If there was a contest for the most dreaded piece of mail, letters from the IRS would win, hands down, every time. These unassuming envelopes have most people yelling profanities before they even begin to tear the paper to reveal what’s inside. The good news is, there are many reasons that the IRS and other taxing agencies contact restaurateurs, so don’t panic! A letter doesn’t always signal an audit.
To ensure that a tax-related notice is handled properly, whether it comes from the Feds or your state taxing agency or county tax assessor, there are four basic steps that need to be followed.
Step 1: Talk to Your Tax Preparer
Immediately, email, fax or snail-mail the notice to your CPA, accountant or individual who prepared the tax return related to the notice. If it’s not clear what form or year the notice applies to, send the notice to the tax preparer that normally handles your restaurant taxes. Ask the preparer to explain to you which agency is requesting information, what tax year is involved, and whom you should contact to assist you in resolving the notice.
Once you’ve identified the person who is familiar with your specific notice, you’ll need to find out if that person has records to support the notice. If he has the records and has responded to this type of agency in the past for other taxpayers, ask him to draft a response to the agency and deliver it to you for review. Make sure he attaches all supporting documents as if this was the final notice to be sent to the agency. It is very important to make sure that the person representing you has represented other taxpayers in the past in regard to the specific agency and is confident with the agency’s unique procedures. The notice becomes much more difficult to resolve if the CPA has not performed representation before.
I understand that the CPA who prepared the records related to your notice may be a family member or best friend and you may not want to ruffle any feathers, but a notice should not be taken lightly. Most tax preparers do not perform much tax agency representation—usually only if they have to when one of their clients gets a notice. This is a very specialized practice, and specific procedures need to be followed as required by the taxing agency.
Step 2: Assign Power of Attorney
Once you’re comfortable with the individual who will represent you, you need to sign a form that labels them as the Power of Attorney (POA) for your notice. Let me make it clear that you should never represent yourself in any tax agency notice case. You, as a taxpayer, have rights that you might not know about. You also might fail to take advantage of records to which you should have access. Find out the date that your POA will be corresponding with the taxing agency and have him send you copies of all correspondence. Stay involved with the notice from beginning to end.
A tax notice is usually one of the last tasks a CPA or tax preparer wants to respond to since there may not be any fees that can be charged by them to resolve it. In the eyes of a restaurateur, the person responsible for the original preparation of the tax forms should respond free of charge since the assumption is that if the tax preparation was perfect the first time, a notice would not have been generated. However, try not to be too hard on your tax preparer since you’re going to need the POA, who has the records, knowledge and experience to handle these matters.
Step 3: Take Care of Paperwork On Time and Efficiently
Submit the appropriate supporting documentation on time. Go over the response before the deadline and review it with your POA several days prior to the due date. Make extra copies of exactly what is sent to the taxing agency. Use USPS-certified mailing procedures for sending documents. Avoid faxing or using email for your responses since these forms of correspondence can be lost or fail during transmission. Many times, the taxing agencies lose your information, and you’ll need to provide copies and proof of mailing.
Do not rely solely on your POA, no matter how much you are paying them. In the end, you are personally liable for the resolution of the tax matter, and usually penalties and interest are accruing (adding to the tax liability, if any) until the notice is resolved. The squeaky wheel gets the grease when it comes to resolution of tax agency notices handled by a POA. It’s tempting to take the attitude of “out of sight, out of mind,” but do not get lazy! Stay on your POA until you receive a response letter from the IRS or taxing agency confirming that the matter has been resolved.
Keep in mind, for most taxing agencies there’s normally a penalty relief provision if you can prove that you hired an independent person or POA to respond to the notice and, for whatever reason, that POA dropped the ball, causing you to incur additional penalties and interest. Normally, a relief is provided and available to taxpayers who can prove they relied on the POA, and under “reasonable cause” they can request the additional penalties and interest to be abated.
Step 4: Prevent Future Screw-Ups
Do not be late, and follow the resolution agreement and payment schedule strictly. Once you receive a resolution notice from the taxing agency, be sure to pay or make arrangements for payment of any additional tax, penalties or interest that are levied on you.
Now it’s time to do some investigation and planning. The tax notice was obviously generated because of some practice or procedure taking place in your restaurant operation. Take the time to find out what this process is so you can take steps to ensure it does not occur in the future. Also, if the identified problem took place in any other tax year that the notice did not cover, perform your own self-audit. Gather all the similar records you provided to the tax agency and keep them organized in your files in the event the same taxing agency comes back in the future. In many states, the sales tax enforcement division will audit the same taxpayer every few years if they find a problem, to verify that the taxpayer has cured the deficiency.
As a restaurateur, you need to build your knowledge and bulletproof your records as you go. Notices from taxing agencies are a way of life and will make you aware of items you need to pay attention to regarding paperwork and practices. Fix any problems and put in procedures so you don’t make the same mistake twice.