Audits/Exams and Appeals

Question 1

What are the possible conclusion at the end of an audit/exam?

Answer 1

1. No change letter
2. Notice of proposed adjustments
   - If taxpayer agrees – may sign Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment)
3. If taxpayer disagrees, may go to IRS Appeals)
4. Statutory Notice of Deficiency (additional tax will be assessed if the taxpayer does not timely file a petition in the Tax Court).
   - If time is tight = will go straight to notice of deficiency

Question 2

How are IRS appeals handled?

Answer 2

• Most IRS disputes are settled or compromised.
• The IRS Office of Appeals provides administrative (i.e., not in court) process for resolving tax controversies.
• Known as “The Independent Office of Appeals.”
• Mission is: “to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.”
• Part of IRS but independent – “Appeals is a separate function and independent of the IRS office that proposed the adjustment or collection action. Appeals will not engage in communication with employees of other IRS functions (commonly referred to as ex parte communication) to the extent such communication appears to compromise our independence.

Question 3

What are the types of matters that Appeals handle?

Answer 3

• Reviews Revenue Agent’s determination in an audit
• Collection due process (consideration of collection alternatives if the taxpayer cannot pay in full), and
• Review of denial of taxpayer’s refund claim

Question 4

How to get to appeals after an audit?

Answer 4

• If the Revenue Agent has determined that there is a deficiency, i.e., that the taxpayer owes additional tax (and there is sufficient time before the IRS’ statute of limitations on assessment expires), the Revenue Agent will issue a Notice of Proposed Adjustment (NOPA).
• The NOPA is also called “Revenue Agent’s Report” or “RAR” and “the 30-Day Letter” (or “60 Day Letter” in some circumstances”).
• Also, if the IRS issues a statutory notice of deficiency, and the taxpayer files a petition or redetermination in the Tax Court, the case will be referred to Appeals for resolution before trial – known as a “Docketed Appeal.”
• The taxpayer generally has 30 days from the date of the Notice of Proposed Adjustment to submit a request for Appeals review.
• The request for Appeals review if called a “Protest” or an “Appeal.”
• The 30-day deadline is “soft” – i.e., it can be extended on consent of the Revenue Agent, and Revenue Agent’s routinely grant reasonable requests for extension
• They give you a 30-day letter, 60 day letter, RAR, or NOPA
• Docketed appeal = sending people back to appeals form tax court
• Protest = request for appeals review
• Revenue agent takes your protest, write a rebuttable, send it to appeals, then send it to appeals officer who will contact taxpayer to schedule conference —> taxpayer can submit additional materials

Question 5

What happens at appeals?

Answer 5

• The Taxpayer submits a written Protest (including exhibits) explaining the taxpayer’s position and why the Revenue Agent’s determination is incorrect.
• The Revenue Agent may prepare a “rebuttal” to the Protest.
• The Revenue Agent will then send case file and Protest to Appeals.
• An Appeals Officer will be assigned and contact the taxpayer. The Appeals Officer will provide a time frame for submitting additional information and schedule a conference.
• Appeals Officer may make IRS file available to taxpayer for review (Taxpayer First Act – see Slide 15)
• The conference may be telephonic or in person, or even on video due to the pandemic.
• There may be multiple conferences on the same matter.
• The Revenue Agent or others from the IRS are not usually present and the Appeals Officer does not communicate with them. There are some exceptions to this, but it is the general rule.

Question 6

What are some exceptions for appeals?

Answer 6

• The Appeals Officer may seek technical guidance from the IRS on certain types of issues but does not have to follow that guidance.
• There are some issues that the IRS identifies as “Appeals Coordinated Issues.” – These are issues with IRS-wide impact or importance that the IRS believes requires uniformity and consistency. The IRS may create Appeals Settlement Guidelines to ensure consistent treatment.
• In certain complex cases, the Appeals Officer will invite Exam for their input but does not have to follow their recommendations.

Question 7

What does the Taxpayers First Act under IRC 7803(e)(7) provide?

Answer 7

(A) In any case in which a conference with the Internal Revenue Service Independent Office of Appeals has been scheduled upon request of a specified taxpayer, the Chief of Appeals shall ensure that such taxpayer is provided access to the nonprivileged portions of the case file on record regarding the disputed issues (other than documents provided by the taxpayer to the Internal Revenue Service) not later than 10 days before the date of such conference.
(C) Specified taxpayer - means
(I) in the case of any taxpayer who is a natural person, a taxpayer whose adjusted gross income does not exceed $400,000 for the taxable year to which the dispute relates, and
(II) in the case of any other taxpayer, a taxpayer whose gross receipts do not exceed $5 million for the taxable year to which the dispute relates.
(ii) Aggregation rule Rules similar to the rules of section 448(c)(2) shall apply for purposes of clause (i)(II).

• If gross income is __ or corp gross income ____ —> you have a right to your file —> IRS supposed to send you agent’s file on you

Question 8

What do revenue agents determine?

Answer 8

• Revenue Agents determine whether additional tax is due, i.e., is there unreported income, should a deduction be disallowed, etc.?
• Appeals Officers also have the discretion to consider “Hazards of Litigation” - the probability that the examination position might not be upheld in court.
• Hazards of Litigation = IRS will just have to determine the amount of tax
• However, at appeals = appeals officer can determine the hazards – if unlikely to win = they usually settle
• Appeals officer = this isn’t a case IRS should take to trial; has discretion; to avoid litigation
• Revenue agents/officer don’t have this discretion

Question 9

What do appeals officers consider for hazards of litigation?

Answer 9

• The evidence that is most likely to be presented, its probative value, and how likely it is to support the taxpayer’s case rather than the IRS;
• The witnesses that are most likely to be called, their availability and credibility;
• The burden of proof upon the taxpayer/or the IRS the ability to meet it;
• The clarity (or lack thereof) as to the issues of fact and the issues of law.
• Appeals does not consider the cost of litigation.
• Appeals agents don’t care about how much it costs to litigate unlike other side who usually cares
• If you resolve appeals —> will have IRS reassess —> IRS sends you bill