The IRS has finally completed poking through your financial history and has concluded your audit. Upon completion, you will receive an IRS examination report in the mail that details all the proposed changes, penalties (with interest), taxes, and possibly even refunds you will receive.
If you agree with the findings of the IRS, all you have to do is sign and return your copy of the report. Pay your fines, and your audit problems are over.
If, however, you disagree with the findings, you have the right to appeal the IRS’s conclusions.
How to appeal an audit
The first step in appealing your audit is refusing to sign and return your copy of the examination report. Doing so results in the IRS sending you a 30-Day Letter that lists the steps of appealing the audit. You are given 30 days from the date listed on the letter (not the day you received it) to file your official protest, although extensions are usually given upon request. The IRS requires that your protest includes each of the following:
- Your name, address and a daytime telephone number
- A statement that you want to appeal the IRS findings to the Office of Appeals
- A copy of the letter you received that shows the proposed change(s)
- The tax period(s) or year(s) involved
- A list of each proposed item with which you disagree
- The reason(s) you disagree with each item
- The facts that support your position on each item
- The law or authority, if any, that supports your position on each item.\
- The penalties-of-perjury statement as follows: “Under the penalties of perjury, I declare that the facts stated in this protest and any accompanying documents are true, correct, and complete to the best of my knowledge and belief.”
- Your signature under the penalties of perjury statement
Accepting your request to appeal
Note that the IRS is not legally required to grant your request for appeal. Your chances of the IRS approving your appeal request are likely if you can prove any of the following:
- You did not receive proper notice for the audit
- The IRS ignored documents that would reduce any taxes or penalties you owe
- You have new documentation to support your case
- You filed an accurate tax return to replace the tax return filed by the IRS during a year in which you failed to file
- The IRS made math errors regarding the amount of tax owed
Denying your request to appeal
Once you receive IRS Form 4549 that details the adjustments to your tax return, you must be certain that you do not want to appeal before you respond to the IRS. Your request to appeal can be denied if you’ve already made a payment or reached a closing agreement with the IRS. Your appeal can also be denied if a United States Tax Court issued a final determination of your owed taxes.
Before you file for an appeal, you must also be sure that the reason you’re appealing is viable. Your appeal must be in accordance to tax laws and relate to a disagreement with the IRS’s conclusions. Cases cannot be appealed for moral, religious, political, or constitutional reasons.
Your letter of protest to the IRS should make it clear which changes you disagree with and why. It’s important to include as much documentation that supports your claim as possible. You can expect a response from the IRS in approximately 30 days, however you should be aware that any penalties and interest you owe from the audit will still accumulate during this process.
Depending on the amount of money you owe, the appeals process can proceed in one of three ways.
You owe less than $2,500
If the IRS claims that you owe less than $2,500 in taxes, you can take your appeal straight to the auditor. This will not go to the IRS Office of Appeals but will be handled by the agent that conducted your audit. A request by phone or in person should be enough, but it would be smart to write a protest letter anyway or fill out IRS Form 12203, the Request for Appeals Review.
You owe between $2,500 and $25,000 (Small Case Request)
If the IRS claims that you’re responsible for $2,500 to $25,000 in tax liability, you can request an informal appeal called a small case request. Although it is informal, it must still all be in writing. You can either fill out IRS Form 12203 or write a letter of protest that must include your contact information, tax ID numbers, a summary of the disputed items, and a statement of intent to appeal. IRS Form 12203 is a form that allows you to list out any objects on the IRS examination report that you disagree with and why. The form will ask for your Taxpayer Identification Number which is your Social Security Number if you’re filing as an individual or your Employer Identification Number if you’re filing as a business. Once you complete the form or the letter of protest, have it mailed to the office that conducted the audit.
You owe more than $25,000 (Large Case Request)
In any case in which you owe upwards of $25,000 to the IRS, known as a large case request, your only option to appeal is to write a formal letter of protest. The letter must contain:
- Your name, contact information, and SSN
- A statement of appeal of the IRS conclusions
- A list of the findings you disagree with and explanations as to why they are incorrect
- The tax periods involved
- Documents supporting your explanation
- A copy of your 30-Day Letter
- A copy of your examination report
- Your signature with a penalty under perjury clause
Send the letter to the local IRS office and an appeals officer should respond within 90 days. If you do not hear back within 90 days, follow up with the Office of Appeals to get an update on your appeal.
