Audit. The very word can send shivers up the spine of even the most conservative taxpayer. For many taxpayers, this dreaded procedure has resulted either in nightmarish visits to the IRS office or, worse, visits from revenue agents to their homes and businesses.
The result is often an assessment of back taxes, interest, penalties – sometimes even criminal sanctions. But those who are unlucky enough to receive unfavorable adjustment rulings from an audit have more recourse than they realize. Audits can be appealed in the same manner as lesser court rulings, and in many cases, the Office of Appeals overturns (or at least modifies) the findings of the original audit in the taxpayer's favor. (For an in depth view, see our special Income Tax Guide.)
The IRS Office of Appeals
The IRS understands that many taxpayers will not agree with the findings of its auditors. Therefore, it has created a separate branch of service called the Office of Appeals, which consists of approximately 1,400 employees located nationwide. Most of them were auditors themselves, at one time, but are now senior employees in the IRS system, and they usually have legal or accounting experience. Their sole function is to review finished examination reports and provide an impartial platform for taxpayers to plead their cases to a higher power within the IRS. They attempt to avoid litigation by resolving tax disputes internally in a way that foments future voluntary taxpayer compliance with the tax laws.
Appeals officers have greater authority and flexibility in deciding cases than auditors. Their competence is in fact judged by how often they are able to reach a successful compromise with taxpayers – not by their willingness to back an auditor's findings. (See our related articles, Cut Your Tax Bill ) The Office of Appeals will listen to any reason why you disagree with an audit other than religious, moral or political beliefs.
Advantages of Appealing an Audit
As stated previously, appealing an audit can often reduce (or even eliminate) previously assessed taxes and penalties. However, a very small number of taxpayers appeal their audits. Why this percentage is so low is something of a mystery, given the ease and speed of the appeals process. Appealing an audit also costs nothing, unless you enlist the aid of a tax professional, which is usually unnecessary.
Best of all, the odds of winning your case are surprisingly high. According to at least one edition of the book "Stand Up to the IRS," by Nolo Publishing, auditors refer to the Office of Appeals as the "IRS's private gift shop." The average taxpayer who appeals an audit can expect to see the total dollar amount originally assessed by the auditor reduced by a 40%. What's more, appealing your case delays the due date of your tax bill for the duration of the appeals process, which can last for months. This gives you additional time to gather the funds necessary to pay the assessment or work out a payment plan. The Office of Appeals also has a formal stated commitment to explain your rights to you in the appeals process, hear your concerns, act in a timely and responsive fashion and provide fair and impartial service.
Disadvantages of Appealing
There are only a couple of instances in which the audit process may prove to be detrimental. The possibility does exist that the appeals officer may find additional items that the auditor missed. This is rare, but if you know of something detrimental on your return that was not flagged previously and could still be found, suing the IRS in U.S.Tax Court may be a safer alternative, as new issues cannot be introduced in this venue. The other issue to consider is that both interest and penalties will continue to accumulate on your assessed balance during the appeals process. This means that if you lose your appeals case, then you will end up paying even more than before.
How to Appeal an Audit
Upon the completion of your audit, you will receive a detailed examination report from the IRS outlining all proposed assessments and changes, broken down by interest, penalties and taxes.
The first step in the appeals process is simply not to sign and return your copy of this report, which usually results in the generation of a 30-Day Letter that explains how to appeal the audit. You must file your official protest within 30 days of the date listed on the letter. You may want to first consider simply appealing to the auditor's manager, although this will not extend the 30-day deadline. Here's the information the IRS says that your formal protest must include:
- 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
If for any reason you are not able to file your protest within the allotted time, you can request a 30- or 60-day extension, which is usually granted. Then you have three choices as to how you move your audit to the Office of Appeals.
- If you owe less than $2,500, you can just ask your auditor for an appeal.
