IRS Tax Audit Appeals: Common concerns & questions
By David G. Parent, Esq.
What is an IRS audit appeal?
It is your right to appeal the work of the auditor after he has complete a tax audit, or “examined” your financial information and has issued his report.
What is an IRS auditor report?
It is report that details the additional amounts owed as well as the penalties and interest. The report also asks that you sign indicating your approval.
What if I don’t agree with the Auditor’s Report?
That is where your right to appeal begins. In fact, the auditor will provide you with forms and information explaining your appeal rights.
“I know my rights! I’ll appeal this to the Supreme Court! Let’s get started right away!”
Not necessarily so. You should do is to read the report carefully. For the contested items the auditor will provide a clear explanation for each one of his changes. In some cases he will even grant deductions that the taxpayer did not claim. Then there are items such as self employment taxes, child care credit, tuition credit that computed using formulas. Thus, if the auditor finds that your profit was higher, his report will contain the increase in self employment taxes, the allowable deduction for self employment taxes other deductions or credits that are affected. There is also a section regarding the computation of penalties and interest. A fair reading of his work may show that he is correct.
“Then I am really stuck because of the math and therefore my appeal rights are meaningless?”
Not necessarily so. The deduction claimed may be mathematically correct but there is no enough evidence to support it. For example, let’s talk about business mileage. The calculation is really simple. It is the number of miles times the mileage rate. The evidence is something else. In a successful appeal to the tax court the taxpayer submitted:
A mileage log showing: The destination, The miles driven to the destination, An abbreviation of the business purpose of the meeting, The activities conducted during the meeting.
A daily planner.
“But I did not have all of that stuff! I am still out of luck!”
Not necessarily so. Mileage is the alternative to deducting actual expenses and depreciation. If you used the car in your business you had to have repairs, maintenance and inspections. Many of those receipts have dates and mileage. From those, one can reconstruct a good estimate of mileage. In another situation the taxpayer can only gain employment by appearing at a union hiring hall. If he was not there when his name is called, he goes to the bottom of the list. Knowing the distance from his home to his hiring hall, and estimating the number of times he would have to appear as his number was coming up, he would be able to substantiate his mileage. If you have 1099 forms from your customers, you can demonstrate that you had to be at his location in order to perform the work. You can also ask your customers for copies of records showing where you were. Finally, an appeals officer may accept less documentation than would the court in order to settle a case.
In this article we have deliberately used the phrase “Not necessarily so” to the point of being annoying. We did that for a good reason. The reason for so doing is to highlight the fact that audit appeals are complex. They involve a great deal of fact and circumstances. They require a great deal of work and thought. You also have to decide if the effort and expense is worth the gain. The decision to appeal is not easy but the results can be rewarding.