It’s bad enough to go through a tax audit, but it can be devastating when things don’t go the way you want. This may be why only 10% of people appeal their audits. But those who stay positive and appeal are often rewarded. On average, those who appeal to the IRS Office of Appeals are rewarded with a 40% reduction on the amount assessed by the auditor. The other advantage, even if you don’t win a reduction, it that the appeals process pushes out the due date for when you must pay the taxes until the end of the appeals process. This gives you some breathing room to negotiate a payment play or at least gather more money to make your tax payment. But be aware that interest and penalties continue to accrue on the amount you were found to owe during the audit, and you will need to pay interest and penalties on amount you are found to still owe during the appeal.
Should You Appeal Your Tax Audit
The IRS gives these guidelines about when to appeal:
- If you believe the IRS made an incorrect decision based on a misinterpretation of the law
- If you believe the IRS did not properly apply the law due to a misunderstanding of the facts
- If you believe the IRS is taking inappropriate collection action against you, or your offer in compromise was denied and you disagree with that decision
- If you believe the facts used by the IRS are incorrect and have evidence
Perhaps needless to say, you will need evidence to support any of the above.
IRS Office of Appeals and US Tax Court
Whether you appeal to the IRS Office of Appeals or sue in US Tax Court, be aware that time limitations apply.
IRS Office of Appeals exists as a way to avoid litigation by tax disputes and handle appeals internally. Contrary to what many might think, the IRS Office of Appeals often overturns audit findings. Appeals officers have greater latitude than auditors, and they are expected to try to find good compromises with taxpayers who appeal.
However, if you appeal here, it’s possible you could be found to owe even more than the original audit, though that’s unlikely. Before appealing, be sure you don’t have some previously hidden item that may be the cause of you owing even more money.
Your other option is to sue the IRS in US Tax Court. The upside of suing in US Tax Court is that there is no possibility that you will be found to owe the IRS even more than found in the original audit. However, court hearings are typically more complex and more expensive. If you first go to the IRS Office of Appeals and are not happy with the result, you can still file in US Tax Court. However, there are time limitations, and they don’t stop while you are appealing with the IRS Office of Appeals.
BE AWARE: If the Tax Court determines that your case is intended primarily to cause a delay, or that your position is frivolous or groundless, the Tax Court may award a penalty of up to $25,000 to the United States in its decision.
Representation at the IRS Office of Appeals
Although you can represent yourself, it’s wise to have a professional represent you. According to the IRS, your representative must be an attorney, a certified public accountant or an enrolled agent authorized to practice before the IRS. Remember that attorneys are trained in negotiation techniques.
How to Appeal to the IRS Office of Appeals
You will need to submit a formal written protest in unless you qualify for the Small Case Request where the entire amount of additional tax and penalty proposed for each tax period is $25,000 or less. (The procedure for that is in a later section of this post.)
Your formal written protest must include
- Your name, address and 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 your representative prepares and signs the protest for you, he or she must substitute a declaration for the penalties of perjury statement as follows:
- That he or she submitted the protest and any accompanying documents, and
- Whether he or she knows personally that the facts stated in the protest and any accompanying documents are true and correct.
You need to send your protest letter within the specified time you are instructed to do so in a letter you will receive that offers you the right to appeal. This is usually 30 days from the date of the letter.
How to Appeal When You Have a Small Case Request
If your total tax liability is less than $25,000 for each tax period, you can file a Small Case Request. The $25,000 includes all taxes and penalties, and in the case of an offer in compromise, it also includes interest due.
There are some exceptions. S corporations, partnerships, Employee plan and exempt organizations may not file Small Case Requests.
- Follow the instructions in the letter you receive.
- UseForm 12203, Request for Appeals Review, or the form referenced in the letter to file your appeal, or prepare a brief written statement. List items you disagree with and your reasons. (You can find forms to file appeals on the IRS website or you can call 1-800-829-3676 (1-800-TAX-FORM).
If you owe any sizable amount of money, and if you can show any of the reasons listed above, it is generally recommended that you file an appeal. But you need to fill out forms and write necessary letters correctly and provide evidence. An experienced tax attorney has not only these skills, but they know how to negotiate with the IRS and present your evidence in its best light. They can also advise you if you are better off appealing to the IRS Office of Appeals or suing the IRS in tax court.
For more information on time limits and processes, see IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree.