How to Survive an IRS Audit
2000-12/01 Steven A. Anderson

Audit. A word that makes the blood run cold in the bodies of individuals, businesses, and estates. However, despite the terrible reputation the IRS has obtained over the years, taxpayers still have rights during and after the audit process. This article briefly summarizes the audit and appeals processes. Due to the differences between the issues confronting an individual taxpayer, a business, and an estate, this article will, by necessity, only provide general information. For more specific information regarding your particular situation, please contact your accountant or attorney.

IRS Examinations

The IRS will generally not use the term "audit." Instead, it prefers to call the process an "examination" of returns. Whatever the process is called, it means that the IRS will be taking a closer look at a taxpayer's return that has already been filed. There are three general ways in which the IRS determines what returns to examine. First, all individual and some corporate tax returns are run through a computer program called the discriminant function system. That computer program assigns a numeric score to returns after they have been processed. Returns that are assigned a high score are more likely to be examined. Second, the IRS may perform an examination if it receives information from third-party documentation, such as Forms 1099 and W2, that does not match the information reported on the tax return. Third, the IRS can perform an examination if it receives information from other third parties, including public records, informants, or the media, that the IRS deems reliable and that demonstrates potential noncompliance with the tax laws or inaccurate filing. Once a return is selected for examination, the IRS will determine when, where, and how the examination will take place. Some examinations may be performed entirely by mail or review of documents. Other examinations may take place at your home, place of business, attorney's office, or at an Internal Revenue office. Generally, the examiner will attempt to make the time, place, or method of examination convenient for the taxpayer.

At the end of an examination, a closing conference will be held between the IRS representative and yourself or your representative. At that time, the examiner will explain any proposed changes. If you agree with the proposed changes and agree to pay additional tax, the examination will be completed at that time. If you do not agree, you have the right to speak with the examiner's supervisor to explain your position. If no agreement is reached, you will receive a copy of the examination report, an agreement or waiver form, and a 30-day letter within a few weeks after the closing conference. The 30-day letter notifies you of your right to appeal the proposed changes within 30 days. From the date you receive the 30-day letter, you have 30 days to tell the IRS whether you will accept or appeal the proposed changes. If you do not agree with the assessment that follows the examination, you can either go through the IRS Appeals Process or appeal directly to the courts.

IRS Appeals Process

The IRS maintains independent Appeals Offices at many locations throughout the country. To appeal an assessment, you must file a written protest. It is recommended that you contact your accountant or attorney for help in drafting the written protest. The Appeals Officer will review all information which the examiner used in determining the assessment, as well as information provided through your written protest. The Appeals Officer will then hold an informal meeting with you and/or your representative. At that time, the Appeals Officer can either reverse or modify the assessment, uphold the assessment in full, or reach some type of compromise with you or your representative. If no compromise is reached, and if you continue to disagree with the IRS assessment, the Appeals Officer will forward the file to the District Office and your next appellate rights are to the courts.

Appeals to the Courts

If you and the IRS still disagree after the Appeals conference, you can take your case to the United States Tax Court, the United States Court of Federal Claims, or the United States District Court. Each of these courts has somewhat different advantages and disadvantages. Additionally, you will have to decide whether you want to pay the tax and sue for a refund or appeal the assessment before paying the tax. Your decision in this regard will also play into which courts are available to you.

The United States Tax Court is the only court in which you can appeal the decision without first having to pay the tax and then having to sue for a refund. The Tax Court hearing will be held before a judge who specializes in tax law and there is no right to a jury. As a practical matter, if you or your business is without the financial means to pay the assessed tax in advance, you will be limited to the Tax Court as a litigation forum. However, if the tax is not prepaid, interest will continue to accrue from the due date on the tax return on any additional taxes owed as a result of the assessment.

A tax refund action in the Court of Federal Claims is commenced by filing a Complaint with the Clerk of the Court in Washington, D.C. Ordinarily, the tax refund action will then be heard by a Court of Federal Claims judge in a geographic location near to the taxpayer. Court of Federal Claims judges do not hear tax controversies exclusively, but generally have had experience with tax law and tax controversies.

The final option for a taxpayer is to file an action in a United States District Court. This action must be filed with the Clerk of Court in the district in which the taxpayer resides or does business. Filing an action in District Court will also provide the taxpayer with the right to a jury trial. It can be assumed that the federal District judge will have the least experience in tax controversies as compared to the Tax Court judge or the Federal Claims judge.

The three court forums available to a taxpayer have numerous differences in rights to discovery, evidentiary rules, procedural rules, and differences in available remedies. By the time a tax controversy reaches the court stage, what started as an audit is now complicated federal litigation with numerous procedural requirements waiting to trip the unwary taxpayer.

We strongly encourage any taxpayer who has had an assessment made against them following an examination to contact a legal representative.

© 2000 Ruder Ware, L.L.S.C. Accurate reproduction with acknowledgment granted. All rights reserved.
This document provides information of a general nature regarding legislative or other legal developments. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed.