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There are several ways to appeal an IRS audit result. This usually involves filing a written protest and having the IRS Office of Appeals hear the case. If the time for filing the protest has passed, you may also be able to file an audit reconsideration request or file a refund claim to appeal the audit results. We will cover each of these options in this chapter.
Appeal to the IRS Office of Appeals
The IRS Office of Appeals (“Appeals”) is authorized to settle cases without litigation. Its mission is to settle cases. This is all Appeals does.
Appeals used to be a part of the IRS Office of Chief Counsel (the IRS’s attorneys). It was made a stand alone function within the IRS several decades ago. Appeals is staffed by appeals officers (who consider substantive tax issues), settlement officers (who consider tax debt collection issues), tax computation specialists (who prepare calculations for appeals officers), and appeals processing staff (who prepare closing paperwork for appeals officers).
The IRS currently employs about 1,000 appeals officers. This is about 50 percent fewer than the number of appeals officers it had just a few years ago. This reduction is due to the IRS’s hiring practices and budget cuts.
Appeals officers are hired from the IRS exam function. They are prior IRS auditors. Most have worked for the IRS for a decade or more, before they start with Appeals. The severe budget cuts in the mid-2010s resulted in a situation where appeals officers were not replaced when they retired. When Appeals did hire, it hired more lower level and lower paid appeals officers at the service centers.
The result is two groups of appeals officers. This first group includes older experienced appeals officers, who exercise considerable discretion in settling case. The second group has newer and less experienced campus appeals officers, who often do not feel comfortable exercising discretion in settling cases. This point is important because the appeals officer assigned to your case has full authority to settle or not settle your case. Technically, their managers sign off on the settlements. However, this is usually just a formality. Thus, your likelihood of being successful in Appeals is driven largely by the luck you have in drawing an appeals officer who is willing to settle cases and does so on more taxpayer-favorable terms. Practices vary widely between appeals officers.
Requesting the Appeal
Usually cases get to Appeals, when you file a written request for the case to be sent to Appeals. The IRS auditor will send you a 30-Day Letter alerting you to your right to request that the case be considered by Appeals. You have 30 days from the letter’s date to file your request or protest to request the appeal. You may contact the auditor who issued the 30-Day Letter to request to extend the deadline from 30 to 60 days. The IRS auditor has the discretion to extend this deadline. You should ask the auditor to confirm the new deadline in writing, since you have little recourse if you miss the deadline.
If the total taxes and penalties you owe is less than $25,000, you can request that Appeals consider your case by submitting a Small Case Request using Form 12203. It is a one-page document that allows you to list items in the audit report that you disagree with, along with a brief explanation. You just send this form by certified mail with a return receipt to the IRS auditor that issued your audit report.
For cases with taxes and penalties due over $25,000, you need to file a formal written protest. The protest is a letter stating your desire to appeal the audit report’s findings, including interest and penalties. You may include an explanation and attach supporting documents. Similar to Form 12203, you need to address this letter to the IRS auditor that issued the audit report. You should send the protest by certified mail with the return receipt requested. In more significant cases, the IRS auditor may prepare a written rebuttal to your protest and send you a copy, before they send the case off to Appeals.
Unfortunately, the IRS is not legally compelled to offer the option to appeal. Therefore, you may not receive the 30-Day Letter. Instead, you might receive the 90-Day Letter or a claim disallowance letter (if you filed a refund claim that is not being allowed by the IRS). The 90-Day Letter allows you to contest the proposed deficiency, by filing a petition to the U.S. Tax Court. If you’re outside the United States, you have 150 days to file this petition. Both the 90 and 150-day deadlines cannot be extended. If you miss the filing date, the U.S. Tax Court will not hear your case.
If you file your petition to the U.S. Tax Court within the deadline, you should be able to have Appeals hear your case. The IRS Office of Chief Counsel attorney will forward your case to Appeals. Appeals will then work the case, as it would if you had been issued a 30-Day Letter or responded to the 30-Day Letter timely.
Handling the Appeal
The appeals officer will contact you to start the appeals process. This usually involves sending you a letter to schedule a conference time and IRS Letter 5157 issued by the appeals officer. This letter also explains your appeals rights and provides the contact information for the appeals officer.
While Appeals is an independent platform that maintains fairness between taxpayers and the IRS, don’t expect Appeals to be fully in your favor. Appeals will usually consider the merit of your case, based on its estimate of the odds you will prevail if the case goes to court. Appeals refers to this estimate as the “hazards of litigation.”