- If you owe between $2,500 and $25,000, you should write a letter of protest, titling it a "small case request." This letter must contain all of your contact information and the tax ID numbers of all involved parties, as well as a declaration of intent to appeal and an itemized breakdown of the disputed items. (A one-time consultation with a tax professional can ensure that you write this letter correctly.) Or, you can complete IRS Form 12203, "Request for Appeals Review," which is downloadable from the IRS website.
- If you owe more than $25,000, Form 12203 is your only option. It is also recommended that taxpayers in the first category either write a letter or complete Form 12203 in addition to making a verbal request to ensure that their case doesn't slip through the cracks. (See our related article, Avoiding An Audit.)
In most cases, an Appeals employee will respond to your protest within 90 days, although this can vary somewhat depending on the nature of your case. If you have not heard from Appeals after 90 days then follow up with the Appeals office where you sent the request for a status report. If you are not able to obtain an update on the status of your case, try to find out when the office might contact you. If you cannot get a date, call an Appeals Account Resolution Specialist (AARS) at (559) 233-1267. The AARS should be able to provide you with information about whom your account was assigned to and how to contact that person.
Preparing for an Appeals Hearing
Taxpayers usually have at least 60 days to prepare for the appeals process after submitting the appeals request. Use this time to cement the details and arguments you intend to make during the appeal. Be sure to request a copy of the auditor's file – you are legally entitled to it under the Federal Freedom of Information Act (FOIA). This requires another letter to be sent to the FOIA officer at your local IRS office. Be sure to specify the tax years covered in the audit, and volunteer to cover the costs of all necessary copies. Send the letter via certified mail and request a return receipt. It will probably take at least a month before your request is granted, and don't hesitate to follow up if it takes longer. Meanwhile, get all of your documents and other papers organized and ready.
Prepare copies of all necessary receipts, statements or other forms you need to prove your case. Break down information clearly on spreadsheets that the appeals officer can easily understand. Even hand-made visual presentations can be effective if the situation calls for them. Create a separate file folder for each contested item for the officer's convenience.
Presenting Your Case to the Appeals Officer
Appeals case hearings tend to be fairly informal, and you can record the proceedings if you desire. It is advisable to create at least a rough outline of what you want to tell the officer, and you may want to rehearse your dialog beforehand. Once you are in front of the officer, clearly enunciate any errors that you feel the auditor committed during the audit. However, do not badmouth either the auditor or the IRS – no matter how much you may want to.
Be prepared to hear the officer request further documentation or time to research a matter; if so, don't hesitate to ask for as much time as you need, if the matter requires your involvement. Above all, be certain to take very careful notes of what the officer says during the hearing if you are not otherwise recording the session. (For more, see 10 Most Overlooked Tax Deductions.)
Negotiating a Settlement
As stated previously, appeals officers are instructed to avert the chance of the IRS losing a case in court. The first thing you should ask the appeals officer to do is waive any penalties that the auditor assessed to you. The officer can do this fairly easily if he or she is convinced that your intentions aren't fraudulent. Agreeing to pay at least a few of the adjustments also shows good faith, but don't specify which ones. The willingness to compromise will raise your credibility in the eyes of the officer. Speak in terms of adjustments, items or percentages, not dollars. It goes without saying that the art of negotiation is paramount in determining the results that you get from the hearing.
Settlement amounts are usually reached verbally and then transcribed onto IRS Form 870, "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment." It can take months for the printed form to arrive in your mailbox after the hearing is over. It should be noted that signing this form will prevent you from taking the IRS to U. S. Tax Court if you should later find another mistake made by either the auditor or the appeals officer. Before you sign, be sure you thoroughly understand everything printed on it. Make certain that the numbers on the form correlate with the verbal agreement you reached at the meeting and don't hesitate to consult a tax professional if you have questions of any kind. (For more, see our related article Surviving The IRS Audit.)
Although appealing an audit can theoretically pose adverse consequences in some cases, most taxpayers who come out on the short end of an audit stand an excellent chance of having at least some of the judgments from their audits reversed. For more information on appealing your audit, download Publication 5, "Your Appeal Rights and How To Prepare a Protest If You Don't Agree" from www.irs.gov.