17.2 Audit process and appeals procedures

The IRS audit process is a crucial part of tax administration. From correspondence audits to field examinations, the IRS uses various methods to ensure tax compliance. Understanding the selection criteria and red flags can help taxpayers prepare and avoid potential issues.

If audited, taxpayers have rights and options throughout the process. From initial contact to resolution, preparation is key. Disagreements can be addressed through administrative appeals or judicial channels, offering multiple avenues for taxpayers to resolve disputes with the IRS.

IRS Audit Types and Selection

Types of IRS Audits

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• IRS conducts three main types of audits varying in complexity and depth of examination
  • Correspondence audits conducted entirely by mail for simple issues or discrepancies in tax returns
  • Office audits require taxpayer to meet with IRS agent at local office to review specific items
  • Field audits involve IRS agents visiting taxpayer's home or business to examine financial records (most comprehensive)
• Correspondence audits most common type
• Field audits most thorough and time-consuming

Audit Selection Process

• IRS uses Discriminant Function System (DIF) to select returns for audit
  • Computer scoring system assesses likelihood of errors or underreported income
  • Assigns numeric score to each return based on statistical norms
• Red flags increase chances of audit
  • Unusually high deductions compared to income (charitable contributions, business expenses)
  • Inconsistent reporting between tax years or different forms
  • Participation in tax shelters or complex investment schemes
• IRS conducts random audits through National Research Program
  • Gathers data on tax compliance
  • Updates selection criteria for future audits
  • Helps identify emerging trends in tax evasion or avoidance

IRS Audit Process

Initial Contact and Preparation

• Audit process begins with official notification letter from IRS
  • Specifies type of audit (correspondence, office, or field)
  • Requests specific documents or information (bank statements, receipts, invoices)
• Taxpayers have right to representation by tax professional
  • Certified Public Accountant (CPA)
  • Enrolled Agent (EA)
  • Tax attorney
• Preparation involves gathering requested documents
  • Organize financial records chronologically
  • Create summaries or schedules of income and expenses
  • Review tax return in question for potential issues

Examination and Resolution

• Auditor examines requested documents
  • May ask for additional information or clarification on specific items
  • Compares reported figures to documentation provided
• Taxpayer or representative provides explanations and supporting evidence
  • Address any discrepancies or unusual items
  • Present additional documentation to support claimed deductions or credits
• Auditor prepares report detailing findings
  • No changes to tax return
  • Additional tax owed (plus potential penalties and interest)
  • Refund due to taxpayer (overpayment of taxes)
• Resolution options for taxpayer
  • Agree with audit findings, sign examination report
  • Arrange for payment or receive refund
  • Disagree with findings, request conference with IRS manager
  • Pursue formal appeal options if disagreement persists

Taxpayer Appeal Options

Administrative Appeals

• Taxpayers have 30 days to appeal unfavorable audit decision after receiving examination report
• Informal conference with IRS manager
  • Discuss disagreements and potentially resolve issues
  • Present additional evidence or explanations
• Formal protest and hearing with IRS Office of Appeals
  • File written protest outlining reasons for disagreement
  • Schedule hearing with Appeals Officer
• Small Case Request process for disputes under $25,000
  • Simplified appeal procedure
  • Less formal than full Appeals hearing
• Alternative dispute resolution options
  • Fast Track Settlement program for quicker resolution
  • Post-Appeals Mediation for cases not resolved in Appeals

Judicial Appeals

• File petition with U.S. Tax Court
  • No payment required before trial
  • Judges specialize in tax law
• Sue for refund in U.S. District Court or U.S. Court of Federal Claims
  • Must pay disputed amount in full before filing suit
  • Jury trial option available in District Court
• Throughout appeals process
  • Maintain thorough documentation of all communications and evidence
  • Consider seeking professional representation for complex cases

IRS Appeals Office Role

Structure and Purpose

• Independent organization within IRS providing impartial review of tax disputes
• Appeals officers trained to consider hazards of litigation
  • Evaluate strength of IRS and taxpayer positions
  • Authorized to settle cases based on probability of success in court
• Handles wide range of tax disputes
  • Audit results (income, estate, gift, and employment taxes)
  • Collection actions (liens, levies, seizures)
  • Rejected offers in compromise

Appeals Process and Authority

• Appeals conferences conducted informally
  • In-person meetings for complex cases
  • Telephone conferences for simpler disputes
  • Written correspondence for straightforward issues
• Appeals officers have authority to consider new information
  • Review arguments not presented during initial audit
  • Evaluate additional documentation provided by taxpayer
• Aim to resolve tax disputes without litigation
  • Saves time and resources for taxpayers and government
  • Reduces burden on federal court system
• If resolution not reached through Appeals
  • Taxpayers retain right to pursue case in federal court
  • Maintains access to judicial review as final option