IRS audits can leave your stomach in a knot and your head in your hands, often because you feel innocent of the changes the IRS is proposing to your tax return.
Notice I said proposing.
An IRS audit is not simultaneously the beginning and end of your defense, with the auditor playing the role of judge and jury. An auditor’s report is a proposal of what he (and probably his manager) thinks the changes should be. Auditors are sometimes right and sometimes wrong in their analysis of the law and interpretation of facts.
If you disagree with the auditor, you do not have to stop everything and accept what the auditor is proposing (there is that word again). You have rights.
Those rights include having an IRS appeals officer review the auditor’s findings, and, if that is unsuccessful, to have an independent Tax Court judge do the same.
In other words, the audit is the first step in what can be a three-step process (audit, appeal, Tax Court). The goal, of course, is to resolve it with the auditor and get it right the first time, but if an agreement cannot be reached, it is important to know where to turn next.
After the audit is over, the IRS will send what is called an Examination Report. The report will detail the auditor’s findings, the changes proposed to your tax return, and the amount proposed to be owed. If you disagree, you have the option, within 30 days, to file an appeal with the IRS, disputing the auditor’s findings. The appeal should be filed in writing, with proof of mailing, and timely sent back to the IRS auditor handling your case. Your case will then be sent to an IRS appeals officer to listen and review why the audit report is incorrect. The appeals officer can erase incorrect findings.
If you do not respond to the Examination Report, you have another chance. The IRS will send another notice, this time called a Notice of Deficiency, to you. The Notice of Deficiency, in many ways, is like the Examination Report – containing the changes the IRS is proposing to your return. However, at this point, rather than filing an appeal to meet with an IRS appeals officer, your appeal rights are now with the U.S. Tax Court. Within 90 days after the Notice of Deficiency was sent, you have the right to file a complaint (known as a “petition” in the world of technical tax talk) to the Tax Court, explaining why you disagree. The Tax Court will set your case for trial. The Tax Court is not affiliated with the IRS.
The Notice of Deficiency is the last notice you will receive from the IRS about the audit. If you do not go to Tax Court in 90 days, the audit will become final, and the IRS will put the changes on its books, make it final, and start collecting from you. As the audit is not final while you are in appeals or Tax Court (still in a proposed status), there is no collection during that time.
Two more items to note in appealing IRS audits: Whether you first file to appeals or Tax Court, you are not leaving either at the alter.
If you go to appeals first, you still have the right of Tax Court review if you do not reach agreement with the IRS appeals officer. (The filing of the appeal simply delays the sending of the Notice of Deficiency. That is the last act the IRS takes before an unagreed exam becomes final.)
If you go to Tax Court first and bypass appeals, the IRS will send your case to an IRS appeals officer to try and settle the case while it is pending and without trial.
Either way, you have a meeting with an appeals officer and the right to Tax Court.
Regardless of how you get there, the goal of the appeals officer is to settle the case based on how a Tax Court judge would interpret your evidence and apply it to the tax laws. An IRS auditor usually has a narrow vision, and does not consider how the Tax Court would interpret your case, or your evidence. This is the job of an appeals officer and the Tax Court. Either way, if you disagree with an IRS audit, make sure you exercise your appeal rights and expand and broaden your options for successful resolution.