms, canceled checks or proof of ACH transfers, and other information related to payroll. In contrast, if they’re auditing a deduction claimed on your corporate income tax return, they will request completely different information.
Generally, Form 4564 isn’t a surprise. Before you receive this form, you will receive an audit notice, and often, you will even speak directly with an auditor.
The initial Form 4564 requests basic books and tax records. After you provide this information, the auditor will review it, and if they need more information, they will send another Form 4564. Before sending subsequent forms, they will let you know which issue they are investigating, and they will outline the documents they want to see.
Types of Records Requested
An IDR can request all kinds of information including income documents, bookkeeping reports, bank statements, canceled checks, or receipts. It can also request electronic accounting records including usernames and passwords.
Keep in mind that the IDR is not the only way auditors gather information. They may also conduct interviews, sample business data, go on tours of your business, analyze your balance sheet, and look at M-1, M-2, and M-3 schedules.
In some cases, the auditor may request a site visit in addition to sending the IDR. You can’t really deny this request, but the auditor should give you ample time to prepare.
Auditor Requirements for IDRs
IDRs should have clear language, and they should be customized to you and your industry. The auditor should discuss the form and its consequences with you at least 10 business days before sending it. Then, they should give you a reasonable amount of time to respond.
If you feel like an auditor hasn’t followed this process, you should reach out to a tax professional for help. You can also contact the Taxpayer Advocate Service. This is an independent part of the IRS designed to help people who are struggling to get results through the usual channels.
Tax Code Basis for Information Document Requests
Does the IRS really have the right to pry into your personal or business finances? Yes, Internal Revenue Code 7601 says that IRS employees have the right to request information from anyone who is liable for a tax bill. They also have the right to examine any relevant information related to the potential tax liability.
Here’s an example. Let’s say that you file your tax return and report $50,000 in income. However, the IRS believes that you have unreported income. The IRS doesn’t need any proof of this. Based only on suspicion, the agency can request information from you.
In this case, the agency may want to see your bank account statements to see if you have extra income going into the bank. If you refuse to share those documents, the IRS can refer the issue to the courts, and at that point, the documents will be summoned from you or directly from the bank if you don’t cooperate.
How to Respond to Form 4564
To help the audit move forward smoothly, you should provide all of the information requested on Form 4564. Feel free to provide any documents that support the information reported on your tax return. But don’t necessarily provide more information than you need to.
If you’re worried that you committed tax fraud on the return being audited, you may want to consult with an attorney before you respond. You should also consult with a tax professional if you need help recreating missing records or if you just want support during the process.
When responding don’t write “FRE408” or “for settlement purposes only” on your documents. FRE408 stands for Federal Rules of Evidence Rule 408, and some people think that they can get a back door offer in compromise by writing this on their documents. Don’t do this. The IRS will just reject your documents if they have these types of notations.
What Happens After You Respond
After you respond to the IDR, the auditor will talk with you about the information that was submitted. If you both agree with everything, they will wrap up the audit. If they make changes to your tax return, they will issue a Notice of Proposed Adjustments.
If you and the auditor have not come to a conclusive agreement, they will issue another IDR along with an acknowledgment of the facts (AOF) with Form 886-A. This form lists the facts that have been established thus far in the audit, and you have the following response options:
- Agree with the facts.
- Disagree with the facts and provide information to support your position.
- Note that facts are missing and provide info about omitted facts.
- Other — If the first three reasons don’t apply, you can write in another reason.
This allows you to have some back-and-forth with the auditor. Ideally, you should be able to complete the process by working directly with the auditor. However, if you can’t come to an agreement, they will issue a Notice of Proposed Adjustmentment, and the NOPA will outline how to appeal.
What If You Don’t Respond to the IDR
If you don’t respond to the IDR, the auditor will try to get in touch with you within five business days. If you have a good reason for not responding, they will give you a 15-day extension. If you just didn’t respond or if the auditor can’t reach you, the IRS will send you a delinquency notice (IRS Letter 5077).
Failure to respond to the delinquency notice will lead to a pre-summons notice and then a summons. Based on IRC 7602, the IRS can summon anyone who is liable to pay a tax or anyone who has control of or connections with the information the agency wants.
The agency doesn’t need any proof to issue a summons. They just need a suspicion that there is an issue. They can even summon people if they just want to make sure that the tax law isn’t being violated.
As indicated above, the IRS must go through a process before issuing a summons. However, if you receive the IDR and state that you won’t provide info without a summons, the auditor can just jump to the summons process.
When documents are located outside of the country, the IRS will alert the Cross Board Activities (CBA) Information Gathering Practice Network team about the issue. Then, they will decide how to proceed.
What If You Don’t Provide Enough Info in Your Response
Now, what if you respond to the IDR but your response is incomplete? In this case, the auditor will also reach out to you within five business days. Then, if you have a good reason for providing an incomplete response, they will give you a 15-day extension. If you don’t have a good reason, they will move on to the summons process.
What If You Miss the Extension
If you miss the extension to provide more information (either after no response or an incomplete response), the IRS will move on with the summons process. To protect yourself during the audit, try to be as cooperative as possible. The IRS gives taxpayers numerous chances to provide documents, and it will hurt you if you miss deadlines.
IRS Summons Requirements
Under the Powell requirements, the IRS can only issue a summons if the following are true:
- There’s a legitimate purpose for the inquiry.
- The inquiry is relevant to the purpose.
- The info requested is not already in the IRS’s possession.
- The procedural steps outlined in the IRC must be followed.
The IRS cannot use a summons to harass a taxpayer or pressure them to settle a collateral dispute. If you think that the IRS is abusing your rights, you should contact a lawyer immediately. Remember auditors work for the IRS. A tax attorney works for you.
When you are summoned, you have the right to representation. You also have the right to invoke the 5th Amendment. That means you don’t have to provide testimony that incriminates you. Additionally, you can rely on spousal privilege, doctor-patient privilege, and tax practitioner
If you don’t respond to the summons, the IRS can initiate a civil proceeding in civil district court. Then, the court can compel you to appear. If you don’t, the court can issue fines or hold you in contempt of court. The IRS, on its own, can’t take these actions. It must go through the court system.
The IRS can refer criminal cases to the Department of Justice. This is rare, however. Most cases are handled on the civil level.
Depending on the information discovered through the IDR, the auditor may adjust your tax return, and they may also assess penalties. Auditors must get their manager’s approval for all penalties, but they also have to get approval if your return understated tax and they don’t apply a penalty.
There are several different audit penalties including the following:
- Penalty for failure to pay estimated income tax
- Failure-to-file penalty
- Failure-to-pay penalty
- Fraud penalties
- Penalties for filing frivolous returns
- Accuracy-related penalties including penalties for negligence or substantial understatement.
- Penalties for failure to include reportable transactions.
- Penalties for erroneous claims for refund or credit.
These penalties are typically a percentage of the unreported tax. To explain, let’s say that your audit reveals that you underreported the tax due by $1,000. If the auditor assesses a failure to pay a penalty, it will be a maximum of 25% so $250. A fraud penalty, in contrast, can be 75% or $750.
The type of penalties you get can have a substantial effect on the amount that you owe. To reduce the penalties, you should work with a tax pro during the audit process. If you’ve already incurred penalties, you may want to work with a tax pro to apply for penalty abatement.
Get Help With IRS Audits
If you’ve received Form 4564, we can help you. The team at Damiens Law has extensive experience guiding clients through audits. We can help you respond to this notice and deal with any other aspects of the audit.
To get help now, contact us at Damiens Law today. We know how stressful an audit can be, and we will work diligently to get you through the process as painlessly and inexpensively as possible.