How to Appeal Your IRS Audit

An IRS audit can send shivers up the spine of even the most conservative taxpayer. For many, this dreaded procedure results in either nightmarish visits to the Internal Revenue Service (IRS) office or visits from revenue agents to their homes and businesses.

The result is often an assessment of back taxes, interest, penalties, and sometimes even criminal sanctions. If you’re unhappy with the findings, you have several avenues for recourse through the IRS’s Office of Appeals.  In many cases, the IRS Office of Appeals will adjust or even overturn the findings of an audit in the taxpayer’s favor.

Here are a few tips you can use to help you appeal an audit should you receive a notice from the IRS.

The IRS Office of Appeals

The IRS created the Office of Appeals to handle disputes between taxpayers and auditors, consisting of approximately 1,550 employees located nationwide. Appeals officers are typically experienced tax professionals who were once auditors themselves. Their job is to serve as a neutral party and help resolve disputes without litigation. This department has the authority to make decisions that can modify, reduce, or even eliminate the audit findings.

Appeals officers are focused on resolving issues fairly and impartially, and they have more flexibility than the original auditor in making adjustments. Their competence is judged by how often they can reach a successful compromise with taxpayers—not by their willingness to back an auditor’s findings. The Office of Appeals will listen to any reason why you disagree with an audit other than religious, moral, or political beliefs.

How to Appeal Your Audit

The IRS sends you a detailed examination report after your audit is complete. It outlines all the proposed assessments and changes and is broken down by interest, penalties, and taxes.

Initiating Your Appeal

After the IRS completes an audit, it will send you a detailed examination report that outlines any proposed changes to your tax return, including taxes owed, penalties, and interest. To begin the appeal, you should refrain from signing or accepting the report, which will trigger a 30-day letter explaining your rights to appeal.

A protest is a written statement explaining why you disagree with the IRS’s findings. Here’s the information the IRS says that your formal protest must include:

1. Your name, address, and daytime telephone number
2. A statement that you want to appeal the IRS findings to the Office of Appeals
3. A copy of the letter you received that shows the proposed change(s)
4. The tax year(s) involved
5. A list of the items you disagree with and reasons why.
6. The facts that support your position on each item
7. The law or authority that supports your position on each item—if any.
8. The penalties-of-perjury statement is 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.”
9. Your signature under the penalties of perjury statement

Did You Miss the Deadline?

If you miss the 30-day deadline for filing your appeal, you may request an extension of 30 or 60 days, which is typically granted. You then have three choices as to how you move your audit to the Office of Appeals:

1. If you owe less than $2,500, you can ask your auditor for an appeal.
2. If you owe between $2,500 and $25,000, you should write a letter of protest, titling it a “small case request.” This letter must contain all of your contact information, the tax identification numbers of all involved parties, and a declaration of intent to appeal and an itemized breakdown of the disputed items. You can also complete IRS Form 12203: “Request for Appeals Review,” which is downloadable from the IRS website.
3. If you owe more than $25,000, Form 12203 is your only option. It is also recommended that taxpayers in the first category either write a letter or complete Form 12203 in addition to making a verbal request to ensure that their case doesn’t slip through the cracks.

Need Help Getting a Response?

Once you file your protest, the IRS Office of Appeals will typically respond after reviewing your case. If you haven’t heard anything in 120 days, follow up with the IRS office handling your case.

If you are unable to obtain an update on the status of your case. call an Appeals Account Resolution Specialist (AARS) at (559) 233-1267. The AARS should be able to provide you with information about whom your account was assigned to and how to contact that person.

Preparing for Your Hearing

Once your case is assigned to an appeals officer, you will usually have at least 60 days to prepare. Use this time to cement the details and arguments you intend to make during the appeal.

Be sure to request a copy of the auditor’s file. You are legally entitled to it under the Federal Freedom of Information Act. This requires another letter to be sent to the FOIA officer at your local IRS office. Specify the tax years covered in the audit and volunteer to cover the costs of all necessary copies. Send the letter via certified mail and request a return receipt. It will probably take at least a month before your request is granted, and don’t hesitate to follow up if it takes longer. Meanwhile, get all of your documents and other papers organized and ready.

Prepare copies of all necessary receipts, statements, and other forms to prove your case. Break down information clearly on spreadsheets that the appeals officer can easily understand. Even hand-made visual presentations can be effective if the situation calls for them. Create a separate file folder for each contested item for the officer’s convenience.

Presenting Your Case

Appeals case hearings are typically informal, and you can record the proceedings if you desire. Create a rough outline of what you want to tell the officer, and be ready to present them.

Once you are in front of the officer, clearly articulate any errors you feel the auditor committed during the audit. However, do not badmouth either the auditor or the IRS, no matter how much you may want to.

Be prepared to hear the officer request further documentation or time to research a matter. If this happens, don’t hesitate to ask for as much time as you need, especially if the matter requires your involvement. Make sure you take meticulous notes of what the officer says during the hearing if the session isn’t recorded.

Negotiate a Settlement

Appeals officers aim to resolve cases quickly and efficiently, and many will attempt to reach a settlement with taxpayers. When negotiating, consider asking for the waiver of penalties, especially if your actions were not willful or fraudulent.

Offer to pay part of the adjustment to show good faith but refrain from specifying dollar amounts or specific items at first. Speak in terms of adjustments, items, or percentages—not dollars. The art of negotiation is paramount in determining the results that you get from the hearing.

Settlement amounts are usually reached verbally and then transcribed onto IRS Form 870: “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.” It can take months for the printed form to arrive in your mailbox after the hearing is over. However, signing this form means you cannot appeal the case further in Tax Court if you find a mistake later. Be sure to fully understand the terms before signing.

Before you sign, be sure you thoroughly understand everything printed on it. Make certain that the numbers on the form correlate with the verbal agreement you reached during the meeting and don’t hesitate to consult a tax professional if you have questions of any kind.

Advantages and Disadvantages of Appealing an Audit

Advantages

There is a very small number of taxpayers who appeal their audits. Given the ease and speed of the appeals process, why this percentage is so low is a mystery. Appealing an audit can often reduce (or even eliminate) previously assessed taxes and penalties. It also costs nothing unless you enlist the aid of a tax professional, which is usually unnecessary.

The odds of winning your case are surprisingly high. The average taxpayer who appeals an audit can expect to see the total dollar amount initially assessed by the auditor reduced by a total of 40%.

Appealing your case delays the due date of your tax bill for the duration of the appeals process, which can last for months. This gives you additional time to gather the funds necessary to pay the assessment or work out a payment plan.

Disadvantages of Appealing

There are a few instances in which the audit process may prove detrimental. The appeals officer may find additional items that the auditor missed. This is rare, but if you know of something harmful on your return that was not flagged previously and could still be found, suing the IRS in U.S. Tax Court may be a safer alternative, as new issues cannot be introduced in this venue.

The other issue is that interest and penalties will accumulate on your assessed balance during appeals. This means that if you lose your appeals case, you will pay even more than before.

The Bottom Line

While appealing an IRS audit can be nerve-wracking, it offers an opportunity to potentially reduce or eliminate tax liabilities and penalties. Most taxpayers who appeal are successful in getting their assessments reduced. It’s worth taking the time to prepare your case thoroughly, and, if necessary, consult with a tax professional for guidance. Be sure to familiarize yourself with your rights and the appeal process by reviewing IRS Publication 5: “Your Appeal Rights and How To Prepare a Protest If You Don’t Agree”.