Appealing the Audit

You've been audited, and you just can't agree with the IRS auditor's result. Well, you don't have to accept it, or their bill. In most instances, you can appeal the decision within the IRS, and you always have the right to go to court; but more on that later. An audit appeal is simple to initiate, and for small Tax Court cases (which are defined as those cases of dispute of less than $50,000 per audited tax year) you don't need to hire an attorney.

IRS statistics reveal that more than eighty percent of taxpayers who file appeals get their tax bills reduced. What's more, the average appeals settlement produces a forty-percent reduction. And even if you don't win your appeal, you'll have succeeded in delaying the final tax bill for many months.

If you refuse to agree and sign the auditor's examination report, in most cases the IRS will mail you a '30-day letter'. This is actually your invitation to take your case to the IRS Appeals Office, which is a completely separate entity from the audit division. Until you receive this letter, you can't appeal (but you don't have to pay the audit bill, either). The IRS is not required by law to let you internally appeal an audit, and sometimes it won't. But they must always notify you in writing of your right to contest the audit results in Tax Court.

You begin an appeal by writing a protest letter to the IRS. If you owe less than $2,500, you can simply tell the auditor that you wish to appeal; however, it's wise to put it into writing anyway. A good protest letter should include the following information

• Your name (or the name of your business, whichever one the audit report specifies) and your taxpayer identification number (either your Social Security number if you're a sole proprietor with no employees or your federal employer identification number).
• A statement saying that you are appealing an examination report.
• The specific findings in the report that you dispute.
• A brief explanation of why you believe the report to be wrong, and
• Your signature, date and these very important words: "Under penalty of perjury, I declare that the facts presented in this protest and in any accompanying documents are, to the best of my knowledge and belief, true, correct and complete."

Be sure to attach copies of the examination report and the IRS 30-day letter to your protest letter. Send the letter to the IRS office that audited you, to the attention of the District Director. Your letter will (eventually) be processed and forwarded to the IRS Appeals Office.

Some time after requesting the appeal, you'll get a call or letter from the IRS Appeals Office requesting a meeting, or an appeals officer may offer to handle your case by phone or correspondence. If you opt for the long-distance method, send in explanations, copies of documents, affidavits of witnesses and anything else that you believe supports your position. But, if you prefer to speak to the officer face-to-face, insist on a meeting.

Even if you handle the appeal yourself, it might be wise to consider consulting a competent tax professional for advice. He or she can offer insights on what might have gone wrong at the audit and how to prepare your appeal in a professional manner. Appeals officers appreciate a well-organized presentation and may reward you with a favorable settlement. After all, their aim is to mediate a resolution so that you won't go to court. Use this opportunity to sell your position that your tax return was – at least for the most part – correct. You want to convince the officer that there's some chance – no matter how slight – of you winning should you go to court.

Some common small business appeal issues include entitlements to a home office deduction, travel and entertainment expenses, and advertising and business car write-offs. In appeal cases, deals are often made by trading issues. In other words, you should get the appeals officer to see that you have an arguable point on at least one issue and that you're willing to concede on another. Don't expect to come out completely victorious; although technically possible, it's highly unlikely. It's much more advantageous to foster a give-and-take attitude. If the officer simply won't budge toward any type of settlement, then politely inform the individual that you will next take the matter to Tax Court. This may compel a last-ditch effort to work things out.

You aren't required to go through the IRS appeals process before going to court. If you don't appeal – or you do but are still unsatisfied with the outcome – you can proceed to one of three courts: the U.S. Tax Court (which is an independent federal court), the U.S. District Court or the Court of Federal Claims. Almost everyone chooses Tax Court, for two reasons: first, the District and Claims courts require that you first pay the tax levied and then sue for a refund. Second, few people succeed in either of these courts without the aid of attorneys. Tax Court, on the other hand, allows you to contest an audit for a nominal filing fee and offers a reasonable chance of success without having to hire a lawyer.

Disputes of less than $50,000 are treated under rules much like Small Claims Court cases. These procedures are informal; you simply present your case to the judge in your own words, without any legal jargon. Regular cases (those where more than $50,000 per audited tax year is in dispute) are best handled with the help of an attorney.

To go to Tax Court, you must have first received an IRS Statutory Notice of Deficiency, also known as a '90-day letter'. This letter will usually be sent within one- to six months following your audit; assuming, of course, that you didn't agree with the examination report. For further information on how to get a small (under $50,000 per audited tax year) case before the Tax Court, be sure to visit the U.S. Tax Court's website.