Tax assessments: how to respond to the IRS?

The tax authorities can initiate different types of tax audit procedures against individuals or companies.

Tax assessments are a procedure initiated by tax authorities to audit taxpayers' returns.

Tax assessments of individuals or companies can take many forms, from audits of accounting records to in-depth, on-the-spot reviews of the regularity of taxes.

But how does it work? What are the procedures? And can the tax agency's decisions be challenged?

Let's find out together in this article.

See all software Accounting

What are tax assessments?

Every year both companies and individuals hand in their tax returns to the Internal Revenue Service, which can be in the form of a 730 form or a 770 form. Once the data on the economic-financial situation is submitted, the Internal Revenue Service has the right to check that this information is true and that no fraud attempt has occurred.

Thus, the tax authority may conduct spot checks of the files registered with the Internal Revenue Service. If an anomaly or inconsistency is found, then tax assessments are made, which is a detailed check carried out by tax agents.

What are the documents under examination for tax assessment?

Within a certain period of time, in fact, the Internal Revenue Service, has every right to proceed to send the assessment on the

• tax returns,
• annual VAT return,
• annual Spesometro invoices and VAT transactions,
• communications on IRPEF, VAT, IRAP,IRES taxes that may be omitted or sent or paid late by taxpayers.

Tax assessments: how do they take place?

Tax assessments change depending on the type of file to be analyzed or whether the person in question is an individual or business owner.

The simplest and most frequently conducted tax assessment is the current account assessment. The IRS requests a copy of the account statements from the bank to verify that the statements made match.

The second type of assessment used is called a synthetic assessment on expenditure indices. In this case, the IRS analyzes your expenses and compares them with your presumed purchasing power, which is determined by your annual income declared to the IRS. If you have purchased a second home or a luxury car and your declared income is almost zero, it is clear that the IRS will ask some questions about your financial situation.

The assessments just described apply both to individuals and to owners of a business or partners in a company. However, for the latter, the IRS may decide to implement additional checks:

• Analytical assessment. This control is performed on the analysis of the company's accounting records, which are compared with the tax return provided to the tax agency
• Inductive assessment. This audit is a real investigation by the IRS into your company's finances. In fact, the IRS has probably deemed your accounting statements to be inadequate and unreliable, so it switches to this mode to personally check your company's asset and financial health.
• Parametric assessment. The Internal Revenue Service makes rough estimates of a company's annual revenue based on industry, number of employees, size of business, etc. If your company, therefore, reports revenues that are far below the established parameters, you may arouse suspicion and be the subject of an audit.

How are tax assessments reported?

The Internal Revenue Service may proceed with the activity of monitoring the payment of tax obligations of individuals and corporations.

As we have seen, it can use different methods of assessment to verify that citizens do not commit violations regarding the payment of state taxes due.

Once, however, the tax agency has determined that there has been an irregularity in payment, it can use two methods to communicate the tax assessment:

• the notice of assessment
• the notice of assessment

The tax assessment report

If the agents of the Guardia di Finanza conduct an on-the-spot inspection at the taxpayer's physical location and find anomalies, they will proceed to compile a tax assessment report listing all possible infractions found and the corresponding amount to be paid.

Notice of assessment

In the event that tax agents did not show up on the spot, but the tax office conducted the audit through the methods of assessment we have discussed, the taxpayer in question will receive a notice of assessment, which is a court document listing the amount to be refunded to the tax agency and a detailed account of the audit conducted.

In this legal document, the reasons for the assessment must be explained in detail, specifying:

• "the assessed taxable amounts and the rates applied
• the taxes assessed, gross and net of deductions, withholding taxes and tax credits
• the office from which information can be obtained as well as the person in charge of the procedure
• the manner and deadline for payment
• the court to which it is possible to appeal."

Agenzia delle Entrate

Can you challenge the decision?

If you have received a tax assessment from the Internal Revenue Service and do not agree with their decision, you have three options to try to recontest the ruling:

• challenging the notice
• the appeal
• admission of guilt and acquiescence or adhesion process.

Challenging the notice of assessment

Article 12 paragraph 7 of the Taxpayer's Statute (Law 212/2000) stipulates that the notice of assessment should be sent to the person concerned only once 60 days have elapsed since the delivery of the record of the closure of operations. If the Internal Revenue Service has, therefore, sent you this notice before the stipulated 60 days, you can avail yourself of the dispute procedure.

The appeal procedure

If the notice of assessment was sent within the contractual time limits imposed by law, but you disagree with the decision, you can make to an appeal to the tax commission, specifying the reasons why you estimate the tax assessment to be unlawful.

In drafting the appeal, you will need to include the following information:

• Personal data;
• The data of the company's legal representative, if any;
• The PEC address and fax number of the legal representative;
• The identification number of the act to which you are making the appeal;
• The Internal Revenue Service office to which you are making the appeal.

Acquiescence or adhesion process

The acquiescence process consists of an admission of guilt and thus acceptance of the tax assessment in its entirety. In this case, you do not disagree with the tax office's decision and therefore a reduction to one-third of the penalty will be applied to you. If the tax office has not sent you the report of the closing of the operations before the notice of assessment, you will be entitled to a reduction to one-sixth of the penalty.

If you opt for the acquiescence process, you will, however, have to pay the amount set by the tax office within 60 days.

The other option available to you in case you do not intend to contest the decision of the tax agency is the adhesion process. You will try, then, to reach an agreement with the IRS by making a proposal to the tax institute. In this situation, you will have to repay the taxes due to which one-third of the penalties will be added. In the event that an agreement is not reached, you will be obliged to take legal action to settle the dispute, which, however, does not provide for discounts or reductions.

How to make payment?

If the appeal has been rejected and the Internal Revenue Service has determined that you must repay the tax authorities a certain amount of money, you are not obliged to pay the entire amount in one lump sum. In fact, Delegated Law 23/2014, Legislative Decree 159/2014 and Legislative Decree 159/2015 stipulates that:

• for a debt of up to 5,000 euros, the amount can be installment from 2 up to 8 installments.
• for a debt exceeding 5,000 euros, the amount can be installmented from 2 up to 20 installments.

The installments can be on a quarterly basis. But if you choose this option, additional criteria apply:

• for debts of up to 50,000 euros, the amount can be accrued up to 8 quarterly installments
• for debts exceeding 50,000, the amount can be accrued up to 16 quarterly installments

See all software Accounting

Can tax assessments become statute-barred?

Tax assessments have specific deadlines within which they can be carried out by the Internal Revenue Service. Past these deadlines, tax assessments can be considered null and void

For the year 2020, in case of detected irregularities, tax assessments and resulting tax notices must be communicated to the taxpayers of interest:

• by the 5th year following the year in which the return was filed
• by Dec. 31 of the 7th subsequent year if the return has not been filed or has been decreed void by the tax office