Audit. Even the most conservative taxpayer will cringe at the mere mention of the term. This feared practice leads in either terrifying trips to the Internal Revenue Service (IRS) office or visits from revenue agents to their homes and businesses.
As a consequence, overdue taxes, interest, fines, and, in rare cases, criminal punishments are sometimes assessed. Those who are unfortunate enough to get negative audit adjustment judgements have more options than they think. Audits may be challenged in the same way that lower court verdicts are, and in many situations, the Office of Appeals overturns (or at least alters) the initial audit’s conclusions in favor of the taxpayer. If you get a notification from the IRS, here are a few pointers to assist you fight the audit.
- Taxpayers have the right to contest audits.
- You must submit a formal objection within 30 days of the date on the IRS letter.
- Prepare for the hearing, state your case, and reach an agreement with the appeals officer.
- Consider challenging the IRS in federal tax court, since new claims cannot be raised in this forum.
- You have a strong chance of winning your appeal, but if you don’t, you must pay any accumulated interest and extra penalties.
The IRS Office of Appeals
The IRS recognizes that many taxpayers may disagree with its auditors’ conclusions. As a result, it established a new branch of service known as the Office of Appeals, which employs around 2,000 people throughout the country. Most of them were formerly auditors themselves, but are now senior workers in the IRS system, with legal or accounting background.
These people’ primary role is to analyze completed examination reports and offer an unbiased forum for taxpayers to defend their cases to a higher authority within the IRS. They try to minimize litigation by resolving tax issues internally in such a manner that future voluntary taxpayer compliance with tax legislation is encouraged.
In determining cases, appeals officers have more power and freedom than auditors. Their skill is measured by the frequency with which they can negotiate a satisfactory compromise with taxpayers, not by their readiness to support an auditor’s conclusions. Other than religious, moral, or political opinions, the Office of Appeals will listen to any reason why you disagree with an audit.
The Office of Appeals has made a formal promise to clarify your rights throughout the appeals process, listen to your concerns, act in a timely and responsive manner, and offer fair and unbiased service.
How to Appeal Your Audit
After your audit is completed, the IRS provides you a full examination report. It details all planned assessments and adjustments and categorizes them according to interest, fines, and taxes.
Initiating Your Appeal
The initial stage in the appeals procedure is simply refusing to sign and return your copy of this report, which normally leads in the issuance of a 30-day letter outlining how to challenge the audit. You must register your formal objection within 30 days of the letter’s date. You might try appealing to the auditor’s management, but this will not extend the 30-day limit.
The IRS requires the following information in your official protest:
- Your full name, address, and daytime phone number
- A statement indicating that you intend to appeal the IRS’s findings to the Office of Appeals.
- A copy of the letter you received, with the requested modification highlighted (s)
- The tax period(s) or year(s) in question
- a list of each suggested item that you disagree with
- Each item’s reason(s) for disagreement
- Each item’s facts that support your opinion
- If applicable, the legislation or authority that supports your opinion on each item.
- “Under the penalty of perjury, I declare that the facts described in my protest and any supporting papers are accurate, correct, and complete to the best of my knowledge and belief,” says the declaration.
- Your signature under penalty of perjury is required.
Missed the Deadline?
If you are unable to register your objection within the time frame specified, you may seek a 30- or 60-day extension, which is frequently granted. You then have three options for referring your audit to the Office of Appeals:
- If you owe less than $2,500, you may simply request an appeal from your auditor.
- If you owe between $2,500 and $25,000, you should file a protest letter titled “minor case request.” This letter must include all of your contact information, as well as the tax identification numbers of all parties involved, a statement of intent to appeal, and an itemized breakdown of the disputed items. Alternatively, you may use IRS Form 12203: “Request for Appeals Review,” which is available on the IRS website.
- Form 12203 is your only choice if you owe more than $25,000 in taxes. To guarantee that their case does not fall through the cracks, taxpayers in the first group should write a letter or complete Form 12203 in addition to making a verbal request.
Didn’t Get a Response?
An appeals staff will usually reply to your objection within 90 days, however this might vary depending on the nature of your case. If you have not received a response after 120 days, contact the office where you made the request for a progress report.
If you are unable to acquire an update on the progress of your case, inquire as to when the office will contact you. If you are unable to get a date, please contact an Appeals Account Resolution Specialist (AARS) at (559) 233-1267. The AARS should be able to tell you who your account was allocated to and how you may contact that individual.