The hazards are usually expressed as a percentage and stated as a range. Based on litigation hazards, appeals officers may have a settlement range somewhere between 20% to 80% of the auditor’s adjustments. The appeals officer will usually have a specific 10% range in mind, after he or she considers your case. For example, the appeals officer may think that an acceptable settlement range is 60% to 70%. The range would vary based on your facts and the law and is just an example. With this example, if you propose a settlement within this range, the appeals officer will likely accept the proposal. If your proposal is not in this range, the appeals officer may counter with a percentage in this range. This is how Appeals negotiates and settles cases. Appeals may also agree to trade tax issues (if the auditor raises more than one issue) or tax years (if Appeals has more than one tax year before it).
Suffice it to say that you should be prepared to discuss the facts and the law during the appeals conference. You should also be ready to make a proposal. To do so, you may want to come to the appeals conference armed with a high/favorable proposal to start the negotiations with and a low/less favorable proposal to negotiate downwards. Knowing the lowest agreement you might accept, provides you with a framework for keeping the negotiations on track.
Most tax disputes with the IRS are settled with the auditor or with Appeals. If you don’t settle your case, you should receive a Notice of Deficiency or 90-Day Letter, and you have 90 days (150 days if you’re outside the U.S.) from the date of the letter to file a protest to the U.S. Tax Court. If you are in Appeals on an amended return asking for a refund of taxes paid, Appeals will close the case with a claim disallowance letter. You then have to pay the tax (if it is not already paid) and file a suit in district court or the Federal Claims Court to recoup the payment. We will cover these options in the next chapter.
Consider Post-Appeals Mediation
Post-appeals mediation can be used to settle a case, when it appears that settlement is possible, but there is some roadblock. For example, it may be that the appeals officer is fixated on a fact or legal argument that is incorrect or does not apply. The appeals officer may reject your proposed settlement based on this. This is where post-appeals mediation comes into play. You can request post-appeals mediation to enlist the help of another appeals officer in settling the case. Post-appeals mediation should be considered in cases like this.
The Audit Reconsideration Request
You can file an audit reconsideration request, if you disagree with the results of an IRS audit or appeal. This request asks the IRS to assign the case to another auditor for consideration.
You can use Form 12661, Disputed Issue Verification, to make the request. You can also just write a letter to the IRS clearly stating in the letter that it is an “audit reconsideration request.” The form or letter should explain the items you disagree with and include any records that support your position. The IRS will usually only consider the request, if you provide new information that was not available previously. Therefore, your request should be very clear that there is new information and, ideally, include a copy of the information with the request.
A request for audit reconsideration can be filed any time after the examination assessment of your account and if the tax remains unpaid. The request is to be sent to IRS campuses and is generally the address where you mail your individual income tax returns.
The IRS may take several months to respond to your request. When the IRS grants these requests, the auditors do not ask all that many questions. They usually just review what you provided and reach a decision based on that information. This is why you have to have everything put together, marked as exhibits, and totaled/summarized, etc. for the auditor with these requests. You have to make it as easy for the auditor to review and decide in your favor as you can. If you do not do this work up front, the IRS auditor is likely to just issue a disallowance letter or denial.
The IRS’s response may be an adjustment notice (agreeing with you) or a denial. The denial letter usually allows you to submit a protest to have Appeals consider the denial.
Amended Returns or Refund Claims
You may be able to contest the IRS audit result by filing an amended return or refund claim. This often involves filing the amended return form. For example, individual income tax returns can be amended using the Form 1040-X, Amended U.S. Individual Income Tax Return, or a Form 843, Claim for Refund and Request for Abatement. Other tax returns have similar amended return versions. The IRS also has published instructions that explain when and how to file these tax returns.
Amended returns or refund claims generally have to be filed within the later of three years of the IRS assessment (which could be the time the IRS audit adjustment is recorded on the IRS’s books) or two years from the date you paid the IRS’s assessment.
Once filed, the IRS will either allow, disallow, or audit the amended return or refund claim. If the claim is disallowed, the IRS will usually issue a claim disallowance letter and you may be able to file a protest to ask Appeals to review the disallowance. This can be an effective strategy for contesting some IRS audit adjustments, if the time for filing the protest has passed and there is no new information justifying an audit reconsideration request.