The Internal Revenue Service often makes errors when it comes to calculating underpayment interest, refund interest and penalties charged to businesses. As a result, many taxpayers are unknowingly walking away from overpayments that are rightfully owed to them. Regardless of a company’s size, or whether it is strapped for cash or flush, ensuring that every due penny is accounted for against its bottom line is a best practice.
Companies that have recently sold, acquired, or liquidated an entity are particularly vulnerable to IRS mistakes. This year’s first quarter was the highest valued quarter for M&A activity since 2007, largely due to four deals totaling $124.2 billion, and outbound M&A activity has risen over 30 percent in 2014. Amid this surge in activity, the IRS may make errors when calculating interest for companies that have recently been restructured. Discoveries of IRS penalty and interest mistakes can be made during the due-diligence process of acquisitions and company sales and can prove to be valuable to both sides of such transactions.
Startups and young companies are at particular risk for error. Payment amounts and deadlines in the quarterly estimated tax payment process can be a lot for companies to keep straight, especially for those who have never had to manage such processes before. Thus, navigating interest and penalties can be especially cumbersome, since new businesses may make errors or fail to discover IRS errors.
In order to discover IRS penalty and interest mistakes, accountants can complete a “scrub” of a taxpayer’s IRS transcripts of account. This is a review of all account transactions in their entirety, as they affect penalty and interest computations. An analysis will include all types of taxes (including, for example, income, employment and excise) that allow the proper calculation of interest, such as interest netting between tax forms, periods and even between entities.
Having the same specialized software that the IRS professionals who calculate interest use to prepare manual calculations allows for the re-computation of account interest and penalties. There are certain interest provisions that the IRS’s computer-generated calculations aren’t equipped to handle, and taxpayers are not afforded the benefit of those provisions unless they make an affirmative claim. Further, the IRS may make computational mistakes on penalties that often stem from the manual calculations being done. At other times, penalties should not have been assessed at all.
Three Phases of Analysis
Typically, an account analysis project is completed in three phases. The first phase consists of a taxpayer requesting IRS “internal” transcripts from the IRS. Once received they’re received, accountants complete a feasibility study for the taxpayer in order to ascertain which tax forms or periods warrant further analysis.
Following phase one, the correct interest and penalty rules are applied to the account transactions, and the correct calculations are made. Finally, once potential recoveries have been identified and the proper calculations prepared, with the taxpayer’s permission, a refund claim for the penalty or interest is filed with the proper unit at the IRS. The claim is followed all the way through to posting on a taxpayer’s account. The entire process can take anywhere from four to six months, with additional interest accruing on the claim until the issuance of any potential refund.
Other than initial administrative duties, such as executing a Form 2848 (power of attorney) for the transcript request, there’s little to no time investment required of the taxpayer for an account analysis project to be completed. In some cases the fee can be solely contingent on the amount of any recovery of penalty and interest from the IRS, so if there’s no recovery identified, there may be little to no fee.
Cathy Stopyra is managing director of account and interest recovery services and Todd Simmens is national managing partner of tax risk management at BDO USA, L.L.P.