Audit. The very word can send shivers up the spine of even the most conservative taxpayer. For many, this dreaded procedure results in either nightmarish visits to the Internal Revenue Service (IRS) office or visits from revenue agents to their homes and businesses.
The result is often an assessment of back taxes, interest, penalties, and 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. Here are a few tips you can use to help you appeal an audit, should you receive a notice from the IRS.
- Taxpayers have the right to appeal their audits.
- You must file your official protest within 30 days of the date on the letter sent by the IRS.
- Prepare for your hearing, present your case, and negotiate a settlement with the appeals officer.
- Consider suing the IRS in U.S. tax court as new issues cannot be introduced in this venue.
- There's a very good chance that you'll win your appeal but if you don't, you are liable for any accrued interest and additional penalties.
The IRS Office of Appeals
The IRS understands that many taxpayers won't 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 2,000 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.
The sole function of these individuals 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 judged by how often they can reach a successful compromise with taxpayers—not by their willingness to back an auditor's findings. The Office of Appeals will listen to any reason why you disagree with an audit other than religious, moral, or political beliefs.
The Office of Appeals 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.
How to Appeal Your Audit
The IRS sends you a detailed examination report after your audit is complete. It outlines all the proposed assessments and changes and is broken down by interest, penalties, and taxes.
Initiating Your Appeal
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 consider 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 that supports your position on each item—if any.
- The penalties-of-perjury statement is 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
Missed the Deadline?
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. You then 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 identification numbers of all involved parties, as well as a declaration of intent to appeal and an itemized breakdown of the disputed items. 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.
Didn't Get a Response?
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 back after 120 days, follow up with the 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 will 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.
The IRS suspended face-to-face conferences, including appeals, because of the COVID-19 pandemic, substituting them for telephone or virtual meetings as of March 2020.
Preparing for Your 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. 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, and any 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
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 go over your points beforehand.
Once you are in front of the officer, clearly articulate any errors 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 this happens, don't hesitate to ask for as much time as you need, especially if the matter requires your involvement. And make sure you take very careful notes of what the officer says during the hearing if aren't (or can't) recording the session.
Negotiate a Settlement
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. The officer can do this fairly easily if they are 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 during the meeting and don't hesitate to consult a tax professional if you have questions of any kind.
Advantages and Disadvantages of Appealing an Audit
There is a very small number of taxpayers who actually appeal their audits. Why this percentage is so low is something of a mystery, given the ease and speed of the appeals process. But appealing an audit can often reduce (or even eliminate) previously assessed taxes and penalties. It also costs nothing, unless you enlist the aid of a tax professional, which is usually unnecessary.
The odds of winning your case are surprisingly high. The average taxpayer who appeals an audit can expect to see the total dollar amount originally assessed by the auditor reduced by a total of 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.
Disadvantages of Appealing
There are only a couple of instances in which the audit process may prove to be detrimental. There is a possibility 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.
Reduce or eliminate previously assessed taxes and penalties
Costs nothing to appeal
High chance of winning your appeal case
Delay the due date on your tax bill
Appeals officer may find items missed by the auditor
Interest accumulates and penalties are due if you lose your case
The Bottom Line
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. Make sure you download Publication 5: "Your Appeal Rights and How To Prepare a Protest If You Don't Agree" from the IRS website if you need more information on how to your rights to appeal.