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IRS Audit Proceedures

Receiving a letter from the IRS indicating that your tax return has been selected for audit can be a scary situation.

However, an examination may or may not result in more tax. An examination may be closed without change or you may even receive a refund. If the IRS proposes to increase your tax, however, you have the right to appeal this decision both within the IRS and to the courts. Here are a few more details about the process.

Selection of Returns for Audit: The IRS examines tax returns to verify the correctness of income, exemptions, credits, or deductions reported on the returns. A computer program selects most returns that are examined. The program evaluates selected entries on a return and gives the return a score. Returns are then screened by IRS personnel. The returns that the IRS thinks have the highest probability of error are selected for examination.

The IRS tries to avoid repeat examinations of the same items. Thus, if the IRS examined your tax return for the same items in either of the two previous years and proposed no change to the tax liability, you should notify the IRS and the examiner may discontinue the repeat examination.

The Examination: Examinations are handled either through the mail or through a face-to-face interview. When the examination will be conducted through a face-to-face interview it should be scheduled to take place at a reasonable time and place that is convenient for both you and the IRS. If the time and place suggested by the IRS is not convenient, the examiner will try to work out something more suitable. However, the IRS makes the final determination of how, when, and where the examination takes place.

Your major decision at this point is to decide who will attend the audit on your behalf. You may represent yourself, you may have someone else accompany you, or, with proper written authorization, you may have someone represent you in your absence.
You may make a sound recording of the examination. However, you must notify the examiner in advance so that he or she can do the same. At the end of the audit, the IRS will give you (or your representative) a written explanation of any proposed changes to your tax return.

Agreed Audits: If you agree with the results of the audit, you may sign the consent form provided by the IRS. You may pay the tax at this time, or wait until the IRS sends a bill. Interest is charged on the additional tax from the due date of the return. However, the IRS must send a bill within 30 days from the date the consent agreement is signed. If it does not, it cannot charge interest after the end of the 30 days until the bill is sent. Assuming the amount of additional tax is less than $100,000 no further interest or penalties are charged if the amount due is paid within 21 calendar days after the billing date. Even if the amount is over $100,000, you would have 10 business days to pay the amount before additional interest and penalties are charged.

Unagreed Audits: If you do not agree with the examiner's report, your first option is to meet (personally or through your representative) with the examiner's supervisor to discuss the report further. If you reach an agreement with the supervisor, the case is closed. If no agreement is reached, the IRS issues a written preliminary notice of proposed adjustments (30-day letter). If you still do not agree with the 30-day letter, you have the right to appeal the findings within the IRS or to go to court. If you are eventually found to be liable for tax, you will be liable for interest on the tax deficiency and possibly penalties.

IRS Audit Appeal Procedures

This section discusses the options available to you with respect to the adjustments to your tax liability proposed by the IRS in the “30-day letter.” In general, once the IRS has completed an examination and has proposed an increase in tax liability, you have the right to appeal this proposal both within the IRS and to the courts.

Appeals Within the IRS: The IRS has a single level of appeal. An appeal from a 30-day letter is to an IRS Appeals office. These offices operate independently of the area office that issued the 30-day letter. Most taxpayers choose to appeal first to the IRS's Appeals office before going to court, since most cases can be settled through this system without expensive and time-consuming court proceedings. If the matter is not settled in Appeals, you can still take your case to court.

To appeal a 30-day letter, you must make a written request to the Area Director according to the directions in the 30-day letter. How you must request Appeals consideration depends upon the amount in controversy and the type of case. If the total amount of the proposed additional tax, penalties, proposed overassessment or claimed refund exceeds $25,000 for any taxable period, you must submit a formal written protest. You must also file a formal written protest in all employee plan cases, exempt organization cases, partnership cases, and S corporation cases. In other cases, if the total amount in issue is $25,000 or less, you may request an appeal using small case procedures. Small case procedures require only that your written request indicate the changes with which you do not agree and your reasons for disagreeing. The Appeals office arranges for a conference at a convenient time and place.

Appeals to the Courts: If you continue to disagree with the position of the IRS after the Appeals conference, or if you decide to bypass Appeals, you can take your case to the U.S. Tax Court, the U.S. Court of Federal Claims, or the local federal district court.
If the dispute is not settled in Appeals (or if Appeals is bypassed), and the tax has not already been paid, the IRS issues a written statutory notice of deficiency (“90-day letter”). You then have 90 days from the date of the notice to file a petition with the U.S. Tax Court. If no petition is filed, the IRS assesses the proposed tax and bills you for the deficiency.

If you choose not to go to the Tax Court, you can still receive judicial review by paying the disputed tax in full and filing a claim for refund with the IRS. If the claim is disallowed (or the IRS does not take action within six months), you can take your case to a federal district court or the Court of Federal Claims. Unlike the Tax Court, however, these courts hear tax cases only after the tax has been paid.

Note: If you first exhaust your administrative remedies and then prevail in court and show that the IRS position was largely unjustified, you may be able to recover some of your administrative and litigation expenses from the IRS, including attorney's fees.

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IRS Audit Proceedures

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