48.9 Disputing the Audit Changes

If you disagree with the agent and the examination takes place in an IRS office, you may ask for an immediate meeting with a supervisor to argue your side of the dispute. If an agreement is not reached at this meeting or the audit is at your office or home, the agent prepares a report of the proposed adjustments. You will receive a 30-day letter in which you are given the opportunity to request a conference. You may decide not to ask for a conference and await a formal notice of deficiency (90-day letter).

Appeals conference.

If your examination was conducted as an office audit or by correspondence, or the disputed amount does not exceed $25,000, you do not have to prepare a written protest for a conference with the IRS Appeals Office. The written protest is a detailed presentation of your reasons for disagreeing with the agent’s report. Even where a formal written protest is not required, you must provide a brief written statement indicating your reasons for disagreeing with the agent when you request an appeals conference; you can use Form 12203 (Request for Appeals Review).

At the conference you may appear for yourself or be represented by an attorney or other agent, and you may bring witnesses. The conference is held in an informal manner and you are given ample opportunity to present your case.

If you cannot reach a settlement, you will receive a Notice of Deficiency, commonly called a 90-day letter. In it, you are notified that at the end of 90 days from the date it was mailed, the government will assess the additional tax.

Interest abatement.

An IRS delay in completing an audit increases the interest that you have to pay when a deficiency notice is eventually issued. You may ask the IRS on Form 843 for an abatement of interest charges that are attributable to unreasonable errors or delays by IRS employees in performing a ministerial or managerial act.

A ministerial act is defined as a procedural or mechanical act that does not involve the exercise of an IRS employee’s discretion or judgment, such as the transfer of a taxpayer’s case to a different IRS office after the transfer is approved by a group manager. A managerial act refers to the exercise of discretion or judgment by an IRS employee in managing personnel. Misplacing the taxpayer’s case file is also a managerial act. General IRS administrative decisions, such as prioritizing the order of processing returns, or decisions on applying the tax law, that result in delay, are not ministerial or management acts for which interest abatement is available.

If you make a request on Form 843 for an abatement of interest and the IRS rejects your claim, you can petition the Tax Court within 180 days to review whether the IRS abused its discretion, provided that your net worth does not exceed $2 million ($7 million for businesses). The same net worth limit applies to recoveries of administrative and litigation costs; see 48.10. The Tax Court has exclusive jurisdiction to review the denial of the interest abatement request; an appeal of the IRS decision cannot be brought in a federal district court or the U.S. Court of Claims.

Going to court.

When you receive a 90-day letter, if you are still convinced that your position is correct, you may take your case to one of three courts. You may within 90 days file a petition with the Tax Court without having to pay the tax. The Tax Court has a small tax case procedure for deficiencies of $50,000 or less. Such cases are handled expeditiously and informally. Cases may be heard by appointed special trial judges. A small claim case may be discontinued at any time before a decision, but the decision when made is final. No appeal may be taken by you or the IRS.

Caution

Penalty for Frivolous Tax Court Action

If you bring a case to the Tax Court that the Court concludes is frivolous or brought primarily for delay, or you unreasonably failed to pursue IRS administrative remedies, the Tax Court may impose a penalty of up to $25,000. Furthermore, if you appeal a Tax Court decision and the federal appeals court or the Supreme Court finds that the appeal was frivolous or brought primarily for delay, the Court may impose a penalty.

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Instead of petitioning the Tax Court, you may pay the additional tax, file a refund claim for it, and—after the refund claim is denied—sue for a refund in a federal district court or the U.S. Court of Federal Claims.

You should consult with an experienced tax practitioner before deciding to litigate.