What is the appeals process?
If your audit was conducted an IRS field office, you can request a supervisor or manager review right on the spot. Remember, for a supervisor to find in your favor suggests that the initial agent is wrong, or is not interpreting tax law and your facts correctly. Office politics might come into play here. Having said that, if you believe the auditing agent is wrong it doesn’t hurt to run it up the flagpole.
After you receive the IRS’s determination of your situation, you have 30 days to decide what to do. You can pay the amount requested, you can request Fast Track Mediation, you can appeal to the Office of Appeals, or you can wait and petition the Tax Court, Federal Claims Court or US District Court.
Fast Track Mediation: If you do not agree with any or all of the IRS findings, you can request Fast Track Mediation. You and the IRS will meet with a trained mediator who will help facilitate communication in a neutral setting. Mediation in various legal proceedings is about educating both sides about the issues, and to work towards an agreement. This typically involves some horse-trading where you and IRS give up a few of sticking points so the matter can be resolved. Remember, the IRS thinks they are right. You think you are right.
Most cases not docketed in any court qualify for fast track mediation including examinations (audits), offers in compromise, trust fund recovery penalties (withholdings, payroll stuff) and other collection actions. Generally within a week of submitting the signed agreement to mediate, the mediator will contact you to schedule the meeting.
You may represent yourself at mediation or you may have an attorney, CPA or enrolled agent act as your representative when Form 2848 Power of Attorney (POA) is in effect. You may stop mediation at any time and you still retain all your appeals rights.
You can download the application at wcginc.com/FTM.pdf.
There is also a Fast Track Settlement program for small to medium-sized businesses.
Office of Appeals: Within 30 days of the IRS’s determination you can have the Office of Appeals review your case. If you want to go directly to court, you must wait the 30 days to receive your Notice of Deficiency.
IRS Publication 3498 describes the appeals process. There are two different processes depending on the taxes due. Under $25,000 is considered a small case, and anything over $25,000 requires a formal appeals process. The statement that is sent to the IRS will depend on the small request versus formal request threshold.
The appeals application for small cases (under $25,000) can be downloaded at wcginc.com/Appeals-Small.pdf.
Some of the reasons to consider appealing your case is-
1. you are submitting additional information that could result in a change to the additional amount you owe, or
2. you are identifying a mathematical or processing error that the IRS made.
Appeal must be based in tax law or fact, and cannot be based on moral, religious, political, constitutional, conscientious or similar grounds. Some argue that taxes are illegal given the framework of our constitution- good luck with that.
Appeals must be completed within 3 years after a tax return is due or filed, whichever is later. A written agreement between you and the IRS can extend this statute of limitations (called a “consent”). You have the option to limit the consent to a particular issue or issues, or limit the consent to a particular of time. You also have the option to refuse the extension (which might or might not be a good idea depending on your situation).
The Office of Appeals handles Examination (audit) issues and Collection issues separately.
Court: After you receive a Notice of Deficiency detailing the final answer from the IRS, you have 90 days to petition the Tax Court (or 150 days if you live outside the United States). Usually the Tax Court will not entertain a hearing unless the matter has been considered by the Office of Appeals.
There are two types of cases- an S case and a regular case. An S case has a limit of $50,000 in terms of dispute amount, but it is less formal and has broader rules of evidence. These cases and the subsequent summary opinion are final, and cannot be appealed.
Visit www.ustaxcourt.gov/taxpayer_info_start.htm for more information.
Also the Tax Court cannot have jurisdiction over Trust Fund taxes (such as withholding or other payroll type taxes).
If you want to bring your case to the Federal Claims Court or the US District Court (and not the Tax Court), you generally have to pay the tax due, receive denials for your claim for refund from the IRS and the petition the Court. This is contrary to the Tax Court which does not require taxes to be paid in advance.
Interestingly the IRS has the burden of proving certain facts in court if you kept adequate records to show your tax liability, cooperated with the IRS and met certain other conditions. Having said that, many Tax Court summaries and opinions start with the words “As we have observed in countless opinions, deductions are a matter of legislative grace, and the taxpayer bears the burden of proof to establish entitlement to any claimed deduction.” Sounds like the Tax Court is really on your side, wink wink.
We can’t be completely sarcastic- Rule 142(a)(1) Section 7491 shifts the burden of proof to the IRS with respect to a given factual issue where a taxpayer-
1. introduces credible evidence with respect to that issue
2. meets all applicable substantiation requirements
3. complies with all record-keeping requirements
4. cooperates with any reasonable requests for information
If you do not respond to the Notice of Deficiency within 90 days, you will receive a bill for the amount due and your appeals as they related to the tax liability are usually over. From here you have several options in terms of payment (see What if I cannot pay my taxes? below).
Taxpayer Advocate Service is for those people who are having trouble communicating and resolving their tax issues with the IRS, or for those who believe the IRS is creating financial difficulties. There are eligibility requirements- call 877-777-4778 or visit www.irs.gov/advocate for more information.