Jan 27, 2009

The IRS audit is over...or is it? The IRS Appeals Process

Last year, the IRS audited just under 1.4 million individual taxpayers with an average tax debt bill ranging from over $20,000 per year for Field audits and almost $9,000 for mail audits. Interestingly, most individuals who are audited never contest the results. In fact, 97.4% agree or default to the IRS findings (For 2007- 40,637 audits were not agreed out of 1.55 million total IRS audits). For computer generated earned income tax credit audits, over 61% do not reply and are accessed the tax, interest and penalties imposed by the IRS. The IRS makes errors (especially last year to manage the stimulus payments) and is pre-disposed to protecting the Government's interests. Hence, you should review and question their findings just as much as you would question any legal judgement against you.

However, taxpayers generally do not question IRS audits and elevating IRS decisions. There are several main reasons why individuals do not contest audits:

1. They are afraid of the IRS and what could happen if they contact them
2. The IRS is correct in their findings
3. They do not know how to respond to the audit
4. They do not know how to Appeal an IRS tax examiner/agent findings

Understanding the audit process is essential to knowing how to reply to the IRS in an audit and how to request an Appeal of your findings. Remember this- the IRS auditor's findings are not final. You can appeal these findings within the IRS or in the Court system if you are timely with your Appeal.

If you do not agree to the IRS audit findings, here is the process you should follow (it is in chronological order and as you progress to the end- it gets more expensive and prohibitive):

1. Protest the findings directly with the IRS auditor (can be called an Agent, Tax Examiner, Compliance Officer, Office Auditor, etc.) with a written protest. Discuss in this protest: the facts, the law and your analysis and conclusion of the law as it pertains to your audit. Most audits have factual disputes (i.e. "I do not have any documents to prove my deductions!"), so make sure that you having a compelling argument and have reconstructed your records, if needed.

2. If the auditor does not agree and proposes a final adjustment (the IRS puts this in a Form 4549 or a Form 1902-B and explains the adjustment in the Form 886-A), ask to have a managerial conference with auditor's immediate supervisor. YOU MUST REQUEST THIS BEFORE THE EXAMINER ISSUES A "30-DAY" LETTER. After the issuance of the 30-Day letter (usually IRS Letter 525), then you usually have no other recourse other than to go to the next step.

3. The 30-day Letter is a formal notice to appeal WITHIN the IRS with one of their Appeals Officers ("AO"). DO NOT MISS THE 30-DAY WINDOW TO APPEAL WITHIN THE IRS! The IRS will usually not let you back into an internal IRS appeals hearing. Appealing your audit within to an IRS AO is a very cost effective method. Also, it provides an opportunity to use "hazards of litigation" factors in resolving your audit. These factors consider the many nuisances of the IRS having to "take you to Court" to respond to your contest to their audit findings.

4. If you miss the 30-day letter or you intentionally let it expire, you will another mode of appeal. However, this appeal is not cost efficient, nor is it usually successful. The last appeal is to the United States Tax Court ("USTC"). You must petition the USTC within 90-days of the dated Statutory Notice of Deficiency (i.e. the "90-day" letter- usually IRS Letter 3219). In very few instances, you may be able to get the IRS to rescind the 90-day letter issuance after it has been issued but the 90 days has not expired and "back-up" the audit to an IRS internal appeal (i.e. the 30-day letter process).

5. If you miss the 90-day letter, you will be assessed the tax and IRS Collection Activity will ensue. The recourse you now have is one of three methods: #1 - pay the tax, file a claim for refund with the IRS, have the refund denied by the IRS (or allow 6 months to expire) and sue the IRS in US District Court or Court of Claims; or #2 - beg the IRS for Audit Reconsideration- i.e. reopen the audit (by the way the IRS rarely allows a "do-over" for an audit unless it is an under-reporter audit that is not responded to timely and the tax is assessed); #3 - file an Offer in Compromise- Doubt as to Liability (Form 656-L)- this is also a rarity in that the IRS has already considered the facts, law and audit findings and has made a decision to assess the tax.

If you snooze- you lose...

The end of the audit is not the end of your rights. The auditor's findings are not final until you agree or you have exhausted your appeal rights- internally within the IRS and through the Courts. But as the old saying goes- "if you snooze, you lose"- in tax audits, this translates into: if you miss your appeals deadline- you will move farther down the process and it will be more painful and costly as it progresses.

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