By Cathy Stopyra and Todd Simmens
Underpayment interest, refund interest, and penalties charged to businesses are just a few of the considerations the IRS calculates when determining taxation for a given company. Though comprehensive in its efforts, the IRS is not immune to error. Blind trust in the process can result in taxpayers walking away from overpayments rightfully owed to them.
If a company believes the IRS has made a calculation error, it can undergo a thorough "scrub" of its IRS account transcripts. Conducted by accountants, this three-step process is a periodic monitoring of a company's tax account assessments for accuracy. The focus of the review runs the gamut, with a concentration on everything from excise to income and employment.
Startups Vulnerable to Errors
When it comes to identifying which companies are especially susceptible to overpayment risk, size does not matter. Rather, age is an important factor – startups and young companies are particularly vulnerable to error. The tax payment process can be daunting, particularly for newly established companies that lack experience in these areas.
There are a number of considerations weighing on new companies, including return dates, installments, and employment tax liability. Even without factoring in the possibility of external errors on behalf of the IRS, this process can seem cumbersome and difficult, and may involve a myriad of stringent due dates.
In addition, companies that have recently sold, acquired, or liquidated an entity are also at risk of falling victim to IRS calculation errors. Such restructuring typically brings with it new financial records and histories that companies and the IRS need to take into account during the tax payment process.
With the first quarter of 2014 being the highest-valued quarter for mergers and acquisitions activity since 2007, it is important that affected companies be attuned to the potential tax risk. What companies are the most exposed? If a company can fill in this blank with any of the following choices, it may be time to take a second look at the finances.
“Has the company _______?”
- Sold or liquidated an entity
- Received an IRS refund without interest
- Filed federal returns with credit elections to the subsequent tax period
- Paid penalties on past IRS accounts
- Owed the IRS in one period and overpaid in another
- Filed any carry-backs or tentative allowances
- Received notice about a missing return, a penalty, a balance due, a return that cannot be processed, or additional interest owed
- Filed amended returns with the IRS
- Paid the deficiency interest on its IRS accounts
- Been or is under audit
How to Conduct a Scrub
If a company answers “yes” to any of these questions, it would be wise to conduct a thorough scrub of IRS account transcripts. When conducting a scrub, efforts lie in the proper calculation of interest – particularly interest netting between tax forms, periods, and even entities.
One best practice to establish a strong foundation for accurate recomputation of account interests and penalties is to use the same specialized software that the IRS has to prepare manual calculations. Penalties can be an especially strong source of error in IRS assessment, as they are often calculated by hand.
It is also important to note that computer-generated calculations are not foolproof. There are certain provisions that software is simply not equipped to handle, and taxpayers are not afforded the benefits of these said provisions if they do not make an affirmative claim.
When a company undergoes a scrub to recover funds, the process is threefold.
- First, a request is made to the IRS for internal transcripts of the company’s account. Upon receiving these transcripts, accountants conduct a feasibility study, the results of which indicate specific tax forms and/or periods that necessitate further scrutiny.
- Phase two involves research and technical calculations. Relevant interest and penalty rules are researched and applied, resulting in what is ideally the sum of the potential recovery.
- The final step is filing a refund claim. With the permission of the taxpayer, the accountant may file a refund claim with the IRS for the sum of the penalty or interest accumulation. This entire process can span from four to six months and is tracked throughout. Additional interest collects on the claim until the issuance of any potential refund.
One of the benefits of conducting an account analysis is that there is minimal cost to the taxpayer. With the exception of administrative fees, such as executing a Form 2848, Power of Attorney and Declaration of Representative, for the transcript, costs are often contingent on the recovery of penalty and interest from the IRS. Thus, the risk-to-reward margin is negligible.
For little-to-no financial risk, companies – especially young or startup companies – seek to ensure their tax liability is correct and gain financial peace of mind.
Material discussed is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual circumstances.
About the authors:
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 LLP.