The Stages of Tax Litigation
Taxpayers have the right to file an appeal with the IRS Appeals Office if they disagree with proposed adjustments made by a revenue agent. This blog post will focus on the administrative requirements for filing an appeal and issues to look out for.
The IRS Appeals Office
The purpose of the IRS Appeals Office is to help taxpayers "resolve their tax disputes without going to Tax Court." IRS Appeals is tasked with providing an independent, fair and impartial review of each case. Appeals are generally handled by the appeals office located closest to the taxpayer, but a taxpayer may request that the office closest to their tax attorney handle their case instead.
Filing an Appeal
As noted in our last post, whenever there are unagreed issues from a tax audit that may result in a proposed tax deficiency, the taxpayer receives a "30-day letter" (a notice of the right to appeal the examiner’s proposed changes), along with a copy of Publication 5 which describes their right to appeal. The taxpayer must submit their appeal within that time frame. An appeal is made by filing a written protest letter with the IRS Appeals Office. That letter must contain:
- The taxpayer's contact information
- A statement that the taxpayer wishes to make an appeal
- A copy of the letter delineating the proposed changes
- The tax period(s) involved
- A list of each item with which the taxpayer disagrees, plus the reason for the disagreement
- Facts that support the taxpayer’s position on each of the items
- The law or authority that supports the taxpayer’s position on each of the items
- A statement under penalty of perjury (if submitted by the taxpayer) or a declaration (if submitted by the taxpayer’s attorney)
If the amount of additional taxes and assessed penalties is $25,000 or less, a Small Case Request may be filed. In that case, either a brief written protest or Form 12203 may be submitted.
Not that if the taxpayer fails to respond to the 30-day letter on time, a 90-day letter ("notice of deficiency") will be issued, which gives the taxpayer 90 days to file a petition with the Tax Court (150 days if addressed to a taxpayer outside of the U.S.). Note that taxpayers may still appeal at this stage but must request that the IRS attorney assigned to their Tax Court petition transfer their case to IRS Appeals.
The Appeals Conference
After the filing of the protest letter, and IRS Appeals Officer will meet with the taxpayer’s counsel for an appeals conference. At an appeals conference, both parties advocate their respective positions (orally and in writing) and negotiate a settlement. This process generally takes a year or two, particularly if IRS technical guidance is sought.
Most disputes are settled at this stage, and are followed by a closing agreement. Disputes that are not settled through appeals may proceed to litigation in U.S. Tax Court (or Bankruptcy Court) or via refund litigation in the U.S. Court of Federal Claims or in a U.S. District Court.
The next two blogs in this series will cover tax litigation forums.
The Stages of Tax Litigation
Two years before her epic final runway walk at the 2016 Olympics, Gisele Bündchen blamed Forbes for her IRS audit. "I earn plenty," stated the supermodel and businesswoman, "but not as much as they say." Bündchen was targeted by the IRS after being listed at first place on the Forbes list of the world’s highest-paid models for seven years in a row – which included its estimates of her earnings each year.
The results of that audit have not been publicized, but the procedure for concluding the audit of the otherwise exceptional Bündchen is the same as with all other U.S. taxpayers. The documentation varies depending on whether or not the taxpayer agrees with the auditor’s proposed adjustments:
- No-change case (aka no-liability case). This is the desired result for a tax attorney, having the IRS auditor agree that there are no tax adjustments warranted. The IRS will issue a letter stating that no changes have been made and that the audit has been closed.
- Agreed case. All of the auditor’s proposed adjustments to the taxpayer’s return are accepted by the taxpayer. The taxpayer and the examining agent complete a form that describes the adjustments to the return and includes an agreement by the taxpayer to the assessment of additional taxes. Following issuance of a notice to the taxpayer and an IRS manager’s review, the taxpayer receives a Letter 987 (income tax), Letter 987-X (excise tax), Letter 3382 (employment tax), or Letter 27 (estate tax) stating that the audit has officially been closed.
- Partially-agreed case. The taxpayer (individual or corporation) agrees to some, but not all, of the auditor’s suggested adjustments. In this case, a Form 886-A Explanation of Items will be completed which explains all adjustments. This is generally reviewed with the assistance of counsel. The closing agreement will specify which adjustments the taxpayer has agreed with, and those issues will be closed. If there are unagreed issues that may result in a proposed tax deficiency, a "30-day letter" (or a 90-day letter as explained below) will be sent to the taxpayer which will give the taxpayer 30 (90) days to submit an appeal.
- Unagreed case. Where none of the auditor’s proposed adjustments are accepted by the taxpayer, a 30-day letter will be issued unless there is insufficient time remaining in the statute of limitations period and the taxpayer refuses to extend it. In that case, a "90-day letter" (statutory notice of deficiency) will be issued to the taxpayer.
The IRS has three years from the date a return was due or is filed to examine a federal tax return, unless the taxpayer agrees to extend the agreement (or if an exception applies as in the case of a fraudulent return or an omission of more than 25% of gross income). The decision to agree or deny an extension is one which requires considerable strategic planning. For example, consent may be given in an unagreed case to stop the running of interest on the proposed deficiency and permit the taxpayer to request further consideration of the issues by the appeals division. It may be denied to prevent the IRS agent time to identify more deficiencies and make additional adjustments to the taxpayer’s return.
The next blog in this series will cover IRS audit appeals.