Appealing the Audit

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:

  1. Your name, address and a daytime telephone number
  2. A statement that you want to appeal the IRS findings to the Office of Appeals
  3. A copy of the letter you received that shows the proposed change(s)
  4. The tax period(s) or year(s) involved
  5. A list of each proposed item with which you disagree
  6. The reason(s) you disagree with each item
  7. The facts that support your position on each item
  8. The law or authority, if any, that supports your position on each item.\
  9. 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.”
  10. 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.

What to Expect when Interviewed by the IRS

Most Americans subject to audit are lucky enough to complete the process entirely through mail. Those who are not as fortunate must meet face-to-face with an IRS agent to discuss the issues of their tax return.

As if an audit itself isn’t scary enough, most people are even more anxious about the in-person interview. IRS agents are trained to scrutinize your financial history, to pick out any flaws with your tax return, and to get you to say something that may incriminate you further. This absolutely justifies taxpayers’ apprehensions.

The best way to ease the anxiety is to prepare for the appointment. It is crucial to prepare/review documents requested in the initial letter, get representation, and to understand what will happen during the interview.

The IRS will choose the location of the appointment, however they will contact you through phone or mail to determine a convenient date and time. You can request a change of location, however it may not be granted.

Where the appoint will take place depends on whether the audit is an office audit or a field audit. The meeting for an office audit takes place in the office of the local IRS branch. Field audits can take place at either your home, your attorney’s/accountant’s office, or your place of business.

Meetings not related to business may take place at your home but will almost definitely take place in your attorney’s/accountant’s office if you have one. The agent will typically discuss issues with itemized deductions, unreported income, or investments on your tax return. They will examine any substantiation you bring and will determine whether you owe money, are owed money, or there is no change to your return.

Meetings relating to business take place at your place of business where books and records are held. The IRS agent is required to take a tour of and review your business facilities. They will want to examine how you operate your business and look at any major equipment you own. The agent will also question you on wheather transactions are made by cash, check, or credit card.

For both business and nonbusiness audit meetings, the agent will begin by previewing your rights and by summarizing what parts of your return/finances are being examined. The agent will then proceed with specific questions.

It is vital to note that if you have representation, you are not required to attend this meeting and it is better if you don’t. By filling out IRS Form 2848, you grant power of attorney to your representative, allowing them to attend the meeting and negotiate with the IRS. This is highly recommended in that it allows an experienced professional knowledgeable in tax law to take control of your audit. This removes not only the possibility of incriminating yourself during the meeting but also removes the anxiety of meeting with the IRS.

If you choose not to proceed with representation, the face-to-face interview will be challenging.

During the interview the IRS examiner may pursue information, such as financial and employment history, in an attempt to find issues outside the specifics of the audit. IRS agents are trained to scrutinize every word you say and every substantiation you claim. Depending on how you respond, you could potentially expand the scope of the audit to issues and tax returns from other years. This can result in what should have been avoidable fines or even criminal charges for the taxpayer. The agent will take advantage of the taxpayer’s lack of knowledge and will attempt to probe damaging information out of them. Any information you give to the agent can be used against you, no matter how innocent it may seem. This can result in substantial penalties and even a criminal investigation regardless of intent.

It is highly recommended that you do not proceed into an audit alone. The Law Offices of Jef Henninger, Esq. are here to negotiate with the IRS and produce the best outcome for our clients.

Types of Audits: What should I expect during an audit?

Nobody wants to go through an audit, but everyone wants to know what to expect. What many people are unaware of, though, is that there are different ways the IRS will audit you. Your expectations will be dependent on the type of audit. Each type of audit has varying means of correspondence between the taxpayer and IRS, has different levels of participation for the taxpayer, and requires different documents from the taxpayer. To figure out what you should expect during an audit, you must first determine what type of audit you’re experiencing.

All audits begin with a letter that states what parts of your tax return are in question. It additionally specifies when, where, and how you are to respond to the IRS. The taxpayer will also receive an Information Document Request (IDR) that specifies which documents must be gathered by the taxpayer.

