What do you do when you disagree with an IRS auditor?
A common misperception of IRS audits is that whatever the auditor says, stands.
The reality is far different – an IRS auditor’s findings are not final. It’s okay to disagree. You have options. The audit is not the end of the road.
First, the IRS has an internal administrative appeal process for review of all audit findings. Once the auditor is done, he will send you a letter summarizing his findings, and give you 30 days to appeal. If you appeal, the case will be sent to a separate IRS office where an independent IRS appeals officer will review the audit and your points of disagreement, trying to reach resolution.
But what if you feel battered by the audit, and want review from an outside, third party not affiliated with the IRS?
That’s were Tax Court steps in.
The Tax Court is a federal court – independent of the IRS. It reviews IRS actions – including audit results and intended collection enforcement actions – and decides if the IRS right, or if you are right. In essence, if you want to take an IRS audit to court, consider filing a petition to U.S. Tax Court.
Here are 5 reasons you can benefit by having the Tax Court decide your IRS dispute:
1. You will be able to testify to things the IRS auditor may not believe. Many audits get derailed by disagreements over what happened – How much did you pay your subcontractors? Were you conducting a hobby or a business? Was the trip you deducted for business or pleasure? In Tax Court, a judge will listen to your testimony, and will decide if you are right. Your fate is no longer in the hands of what the IRS believes to be true.
2. Your records – receipts, logs – the documentation you submitted to prove your case in audit – will be reviewed fresh by the Tax Court judge. Your testimony can supplement the documentation – permitting you to tell your story to ears other than the IRS. A common audit problem is the IRS bank deposit analysis – resulting in the IRS believing that you had more income than reported on your tax return. The Tax Court can review your bank statements, your testimony and your documentation proving that not all bank deposits were earned.
3. The IRS audit will be closed, and the issues quantified. In most cases, once you get to Tax Court, the issues are settled, and the audit is over. No more IRS digging into other years, or examining other items on your tax return.
4. If you have a disagreement with the IRS over tax law, the Tax Court can interpret and decide how the law impacts your case. That’s what the Tax Court does – apply facts to the tax law contained in the Internal Revenue Code. The IRS auditor’s interpretation of the tax code may be wrong. Tax Court judges are lawyers, well-versed in the tax code. In most cases, we will be given an opportunity to write a legal brief explaining how the tax laws should be applied to you and the facts of your case, and the opportunity to respond to the IRS’ arguments to the contrary. Then, the Tax Court decides who is right.
5. IRS hazards of litigation. Once you file in Tax Court, your case will be forwarded to an IRS trial attorney, who will be in charge of the case (rather than an IRS auditor). The IRS attorney has the authority to settle your case based on what the IRS calls “hazards of litigation.” Hazards of litigation are defined by the IRS as the risk (hazard) that the IRS will lose, and the Tax Court will agree with you.
IRS auditors are usually narrow in their approach to a case – they are investigators, and do not consider the hazards of litigation. The IRS trial attorney usually has a different view – which analyzes and considers what will happen at trial – what will the judge believe? – and the likely result. In most cases, before trial, the IRS will review your case, your documentation, and your legal arguments, and often will make a settlement offer based on the IRS’s prediction of what will happen at trial and how a judge will rule, not just what the auditor said.
When being audited by the IRS, it is important to remember that the audit is a beginning, but if you disagree with the auditor, it is not the end. In a best case scenario, we want to resolve your audit with the auditor, but if you are stuck in audit and cannot reach agreement and case closure, you have rights. With all due respect to IRS auditors doing their best, as it relates to you, the final say does not have to belong to them.