Because of the COVID-19 epidemic, the IRS has halted face-to-face conferences, including appeals, and will replace them with phone or virtual sessions beginning in March 2020.
Preparing for Your Hearing
After filing an appeals request, taxpayers typically have at least 60 days to prepare for the appeals procedure. Use this opportunity to solidify the information and arguments you want to present during the appeal.
Make a request for a copy of the auditor’s file. You have a legal right access it under the Freedom of Information Act. Another letter must be submitted to the FOIA officer at your local IRS office. Make careful to mention the tax years covered by the audit, and offer to pay for any required copies. Send the letter certified mail with a return receipt request. It will most likely take at least a month for your request to be approved, but don’t be afraid to follow up if it takes longer. Meanwhile, arrange and prepare all of your paperwork and other materials.
Make copies of any receipts, statements, and other documentation required to substantiate your case. Divide information properly on spreadsheets so that the appeals officer may grasp it. If the circumstance calls for it, even hand-made graphic presentations may be powerful. For the officer’s convenience, create a separate file folder for each challenged item.
Presenting Your Case
Appeals case hearings are usually casual, and you may record them if you like. It is best to prepare a general outline of what you want to tell the officer, and you may want to go over your points ahead of time.
Once in front of the officer, carefully state any mistakes you believe the auditor made throughout the audit. However, no matter how badly you want to, do not disparage either the auditor or the IRS.
Prepare to hear the officer seek further paperwork or time to investigate a situation. If this occurs, don’t be afraid to request as much time as you need, particularly if the situation demands your participation. Also, if you aren’t (or can’t) record the hearing, make sure you take meticulous notes on everything the officer says.
Negotiate a Settlement
Appeals officials are directed to avoid the IRS losing a court case. The first thing you should ask the appeals officer to do is to waive any fines imposed by the auditor. If the police is confident that your motives are not dishonest, the officer can accomplish this pretty effortlessly.
Accepting to pay at least some of the adjustments demonstrates good faith, but you don’t say which ones. Your willingness to compromise will increase your credibility in the officer’s eyes. Adjustments, things, or percentages should be used instead of money. It goes without saying that the skill of bargaining is crucial in deciding the outcome of the hearing.
Settlement amounts are normally agreed upon orally and then recorded on IRS Form 870, “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.” After the hearing, the printed form may take months to appear in your inbox. It should be noted that signing this form precludes you from suing the IRS in U.S. Tax Court if you subsequently discover another error committed by either the auditor or the appeals officer.
Before you sign, make sure you completely understand everything on it. Check that the figures on the form correspond with the verbal agreement you established at the meeting, and don’t be afraid to contact a tax specialist if you have any issues.
Advantages and Disadvantages of Appealing an Audit
Only a tiny percentage of taxpayers actually file audit appeals. Given the simplicity and quickness of the appeals process, it’s a surprise why this number is so low. However, challenging an audit may sometimes result in a reduction (or even elimination) of previously imposed taxes and penalties. It also doesn’t cost anything unless you hire a tax specialist, which is typically unneeded.
Your chances of winning your case are shockingly good. The typical taxpayer who files an audit appeal may anticipate the total cash amount initially assessed by the auditor to be lowered by 40%.
Furthermore, filing an appeal postpones the due date of your tax bill for the length of the appeals procedure, which might take months. This provides you more time to collect the cash needed to pay the assessment or to work out a payment plan.
Disadvantages of Appealing
There are just a few circumstances when the audit process may be damaging. There is a chance that the appeals officer may discover more issues that the auditor overlooked. This is uncommon, but if you are aware of anything harmful on your return that was not reported earlier and might yet be discovered, suing the IRS in U.S. Tax Court may be a safer option, since new concerns cannot be brought in this court.
Another thing to keep in mind is that interest and penalties will continue to accrue on your assessed debt throughout the appeals process. This implies that if you lose your appeals case, you will have to pay even more money than previously.Pros
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
The Bottom Line
Although appealing an audit may have negative implications in certain situations, most taxpayers who come out on the short end of an audit have a good chance of having at least part of the audit judgements overturned. If you need more information on your rights to appeal, download Publication 5: “Your Appeal Rights and How to Prepare a Protest If You Don’t Agree” on the IRS website.
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