When an audit ends with proposed changes you disagree with, you generally do not have to choose between accepting the result and going to court. The IRS Independent Office of Appeals reviews disputed cases and works to resolve them without litigation. This article explains how to request an appeal, what to include, and what happens if the case does not settle.
What Appeals Is
Appeals is an independent function of the IRS, separate from the examination office that proposed the changes. The IRS describes its mission as resolving disputes without litigation in a way that is fair and impartial to both the government and the taxpayer. Appeals conferences are held in an informal manner; they are not trials.
The 30-Day Letter
In an audit that ends without agreement, the IRS generally sends a package that includes a letter known as a 30-day letter, a copy of the examination report explaining the proposed changes, an agreement or waiver form, and Publication 5, which explains appeal rights. The letter gives you 30 days to appeal the proposed changes.
If you agree with the changes, you can sign the agreement form. The additional tax is then assessed, and interest generally runs from the original due date of the return.
If you do not respond to the 30-day letter, the IRS will send a notice of deficiency. That notice generally gives you 90 days to petition the U.S. Tax Court without paying the tax first, and a case petitioned to the Tax Court will normally be considered for settlement by Appeals before trial.
How to Request an Appeal
Small case request
If the total amount of tax and penalties for each tax period involved is $25,000 or less, you may make a small case request instead of filing a formal written protest, either with a brief written statement or with Form 12203. All partnership and S corporation cases, and all employee plan and exempt organization cases, require a formal written protest regardless of the amount.
Formal written protest
A formal protest includes, among other items, your name, address and daytime telephone number, a list of the disputed issues, the facts supporting your position, the law or authority you rely on, and a signed declaration under penalties of perjury (or a representative’s declaration if a representative prepares it). Send the protest to the address in the letter within the time stated in the letter.
Time on the Statute of Limitations
Appeals needs time to consider a case before the deadline for assessing tax expires. According to Publication 5, before an examination case is received in Appeals, IRS policy may require more than 365 days to remain on the statute of limitations, and the IRS will ask you to agree to extend it if needed. The IRS’s audit guidance likewise notes that an appeal is available if enough time remains on the statute.
How Appeals Evaluates a Case
Appeals can weigh the hazards of litigation, meaning the risk each side would face if the case went to court. Under the IRS Statement of Procedural Rules (26 C.F.R. 601.106(f)), Appeals will ordinarily give serious consideration to a settlement offer that fairly reflects the relative merits of the opposing views in light of the hazards that would exist if the case were litigated. It will not settle based on the nuisance value of a case.
A persuasive presentation therefore addresses both the facts and the law: organized documentation of the facts, and accurate citations to the Internal Revenue Code, Treasury regulations and court decisions that support your position.
Timing of evidence matters. According to Publication 5, if you submit new information or raise a new issue requiring additional analysis, Appeals will generally return the case to the originating IRS office for its determination on the new information. Providing complete documentation during the audit helps avoid that step.
Other Ways to Resolve a Disputed Audit
A taxpayer who disagrees with an examiner’s findings can also request a conference with the examiner’s manager. The IRS also offers mediation and other alternative dispute resolution programs for certain cases.
If the Case Does Not Settle
If no agreement is reached in Appeals, the IRS issues a notice of deficiency. You then generally have 90 days (150 days if the notice is addressed to a person outside the United States) to petition the U.S. Tax Court, which can hear the case without the tax being paid first.
Alternatively, you can pay the tax, file a claim for refund and, if the claim is denied, sue for a refund in a U.S. District Court or the U.S. Court of Federal Claims. Those courts generally hear tax cases only after the amount in dispute has been fully paid.
The Bottom Line
Appeals provides an independent review of a disputed audit without going to court. Responding to the 30-day letter on time, choosing the right type of request, and presenting the facts and the law clearly put the case in the strongest position to be resolved at that stage.
Disagree with your audit results?
Tax attorney Cassra Minai, Esq. can review the proposed changes and your appeal options in a confidential consultation.