Sam Brotman, JD, LLM, MBA October 15, 2020 7 min read

How to Appeal an IRS Audit

I Owe HOW Much?

At long last, you have received your audit report. And … to your dismay … you owe money … a lot of money to the IRS. Not only are there back taxes and interest, but the penalties are insane! So, if you disagree with the amount you owe, do you have any recourse? The answer is … yes.

At Brotman Law, we specialize in helping small businesses solve their tax problems and that includes guiding them through the appeals process. The appeals process is complex and needs an experienced hand to help you minimize your tax liability and knock back the penalties.

This chapter will discuss the appeals process, how it works and what you can expect as an outcome.

Working Things Out With the Auditor

At the end of an IRS audit, the auditor issues an audit report, and you have basically two options. You can agree with the audit report and the audit's over. You can disagree with the audit report, and then have the options of working with the auditor to try and resolve the disagreement or go into the Office of Appeals.

The IRS is tough when it comes to disputed audits. Usually, by the time the auditor has gone through the trouble of drafting and issuing an audit report, they are less likely to change their position. The better avenue is to appeal directly to the auditor's manager. 

This is sort of a gamble depending on the issue and the likelihood of the auditor to get backed by their manager. But, at least with the manager, you may have the option of resolving the audit as agreed versus taking the case into appeals.

Moving Into IRS Appeals

Now with appeals, unlike the state, the auditor is not really involved in the process and you usually get into appeals within a month or two. Once the auditor has issued the report, their part is over. Unless there is additional documentation that gets submitted during appeals, the appeals officer does not have anything to do with the auditor, and neither do you. The decision here is a tactical one. Do you stick around and work things out with the auditor, or do you go into the IRS Office of Appeals?

The answer to that is multifaceted. It depends on the facts; it depends on the circumstances and it depends on how far apart you and the auditor are. The important thing is that you make a strategic decision with respect to that issue and try to reduce your liability as much as possible.

What Is the Appeals Process?

IRS appeals are supposed to be an independent body that is neutral and that is designed to resolve disputes with the IRS prior to going to tax court. In reality, appeals is staffed with former auditors and former collection agents. In our firm, we have had a lot of positive experiences in the course of appeals. I like dealing with appeals and I find that the appeals process is generally fair and impartial and usually yields a pretty good result depending on the circumstances. 

During the day of the appeals conference, you and the appeals officer or perhaps your representative and the appeals officer will meet, go through the issues in the audit, and try to reach a resolution. 

The appeals officer will allow you to submit additional documentation, but anything that was not submitted in the audit is going to have to go to the auditor for review. The appeals officer is not the auditor. 

The appeals officer is not going to open up the audit; their goal is to try to reach a settlement to avoid the case going into tax court. That does not mean the appeals officer is going to back down, but it does mean they are willing to weigh the risks of litigation and can potentially move the needle in your favor. 

In our experience, IRS appeals is a great way to resolve tax issues, even when there is a disagreement after the audit.

The Docketed Appeal

The other way to get a new appeal if you disagree with the audit report, is by filing a docket appeal, which is when you wait for the audit result to finalize and elect not to go into appeals. Then, the IRS will send you what they call a notice of deficiency stating, "You did not elect to go into appeals. We are going to assess you based on your audit." 

Based on that notice of deficiency, you could file a tax court petition and go into tax court. Prior to going into tax court, so you do not have to litigate, you can go into appeals that way.

In our experience, we find that process to be a little bit more helpful because once you file a tax court petition and enter into appeals that way, the district council is involved. District council is more apt to settle the case. It is to the IRS's advantage to resolve your audit protest before moving into litigation.

Seek Experienced Representation

Just keep in mind, the auditor does not have the final word on this. The key is to make sure that you are prepared and have all of your records in order — neatly organized and easy to follow. Keep your audience in mind, which will be appeals officers and possibly, tax court. 

By the way, if you do decide to appeal your audit, make sure you hire an attorney who has experience dealing with the tax court so that you can be prepared to go the distance if you absolutely have to.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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