Just because the Internal Revenue Service makes a determination of their findings in an audit, does not mean taxpayers have no further remedies to contest their position. An appeal is an accessible and worthwhile remedy to dispute an unfair IRS position or determination. According to statistics compiled by the IRS, appeals of tax audits result in an average reduction of 40 percent in taxes, penalties, and interest. As specifically listed within the official Declaration of Taxpayer Rights published by the IRS, taxpayers have the fundamental right to appeal IRS decisions.
The IRS Office of Appeals was established to provide a platform for resolving controversies and disputes between taxpayers and the federal government in an informal setting, without a court hearing. Appeals are typically speedier and less expensive than litigation. However, attempting to find a resolution through the Office of Appeals does not necessarily preclude litigation.
Once the IRS makes an audit determination, they will send their findings to the taxpayer. The taxpayer can either agree or disagree with the audit findings. A disagreement with the IRS findings offers the opportunity for a taxpayer to appeal the result of the examination.
Not every IRS decision should be appealed. Before appealing, a taxpayer should give careful consideration to the process used by the IRS to reach its conclusion. An appeal may be based on a legitimate dispute over interpretations of the law or facts relevant to a case. An appeal might also be warranted if the taxpayer believes the IRS has made an inappropriate decision regarding the means of payment collection, such as a lien, a levy, or a seizure of assets.
While the Office of Appeals is operated by the IRS and administered by experienced former IRS examiners and collection agents, its stated goal is to remain fair and impartial to both parties (i.e., the taxpayer and the IRS) in a dispute. Discussion of the dispute takes place directly with an Appeals Employee. At this time, the facts of the case are compared and contrasted with existing tax court precedent. Once the matter has been discussed from all angles, the case is placed before an Appeals Team Manager, who considers the recommendation of the Appeals Employee before rendering judgment. The Appeals Office, based on their stated mandate, makes every attempt to make a decision that is mutually acceptable to both parties. Naturally, not every appeal ends favorably for the taxpayer. With an unfavorable appeals decision, the taxpayer is entitled to and receives a full explanation of the decision.
In general, there are three potential outcomes for an appeal decision:
The Appeals Employee recommends full concession by the IRS (if the facts and law clearly support the case, or where precedent is in your favor)
The Appeals Employee recommends that the taxpayer fully concede (if the facts and law clearly don’t support the case and precedent is against you)
A settlement is agreed upon, wherein some of the issue is conceded by both parties (very common, especially in cases where the facts or law are unclear, or court precedents are mixed)
In cases of settlement, one party generally agrees to give up more than the other party. Far more often than you might expect, the party giving something up turns out to be the IRS. If a taxpayer agrees with the recommendation made by the Appeals Employee and the decision rendered by the Appeals Team Manager, an agreement form will be provided for signatures. If not, further options will be presented, including a formal court hearing.
Before filing an appeal, taxpayers should consider their options for representation. While taxpayers are free to represent themselves during the appeals process, many choose to appoint a certified public accountant to deal directly with the IRS. The advantages to appointing a CPA include familiarity with tax law and experience with prior appeals. Even though an IRS appeal is generally advantageous for the taxpayer, it still can be intimidating if you are not familiar with the process.
Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC (www.reliancecpa.com). He can be reached at (813) 931-7258 or via email at firstname.lastname@example.org