Appealing an Audit

If you can't stomach the tax bill you receive after an IRS audit, you may want to file an appeal. IRS agents grudgingly refer to the internal appeals process as the "gift shop" because so many taxpayers are able to downsize the amount of taxes, interest and penalties owed by appealing their audits.

A potential downside to appealing is an appeals officer can uncover issues missed by the initial auditor. IRS appeals agents are entirely independent of the opinions and conclusions of audit agents. They have a lot of discretion in looking over audits. You could end up with a bigger tax bill than when you started. Although this rarely happens, you might want to skip the internal IRS appeals process and go straight to federal tax court.

Writing a Protest Letter

For an audit within the IRS, you must file what's called a protest letter within 30 days of the date of the examination report showing taxes are due. The protest letter should include:

  • Identifying information such as your name, address and phone number
  • A statement that you wish to appeal the IRS findings
  • A copy of the letter with the findings you're appealing
  • The tax years involved
  • What specific conclusions you disagree with and why
  • The facts supporting your position
  • The tax law on the issue

If the amount the IRS says you owe is $25,000 or less for any tax year, you can make what's called a small case request instead of filing a formal protest. While the process is informal, your request still must be in writing and made within 30 days of the date of the letter determining you owe taxes. If you decide to hire a lawyer to represent you in the appeal process, he or she must be qualified to practice before the IRS. You need to sign what's called a power of attorney authorizing your lawyer to access confidential information at the IRS.

What to Expect in Appeal Negotiations

Appeal negotiations take place in person or by mail. The negotiations are informal. An appeals officer has power to settle a dispute based on what the IRS calls the hazards of litigation. This means you'll be more likely to get your tax bill lowered by convincing the agent there's a significant chance the IRS will lose in tax court. The IRS considers:

  • Specific facts of your case
  • Chances of both you and the IRS being able to prove the facts at a trial
  • The strength of your legal arguments
  • The practical realities of litigating the particular issue in court

The agent looks at negotiating the specific issues involved, rather than entertaining a reduction of the overall tax bill. If there's an agreement, the appeals agent prepares an agreement called a stipulation. You next discuss payment of the remaining tax. If you can't reach an agreement, you can appeal the audit results to the federal tax court.

Questions for Your Attorney

  • Should I appeal or just pay the tax in my case?
  • I filed a protest letter. What's my next step?
  • Do I need an attorney to negotiate with IRS appeals officers?
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