Why would anyone agree to sign a Form 872 (consent to extend the time to assess tax)? As I discussed yesterday the IRS, fortunately, does not have forever to collect a tax bill from you, so it would follow that the IRS doesn't have forever to assess you a tax bill, right? You only have a limited amount of time to claim a refund from the IRS, 3 years from the date the return was due or 2 year since payment, so it would only be fair that the IRS be as limited in imposing additional taxes, right? Well…not really.
What should you do about a Form 872 consent to extend the time to assess tax in an Audit Situation?
Generally, and with a whole boat load of exceptions, the three-year rule to assess an additional tax beings to run the date you filed a return. Or it was the date it was originally due, in case you filed early. Yes, this rule too favors the IRS.
The person who may want to assess additional tax against you is called an IRS Revenue Agent. One of the Revenue Agent's primary duties is to not allow a statute on assessment to lapse and thus cost the federal government from receiving "what it feels is due." If the Revenue Agent has a rapidly elapsing statute, he or she will make an immediate assessment of what they deem to be the highest possible amount they can support and then allow you to fight it out later.
We've seen it happen: If the IRS can't get their job done in time, they will act in a manner that is grossly unfair unless you grant them more time to be fair to your arguments.
In such a precarious positions, we often find it is preferable to extend the statute of limitations to assess a tax. This strategy has always worked in our client's favor by giving the Revenue Agent some breathing room to consider our arguments. Also, not consenting the time to assess a tax creates a hostile relationship with the examiner. For the same reason we don't tape-record an audit, this is the same reason we rarely refuse to grant additional time to extend the statute of limitations to assess additional tax.
We use IRS Form 872 to consent, however reluctantly, to extend the time to assess a tax in an audit. Even though the IRS does not like to, and it may be difficult to have them agree, a restricted consent may be possible in certain examination situations. See IRS publications 1035 and 3498.
What should you do about a Form 872 consent to extend the time to assess tax in an Offshore Voluntary Disclosure Program (OVDP) situation?
One of the rules of the Standard OVDP is that you have to consent to extend the time to assess tax using Form 872 . If you don't consent, you can't participate in the program. Additionally, you will also have to extend the time in which the IRS can assess Title 31 FBAR penalties as well. Under the Streamlined OVDP, no consent to extend is needed as the last three years are all that is required to be amended.