Correspondence Audits:

Correspondence audits are the most common type of audit, making up approximately 70% of all audits, and are done entirely through mail. These audits are fairly simple and do not require in-person meetings or extensive investigation. Correspondence audits are primarily for verification issues on a tax return such as justifying income or deductions.

The IRS uses computer systems to examine your tax return and to detect mathematical errors, missing documents, or inconsistencies. The IRS compares the information on your return to information already on record provided by third parties such as banks and employers. Items typically requested by the IRS for verification purposes usually include W-2’s, 1099 income items, itemized deductions, and Schedule C receipts.

If the information from the return conflicts with what is on record or the return is missing significant documents, then the taxpayer will be sent a Letter 566 or a CP 2000.

Letter 566 informs the taxpayer that their return has been selected for audit and will list required documents to be sent back to the IRS. This letter is mostly sent out to substantiate specific claims on a tax return such as itemized deductions as opposed to a broad examination.

A CP 2000 is not a bill, but it can result in an increase, decrease, or no change in your taxes. The CP 2000 is a notification of the mismatched information and a request for additional information. Taxpayers are given 30 days from the date of the CP 2000 (not the day you received it) to respond to the IRS or they will face added penalties.

Although the correspondence audit is the most simplistic type of audit, it is not unusual for a taxpayer to consult an attorney for assistance. The IRS tends to request more than they’re entitled to, so proper representation will be helpful in protecting the taxpayer.

Office Audits:

Not nearly as common as correspondence audits, office audits are more comprehensive looks at an individual’s financial history. These are conducted through interviews with an auditor in person at the local IRS office.

A letter is sent to the taxpayer that lists specific items on their tax return that are in question. The IRS requests that you bring in substantiation or any documents that can justify the questionable items in to the IRS office.

Office audits are far more troublesome for the taxpayer in that during the interview the IRS examiner may pursue information, such as financial and employment history, in an attempt to find issues outside the specifics of the audit. IRS agents are trained to scrutinize every word you say and every substantiation you claim. Depending on how you respond, you could potentially expand the scope of the audit to issues and tax returns from other years. This can result in what should have been avoidable fines or even criminal charges for the taxpayer.

It is highly recommended to bring an experienced tax attorney to the interview. Proper representation can protect the taxpayer from the IRS overstepping their bounds and can prevent further investigation.

Field Audits:

Field audits are the most thorough investigations conducted by the IRS with the purpose of uncovering major violations. These audits are done by highly trained revenue agents who review the entirety of an individual’s or firm’s financial/tax history. It is the agent’s goal to uncover issues with the taxpayer’s reported income and deductions.

They’re called field audits because the revenue agent will interview the taxpayer in their own home or place of business. Most businesses are audited this way so the agent can review all records related to the return and to interview the owners. If you hire professional representation, however, the first meeting will more than likely take place in your attorney’s office.

The agent will examine a tax return to discover any flaws or inconsistencies such as unreported income or improper deductions. After examining one year’s return, the agent can open other years’ tax returns if issues are found. The agent is not limited to tax returns but may also examine records such as credit databases and property records.

The investigation will go as far where the agent will examine the taxpayer’s general expenditures. If the agent finds that the expenditures surpass the reported income, the agent will assume there is unreported income and the burden lies with the taxpayer to prove otherwise.

It is crucial to contact an attorney or accountant as soon as a field audit has begun. Similar to the office audit, the agent will take advantage of the taxpayer’s lack of knowledge and will attempt to probe damaging information out of them. Any information you give to the agent can be used against you, no matter how innocent it may seem. This can result in substantial penalties and even a criminal investigation regardless of intent. By using IRS Form 2848, you authorize power of attorney which grants an experiences representative the power to settle tax matters on your part. Here at the Law Offices of Jef Henninger, Esq., we have the means and experience to shield you from the potential dangers of a field audit.