IRS tax appeals process: Overview
Imagine if every taxpayer who had a beef with the IRS took the IRS to court. Well, seeing how there are about 100 million tax filers and about one million Americans owing some kind of money to the IRS and another million or so under some type of audit, the Federal courts would be quickly overwhelmed and consumed with nothing but tax cases. This is one of the reasons why the US government created the IRS Office of appeals in Title 26 Vol 20 – Sec 601-106 of the tax code. The purpose of IRS appeals is to the provide for an administrative, outside of court, means for taxpayers to resolve their differences with the IRS without resorting to legal action that would shut down Federal court system. Although the IRS Office of Appeals has wide-jurisdiction to settle a wide variety of cases, there are limitations to what the kinds of cases they can hear. This article will discuss the types of cases IRS appeals can settle, and the appeals process by which as case gets settled, dropped by the taxpayer, or ultimately, litigated in tax court.
First thing, if you want to go to tax court, you must start with IRS appeals!
This is called exhausting administrative remedies. Our court system wants taxpayers to resolve their cases at the lowest level possible (no offense to Tax Appeals officers, of course). Cases are routinely dismissed because taxpayers did not “exhaust their administrative remedies.” What this means is, if you have an argument to make, make it with IRS appeals first. They may agree with you! Don’t raise issues for the first time in tax court and expect to win.
What kind of cases are appealed?
Individual Correspondence Audits. There are “paper” audits, or “corr” audits. These audits are all done by mail. The IRS makes far more money off of these types of audits than “field” or in-person, audits. One of the reasons, we suspect, is that the process is so frustrating that many taxpayers just give up during the “corr” audit process.
Field Audits. Field audits are the in-person audits most people think about with the IRS. For us, this is the most common type of audit appeal we do as tax attorneys. Even though there are far less field audits, we think we wind up with more of the appeals, as the issue are complicated, the stakes are high, and we also have suspicion that most people involved in “corr” audits don’t appreciate the significance of appealing their audit, while those who have been personally inspected by the IRS do.
Denial of Claims for Refunds. Claims for refunds are time sensitive and it is a difficult if not impossible to win a claim for refund if you are late. But one type of claim for refund appeal that can be successful is in the case when someone was assessed a Trust Fund penalty through the 4180-Interview process and did not raise a defense or who had a taxpayer representative with a conflict of interest (i.e., CPA represented two taxpayers, partner A and partner B, CPA was sleeping with partner A, the two colluded against partner B). There are other such successful cases as well.
The issuance of a lien, or proposed levy or seizure. Be warned: The time to claim an appeal is limited by time. Typically an appeal must be filed 30 days after an Issuance of a Final Notice of Intent to Levy, or Notice of a Federal Tax lien in order to preserve rights to tax court. There are other appeal rights that exist for up to a year afterwards, but those will not trigger rights to tax court if settlement is unsuccessful.
The proposed rejection of an installment agreement or offer in compromise. If an offer in compromise is rejected by an offer examiner or an installment agreement rejected by a revenue officer, oftentimes, if we think we have a strong case, we will file an appeal. Note: In order to prevail, we must demonstrate exactly where the IRS employee was wrong, and why our solution is the most reasonable and in the best interest of fair tax administration. For this solid financial statements must be prepared and documented. We do not win appeals simply because we are nice guys, rather quite simply, through hard, diligent, thorough work.
If the case is settled, the taxpayers will sign something called a closing agreement the IRS appeals officer will have prepared. If the taxpayer agrees with the settlement, that ends the case. If the taxpayer does not agree, there is a limited amount of time to file a Petition in tax court. However — and this is really important — if one of the reasons why the Appeals officer ruled against the taxpayer was because he didn’t show up for your appeals hearing, or he presented no alternative, or he was generally uncooperative, the chances of winning a tax court case is very small. Why? Because the tax court judge will rule that the taxpayer did not “exhaust your administrative remedies.”
While IRS appeals is rather informal in process, it is absolutely formal in effect. Therefore, in order for the most optimal resolution of your tax dispute, your case, from start to finish must be treated with the utmost respect — as if you were going to make a case in front of a solemn jury. You must be that intense and deliberate and knowledgeable on the law. Consider, the law allows you to represent yourself at IRS appeals, it also allows yourself to yourself at a criminal trial. Does either either one sounds like a prudent idea when there is a lot on the line?