The IRS Office of Appeals
The IRS has an independent branch that conducts appeals called the IRS Office of Appeals. This office is made up of experienced employees, most of them previously auditors, who evaluate examination reports and assess the taxpayer’s arguments. The original auditor plays no part in this process. The goal of the Office of Appeals is to resolve tax disputes and to avoid court. Unlike the auditor, appeals officers have no interest in fining you or raising funds for the IRS. Appeals officers work to avoid litigation and to compromise with taxpayers, not to uphold whatever the original auditor concluded. Once they approve your appeal request, the Office of Appeals will schedule a conference with you.
The Appeals Conference
After submitting your request to appeal, you generally have 60 days to prepare for the appeals conference. The appeals agent will contact you and arrange a meeting in their office. In preparing to make your case, you should be sure to:
- Solidify any arguments you plan to make
- Acquire a copy of the auditor’s file from the local IRS office (this is done by mail and can take up to a month)
- Prepare and organize all necessary documents, statements, receipts, and forms that support your argument
- Get professional help from a tax professional permitted to practice before the IRS
Organization is an important component to winning over the appeals officer. If you go into the hearing unprepared with a mess of unorganized files, you probably won’t get your point across nor will the officer be willing to listen. The burden of proof is on you, so you must make your case as clear as possible. Organize your documents—receipts, bank statements, cancelled checks, etc.— according to each item you disagree with from the examination report. File them into folders and provide a brief explanation as to why the auditor was incorrect on each item. If organization isn’t your strong suit, hiring a bookkeeper is recommended.
The conference with the appeals officer is informal. There will be no testimony or procedures for evidence like in a trial, nor does the IRS record these meetings. You can record it yourself if you wish to as long as you notify the IRS several days in advance. This isn’t recommended, however, in that the officer will view you as difficult and be less willing to cooperate.
When negotiating with the appeals agent, keep in mind that the Office of Appeals settles disputes on what is known as the hazards of litigation. The hazards of litigation is the chance that the IRS would lose in tax court. If you can convince the officer that your case would win in court, they will lower your tax bill to avoid an unsuccessful case.
Once you prove your case, you should request that the officer waive or reduce the tax penalties placed on you by the auditor. The officer will be more lenient if you speak in terms of percentages as opposed to flat dollar amounts. Do not demand anything. This is a compromise, so you should be willing to pay at least part of the proposed adjustments. Your willingness to compromise will influence the officer’s willingness to compromise. Once you reach a settlement, the hearing is over.
You can then expect IRS Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Over-assessment, within your mailbox within the next couple of months. Before you sign and return the form, read it and reread it again. Signing the form prevents you from taking the IRS to tax court or take any further actions regarding your audit. Be sure that the numbers and reductions on the form match the compromise you made during the hearing.
If you still do not agree with the IRS’s findings even after the appeal, your only option is to take your case to the U.S. Tax Court.
Advantages of appealing an audit
The pros to appealing an audit are obvious. You can reduce and in some situations completely eliminate any extra taxes or penalties you owe to the IRS. The process is completely free, too, unless you hire professional help. Chances of a favorable outcome are also high. IRS statistics show that approximately 70% of cases are settled and lead to a 40% reduction in penalties originally assessed by the auditor.
The appeals process can also delay the due date of your assessed tax bill for months at a time, giving you more time to raise money or consider payment plans.
Disadvantages of appealing an audit
There are a few situations in which appealing an audit can potentially be harmful to you. Although it is rare, the appeals officer may find suspicious items on your return that the auditor had missed. The last thing you want to happen is to be criminally investigated on suspicion of tax fraud. If you are afraid of this happening, it would be smarter to just pay your tax bill or take your case directly to U.S. Tax Court. It’s also important to know that any penalties and interest placed on you during the original audit will continue to accumulate during the audit process. In the event that you lose the appeal you will have to pay even more than you originally owed.
Audits are generally frustrating, dragging processes that usually result in increased tax liability. Appeals, however, are not as complex and usually put money back in the taxpayer’s pocket. If you are undergoing an audit or need assistance in appealing the findings of the IRS, contact the Law Offices of Jef Henninger to assure the best possible outcome.