A misconception about tax audits is that anytime the IRS orders one, the taxpayer is immediately in the wrong. However, it is often the opposite. The IRS may just need to follow up and verify some more details, or there may have been an error on the side of the agency.
When an audit does occur and, even worse, the IRS determines you owe more taxes, you do have an opportunity to appeal the decision. But what happens when your tax audit appeal fails? Are there any other solutions?
The Process of a Tax Audit
When the IRS orders an audit, which is a closer examination of your taxes, there is a general series of events that occur:
- The IRS mass checks tax returns with a computer system called the Discriminant Information Function (DIF). It looks for common red flags that indicate tax fraud or other miscalculations.
- The taxpayer who filed the return in question is contacted by the IRS and notified that an audit is scheduled to take place. The IRS determines what type of audit they will conduct.
- In most cases, the taxpayer (with or without representation) meets with an auditor and presents evidence to defend their case.
- The auditor will reach a final verdict, and you will be notified. If you disagree with the decision made by the officer, you have the right to appeal.
The IRS Office of Appeals
There are several circumstances in which a taxpayer might disagree with the findings of the auditor and wants to appeal the decision. A separate branch known as the Office of Appeals is designated to handle tax audit appeals as a third-party system.
The Office of Appeals is known to try and prevent litigation by resolving tax disputes internally in a way where both parties can reach a mutual understanding. Appeal officers are granted more authority and flexibility in deciding cases compared to auditors. However, they are not the only ruling authority.
If you are unhappy with the negotiated settlement that the Office of Appeals proposes, you do not have to accept it. There is an understanding that a taxpayer appealing an audit may have to compromise to some extent, but that doesn’t mean you need to automatically accept a decision.
Fighting a Tax Audit Appeal
If you agree to a settlement, the Office of Appeals will ask you to sign a form called Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. It is very important that you do not sign this document if you do not agree with the terms of the negotiated settlement. Once you sign Form 870, you waive your right to take the IRS to U.S. Tax Court.
Therefore, before you agree to any terms and conditions proposed by the Office of Appeals, make sure you thoroughly understand everything printed on the agreement. Hiring a tax professional to help you review the settlement is highly advisable.
U.S. Tax Court
Taxpayers who are unhappy with the proposed settlement might want to consider U.S. Tax Court. The court is designed to resolve disputes between taxpayers and the IRS. The appeals process follows much more of a traditional court setting and style compared to filing an appeal.
To begin the process:
- File a petition with the U.S. Tax Court.
- Determine whether you want a case heard under a “Small Tax Case” procedure or a more formal trial.*
- You will receive a trial date. Trials are conducted before one judge and no jury. Taxpayers may represent themselves or hire a professional defense.
- The judge reaches a final verdict on the lawsuit.
* Electing to have your case heard under a small tax case trial means the decision made by the U.S. Tax Court is not appealable. However, small tax cases are traditionally resolved quicker.
Get the Right Tax Defense
Are you unhappy with a negotiation settlement? If your tax audit failed, it doesn’t mean that you are out of options. It’s still possible to take the IRS to court.
If you are considering this option and want favorable results, you should contact a tax professional for the best representation. Levy & Associates offers free initial consultations with absolutely no commitment. To learn more about how we can help you, reach out today. Call 800-TAX-LEVY, or visit www.levytaxhelp.com for more information.