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Federal Income Tax – Appeal Your Audit

Posted on February 20th, 2016

If you don’t agree with the results of a tax audit, appeal! The Appeals Division is the only place to appeal audit results within the Internal Revenue Service.  The Appeals Division’s  job is to reduce the number of unagreed cases. Move to Appeals, and you will get several chances to improve  or correct the findings of the audit.

Appeals wants to settle cases. That is its reason for existence. Section C of the Internal Revenue Manual states:

“Appeals accomplishes this mission by considering protested cases, holding conferences, and negotiating settlements in a manner which ensures the following:

As many non-docketed cases as possible are closed while in non-docketed status, and as many docketed cases as possible are closed without trial.”

Non-docketed cases are cases that have not yet been filed in Court. Appeals measures its success by how many cases it can settle without court filings.

Prepare, Prepare, Prepare

While you are appealing, you can further prepare your case. You prepared for the tax audit. Now you have just gone through the audit. You have been told which items the auditor accepts, and which he rejects and why. At the appeals level, you will be allowed to present ANY arguments or facts you have that will improve your position, even if you did not present them previously. (This is different from the court system, where you present your best case first, or you lose the opportunity.)

If you can get a letter from your employer to support your position, do it. If the connection between your expense and your business is questioned, work on that connection. If more supporting documents are needed, try to obtain them. Use your imagination. If detailed mileage logs are not available for all of your mileage, try to support your mileage for one month and convince the Appeals Officer to accept it as “typical.” Use your appointment book to show your travel. Concentrate on the areas the auditor did not accept.

Again, if you remember or find issues that are in your favor, you are allowed to raise them. If you forgot to deduct some business expenses, tell the Appeals Officer. The Appeals Officer is directed not to raise new issues on behalf of the government, but to accept any new information in the taxpayer’s favor. Inernal Revenue Manual Section states:

“Appeals gives full, fair and impartial consideration to the merits of each new issue raised by a taxpayer. If such an issue is based upon important evidence, such evidence is ordinarily referred to IRS Compliance for verification.”

Opening an Appeal

The normal income tax examination involving less than $25,000 in tax can be appealed with a simple letter stating  what issues you don’t agree with, and why, and requesting Appeals consideration.

If your tax controversy exceeds $25,000, or involves issues other than the normal income tax examination (retirement plan issues, partnerships, S Corporations, appeals of liens, levies, seizures, or installment agreements) you will need to file a formal “Protest” of Internal Revenue Service’s decision or action. A formal Protest is simply a letter identifying you, a statement that you want to appeal IRS’s findings to the Appeals Office, a copy of the notice of the IRS findings, the time periods involved, a list of the changes you don’t agree with, a statement of the facts that support your position, and a statement of the law that supports your position. The protest must be signed under penalties of perjury.

Mission Statement

Internal Revenue Service states the mission of the Appeals Office as follows:

“The Appeals Mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.”

Resolution of tax controversies, “on a basis which is fair and impartial” claims to be a place where you can receive “justice” in the tax system. You would assume that, in a “fair and impartial” system, if you had a better argument than IRS on a tax issue, IRS would back down and concede the issue. It doesn’t work out that way. The Appeals Officer, rather, is working for Internal Revenue Service. The Appeals Officer has the authority to compromise issues with taxpayers. The way in which the Appeals Officer evaluates issues is to calculate the government’s chance of winning each issue, and then offering a settlement to the taxpayer based on that chance of winning.

Hazards of Litigation

If the Appeals Office feels that you have a 60% chance of winning an issue in court, it will not concede the issue. Appeals Officers have the authority to split the issue. They may settle such an issue with the Taxpayer by having the taxpayer pay 40% of the tax IRS billed (in this example) in the examination process. This process is called taking into account the “hazards of litigation.” Examination level employees are supposed to raise all issues on which Internal Revenue Service has any chance of winning in court, and Appeals Officers are authorized to consider how strong the government’s case is.

As explained in Regulation 601.106 (f):

“(2) RULE II. Appeals will ordinarily give serious consideration to an
offer to settle a tax controversy on a basis which fairly reflects the
relative merits of the opposing views in light of the hazards which would
exist if the case were litigated. However, no settlement will be made
based upon nuisance value of the case to either party. If the taxpayer
makes an unacceptable proposal of settlement under circumstances
indicating a good faith attempt to reach an agred disposition of the case
on a basis fair both to the Government and the taxpayer, the Appeals
official generally should give an evaluation of the case in such a manner
as to enable the taxpayer to ascertain the kind of settlement that would
be recommended for acceptance.”

Taking the hazards of litigation into account should leave the taxpayer in a better position than if he accepted the examiner’s conclusions, where the examiner raised all issues on which Internal Revenue Service had any chance of winning. But from the taxpayer’s perspective, wouldn’t it be fairer if all cases where the taxpayer has probably interpreted the law correctly were dropped?

Correspondence Appeal?

As part of its efficiency drive, Internal Revenue Service would like to settle as many cases as possible with as little taxpayer contact as possible. Appeals are handled by correspondence, telephone or in person. If you can manage it at all, arrange an in-person conference. You will be more than a number to the Appeals Officer after you have conferred for an hour about your tax situation. You will have a better chance to explain your position, and especially to answer the Appeals Officer’s questions. You will be able to see where your arguments are not getting through, and be able to expand them.

Internal Revenue Service makes a big point of stating that interest and penalties continue while you are appealing their decisions. In point of fact, the tax audit usually doesn’t happen until all penalties have reached their maximum. Interest continues, but is calculated at a rate related to the Treasury borrowing rate, so is not severe.

The Appeals level can be skipped. If you don’t request to go to Appeals, you will receive a letter that states that you have 90 days to appeal the results of the audit to the Tax Court. Remember the examiner is supposed to raise all questions on which the government might win. The bill you get after the examination will be the highest you can possibly get in the system. Go to Appeals if you have any strong arguments, and you may get a better result.

Appeals Officers settle about 9 out of 10 cases they handle, so your chance of getting a result you can live with is pretty good.

If you skip Appeals, or if you don’t resolve your case in Appeals, you will receive a “90 day letter” which advises you that you have 90 days to appeal your case to the Tax Court. Pay attention to the due date for your filing with the Tax Court. If you miss the date, the Tax Court is deprived of jurisdiction, so you have lost your best chance to resolve your case in your favor in court.

When your case is “docketed” in Tax Court, the case is assigned to an attorney to prepare it for trial. The attorney’s job is to plan and gather evidence to present the case to the Tax Court. The attorney will gladly confer with the taxpayer, in an attempt to “narrow the issues” that the Court will have to address. The taxpayer can use this as another opportunity to resolve the case, short of going to Court, although the attorney will be working with the Appeals Officer that originally considered the case.


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