Although IRS Form 5278 is entitled, "Statement - Income Tax Changes", it is essentially the same as Form 4549. It is used to either propose changes to your return in an audit or as support for the issuance of a Notice of Deficiency.
If your return(s) are not filed
You could have received the Form 5278 along with a Notice of Deficiency when you have unfiled returns and the IRS has determined that you owe. In this case, you have the choice of preparing the returns or filing a Petition in Tax Court within 90 days. In the Notice the IRS might list all the documents upon which they rely to charge you the tax. But, if not, call the IRS at 1-800-829-1040 and order your Wage and Income Transcripts for the tax years. Contact our office so we can prepare your file and avoid trouble.
If your return(s) are filed
More likely, you have participated in an IRS audit and the IRS is reporting its findings to you on Form 5278. They also can use Form 4549-A or Form 4549-E. The IRS might also use Form 4549. They also will include various cover letters: Letter 525, Letter 692, Letter 950, Letter 1912, & perhaps, Letter 5262, which gives you another chance to respond.
The IRS will usually request that you sign & agree to the balance due with Form 870 or ask you to sign the second page of the Form 5278.
The legal implications of signing and agreeing to this are serious so please DO NOT sign the second page if you do not agree. This is NOT A BILL so don't give up! Depending on how prompt you are, we can force a revision of this Form 5278 or we can always go to Appeals or Tax Court!
Steps in response to Form 5278
Your options are: 1) to pay the bill, 2) to gather more evidence or law to support your case & Respond with Form 12661, 3) appeal to the agent's manager, 4) Appeal within the IRS, or 5) wait for a Notice of Deficiency and petition Tax Court. See Prep Steps - IRS Appeals or Prep Steps - Court Cases.
If You Agree
If you agree with the calculation on the Form 5278, sign & send it by certified mail to the agent at the IRS office address on the 2nd page or on any Letter 692 or Letter 1912 you may receive. You can also send them money but if you can't pay it entirely the IRS will send a bill to you with instructions. See Prep Steps - Collections.
If You Default
If you do not respond to Form 5278, the IRS will send you a Notice of Deficiency. This gives you 90 days to petition Tax Court. If you do not file a petition, the IRS will bill you for the taxes. Tax Court is often the best choice because it is less expensive & more fair.
Audit Timing
The IRS usually has 3 years to audit you. If time is running out, they will likely ask you to sign an extension (Form 872) so they can continue to examine you. Please do not sign this without legal advice, either. We generally do not grant extensions to the IRS.
Since an audit is a legal process, attorney guidance is critical. We have Prep Steps for you to follow for the crucial documents to bring to your confidential attorney meeting. The attorney is an advocate & will prepare an Action Plan for your specific needs.
If You Disagree
Income Issues
The IRS looks at your Wage & Income Transcripts, your bank accounts & your lifestyle to determine your income. You should get the Wage & Income Transcripts from the IRS Agent or by calling 1-800-829-1040 so you can compare them with your records.
The IRS will consider all deposits into your bank accounts as income unless you can prove otherwise. This can be very tedious so the TaxHelpAudit Program makes the task easy with a section that shows you "How to Prove Deposits are Not Income".
Deduction Issues
The IRS agent may deny you various deductions but give little reason for doing so. Usually, it is because the evidence is insufficient or not properly organized.
The IRS is not allowed to give you legal advice or tell you how to arrange your records. Look at how worthless are their "tips" for preparing for an audit. Each question has its own unique evidence requirement, requiring more than supplying a few cancelled checks or receipts. You will be required to provide titles, insurance policies, purchase & transaction documents, contracts, employment records, court & public records, etc. If the evidence is lacking or not organized correctly you will be rejected by the IRS.
Someone must organize your files or the IRS & even the Tax Court will refuse them. You can do-it-yourself or hire a CPA, bookkeeper or attorney for a cost. The most common reason why taxpayers lose against the IRS is failure of proof & poor record-keeping. Plus, the IRS will impose a "negligent record-keeping penalty"or an "accuracy-related penalty" on you as well! (See IRS Notice 746)
Self-Prepare
The least costly method to self-prepare is to buy a TaxHelpAudit.com program. These memberships show you with video, audio & publications exactly what to gather and how to arrange ALL your documents. Do-it-yourself & save a lot of time & money!
It is wise to self-prepare your records because you are familiar with your business and understand what occurred and where items are located.
To see how the TaxHelpPrograms work see our Advantages page!
Lost Documents
If you didn't keep your records or the records are lost or unavailable we can still re-create your case. Unless you dealt solely in cash, bank records & credit card records can be obtained. Even if you used a lot of cash, we can get affidavits or use industry standards to arrive at a reasonable figure. See Lost Documents.
Please carefully review the issues on your Form 5278 or the requests for information the IRS sent you with Form 4564 or Form 886A.
If the questions relate to a Schedule C, Form 2106 or a Schedule E, please follow the Business Program Prep Steps.
If the questions relate to your Form 1040, Schedule A, Schedule B or Schedule D please follow the Individual Program Prep Steps.
Please also see the TaxHelp Blog series, "Audit Issues".
Attorney Consultation
But, even if you do-it-yourself you still should get legal advice. To prepare you for the most productive attorney meeting we have designed Prep Steps to follow. You save time & money by gathering the documents for the attorney to review. We will create an Action Plan with strategies for your specific case.
