Keith Schroeder writes The Wealthy Accountant blog and has 30 years of experience in the tax field.
This is article 5 in the IRS Audit Manual, a series of 10 articles on the IRS audit process and procedures. We are now ready to review the IRS appeal process.
At this point you are finished with the auditor that came to your home or office. She has added all the receipts and income from bank statements and created an audit report. This report outlines all discrepancies between the filed tax return and the audited results.
Small changes on the audit report from the original tax return are frequently adjusted to no change. In about a quarter of audits the IRS owes the taxpayer more money. You will be paid interest on the amount owed you from June 1st of the year the original return was due until the day the check is cut. In most cases, you will not appeal an additional refund. The exception is if the review of your tax papers leads you to believe the IRS owes you even more.
This article will focus on the most common reason you appeal: the IRS says you owe them more money. About 25% of audited tax returns get an additional refund; 15% are no change; and 60% result in an additional tax assessment. These numbers fluctuate each year, but is a nice guide for expectations heading into an audit.
Begin the Appeal Process
Formal appeals take place outside the local IRS office that handled the beginning phase of the audit, the gathering of information phase. However, there is an opportunity to work with the supervisor of the auditor in the local IRS office.
The local IRS office is limited in what they can adjust compared to the “official” IRS appeals offices. A disagreement on a deduction can sometimes be brought to a satisfactory conclusion at the local office. Missing receipts and larger tax issues get few results at the local level.
No matter what the situation, use every opportunity to reduce a tax assessment. You might get something at the local level. Anything is cash in your pocket. You can still file a formal appeal.
Filing a Formal Appeal
The audit report will have a place for you to sign. You are given three options: agree with entire audit report, disagree with entire audit report, and agree in part and disagree in part with the audit report. Make sure you check the correct box and sign in the right place. Once you sign that you agree with the report you have few recourse options remaining.
If you are not sure, state that you disagree with the entire tax assessment in the audit report. The audit report will include information on where to file a formal appeal and the date it is due. If you do not file an appeal by the date listed, the IRS will begin collection procedures.
The IRS Appeal
Structure of an Appeal Letter
The appeal letter can be short and informal for simple issues, but can stretch into several pages for complex or numerous issues. Accountants and attorneys will use a longer, more formal format when addressing the appeals office.
The appeal letter must include information from the audit report, the tax year/s involved, the assessment being appealed, and the reason why. A copy of the audit report should also be included.
I personally feel that all tax assessments from an audit should be appealed. Even lost receipts get accepted in appeals. Not all lost receipts, but many are. There are times an appeal should not be filed. If there are no real issues to appeal, then filing an appeal is frivolous and can subject you to penalties. It is not frivolous to file an appeal because the auditor did not allow all your cell phone expense as a deduction. It is common to get these lost deductions back in appeals.
What to Expect From an Appeal
Most people are nervous when the IRS says they owe more money. They feel an additional tax assessment from an audit is an accusation or they feel guilt, like they intentionally did something wrong. Nothing is further from the truth. With 80,000 plus pages to the tax code, it is amazing there are not more disagreements in interpretation than there are.
A tax assessment is only a report showing a difference from what you originally reported and what a later review revealed. Paperwork gets misplaced and interpretation of the tax code differs among tax professionals. Decisions are made when filing a tax return. It does not always work out.
I appeal the vast majority of tax assessments in my office. We achieve a reduction in the tax assessment over 80% of the time. Most years are over 90%.
It costs the IRS money to fight a taxpayer over a balance due. The IRS is happy to settle for less if they can get paid now and close the account. This is why I appeal most tax assessments, whether from a field or correspondence (letter) audit. Most tax assessments involve areas of varying interpretation. I present my case and save my clients money.
How much you can reduce your tax assessment varies by the adjustment under review. I always shoot for a 100% reduction in tax assessed. I average about 50%. Serious issues and significant amounts tend to lean heavily toward full reduction or no reduction. Tax assessments under $25,000 tend to get something and I usually get up to 50% off the original assessment, plus elimination of all penalties.
Your experience will be different. You can not look at what I do or my averages and say this will be the result you get. Each situation is different. A lot of assessments from an audit deal with misplaced receipts. Unreported income is more difficult to work with than deductions. You always want to keep a record of each deposit to a bank account. The IRS assumes all deposits are income. Loan proceeds (never taxable) require proof so the IRS does not consider this income.
Do not fear the IRS appeal process. Use the information above to file a formal appeal to get a tax assessment reduced or eliminated.