You Received an IRS Letter 6316, Now What?

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Zachary J. Montgomery

Zachary J. Montgomery

Attorney

469.998.8484
zmontgomery@freemanlaw.com

Zachary J. Montgomery is a dual-credentialed attorney and CPA. He practices in the area of federal and state tax litigation, white-collar defense, business and tax planning, and litigation. Mr. Montgomery has experience representing both businesses and individuals in federal tax controversies, including appeals, examinations, penalty abatement and collection matters. He has also represented taxpayers—from small organizations to Fortune 500 companies—with Texas franchise tax refund claims, audits, penalty abatement, and corporate structuring.

Mr. Montgomery is a graduate of the University of Virginia School of Law where he focused his studies on corporate and tax law and served on the editorial board of the Virginia Tax Review. Prior to joining the firm, he gained experience with PricewaterhouseCoopers, LLP, and a regional firm, focusing on federal and state tax controversies. His previous experience also includes Ernst & Young, Deloitte & Touche, and a judicial student clerkship with the First Court of Appeals of Texas.

Mr. Montgomery is a graduate of Texas A&M University, where he graduated Summa Cum Laude and received his B.B.A. with a double major in Accounting and Business Honors and his M.S. in Management Information Systems. While attending Texas A&M, he developed his business acumen, working as an enterprise risk consultant and financial analyst.

You Received an IRS Letter 6316, Now What?

Audits are nothing new. Taxpayers may find themselves in the unfortunate situation of opening their mailboxes to an IRS examination letter. The IRS Letter 6316 (“Letter 6316”) is one such letter. The IRS issues these particular letters as part of its National Research Program, and the IRS is certainly issuing them—I have spoken with multiple taxpayers who have received such letters in the last few months alone. Taxpayers must pay attention to these letters, as well as others, and understand their rights and responsibilities with respect to each. Our firm has previously described other IRS notices/letters: You Received an IRS CP518 Notice, Now What?; You Received an IRS CP504 Notice, Now What?; You Received an IRS CP15 Notice (re: Form 3520 Penalty), What Now?; You Received an IRS LT11 Notice (or Letter 1058), Now What?; and You Received an IRS Notice CP2000, Now What?. This article discusses the Letter 6316 and how a taxpayer should respond.

What is the Letter 6316?

Generally, a taxpayer receives the Letter 6316 from the IRS as part of the IRS’s National Research Program (“NRP”). The IRS letter’s first line states as much: “We’ve selected your federal income tax return for the tax period shown above for a compliance research examination.” Despite many taxpayers’ initial thoughts, the IRS examination letter is not necessarily spurred by errors or issues on the taxpayers’ federal income tax return(s).

According to the IRS, the IRS needs reliable compliance estimates to determine which key areas of noncompliance to address and which treatments to apply to maximize the use of its limited resources.[1] Consequently, data provided by NRP examinations give the IRS the information to meet these needs.[2]

The IRS expounds on NPR examinations in Notice 1332:

Your return was selected at random for a compliance research examination. We usually select returns for general examinations because there is some indication that the return is incorrect. We also randomly select returns for compliance research examinations in order to gather data for use throughout the Service to improve our tax system. We recognize that taxpayers who consistently meet all of their tax obligations bear their fair share of the overall tax burden. Our mission, however, includes examining enough tax returns to ensure that the federal tax system is administered fairly and that any errors on the examined returns will be corrected.

The random selection of your return does not mean it contains errors, but allows the IRS to collect information in a statistically valid manner about how taxpayers meet their tax responsibilities. This information will help us determine what changes to IRS forms, publications, and tax laws may improve voluntary compliance. It will also be used to guide improvements to how the tax laws are enforced, and to programs designed to help taxpayers understand and comply with the tax laws. All this improves the fairness of the tax system.

There may not be any errors in your return; however, if there are, we will tell you and give you a chance to explain them. If you overpaid your tax, we will send you a refund plus interest. If any tax is due, we will ask you to pay it plus any penalties and interest due as required by law.

It is to the advantage of all taxpayers that everyone pays their fair share of taxes in accordance with the laws enacted by Congress. We appreciate your cooperation with the examination of your return.[3]

Next Steps for the Taxpayer

If a taxpayer receives a Letter 6316, he or she should obtain representation as soon as possible. A taxpayer should not be fooled by a “research” audit. Such audits are typically more involved than a “regular” audit. Unlike a typical audit where a tax return has been flagged for a particular issue or issues, a research audit involves a complete review of the tax return. Taxpayers will need to muster information and supporting documentation for everything represented on the tax return. Moreover, despite the name, research audits may result in assessments of taxes, penalties, and interest. That is, for the taxpayer who draws the short straw for a research examination, an auditor may determine he or she owes additional amounts for various reasons, such as: lack of support/documentation for expenses/deductions or misreporting certain tax items.

Collection Alternatives & Due Process Rights

Further, if changes to the tax return result in taxes, penalties, and interest owed to the IRS, taxpayers must also understand their rights and collection alternatives. A taxpayer can pursue certain collection alternatives, such as installment agreements and offers in compromise. While such installment agreements and offers are pending, no levy actions can occur.[4] However, taxpayers may also request (and are entitled to) a hearing. Collection Due Process (“CDP”) hearings are crucial to taxpayers. Taxpayers have a right to a CDP hearing with the IRS Independent Office of Appeals before levy action is taken. According to the IRS, a “CDP hearing is an opportunity to discuss alternatives to enforced collection and permits you to dispute the amount you owe if you have not had a prior opportunity to do so.”[5]

Conclusion

The Letter 6316 may arrive in a taxpayer’s mailbox based on random selection by the IRS. Taxpayers need to know that they have rights and options to address these types of IRS letters. While this examination may be initiated for research purposes, taxpayers may still be subject to a full-blown audit of their entire tax returns and face tax, penalty, and/or interest assessments. Taxpayers who receive a Letter 6316 should consider contacting a tax advisor to determine the best course of action in responding to the IRS.

 

Expert Tax Attorneys

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[1] I.R.M. 4.22.6.1.1.

[2] Id.

[3] IRS Notice 1332, Why Your Return is Being Examined.

[4] See I.R.C. § 6331(k).

[5] Collection Due Process (CDP) FAQs, IRS, available at: https://www.irs.gov/appeals/collection-due-process-cdp-faqs.