September-October, 2007 Tax Newsletter

Resolving IRS Tax Disputes Out of Court

Assume your tax return has been audited and the examining agent has proposed adjustments to your liability to which you take exception.  The possible reasons for your disagreement are that the agent made his adjustments under a misunderstanding of facts, a misunderstanding of law, or possibly both.  In the vast majority of cases the facts surrounding a tax issue are not in dispute, so the case boils down to your contention that the agent has not correctly interpreted or applied the tax laws to your facts.  You may wish to consider taking your case to Appeals.

The Appeals Division of the IRS acts independently of any other IRS office and provides a venue where disagreements concerning the application of tax law can be resolved on a fair and impartial basis for both the taxpayer and the IRS.  No oral or written communication is allowed between the Compliance (Audit) and Appeals divisions about the case without the taxpayer’s knowledge.  If such communication occurs, the IRS can either share that communication and all related content with the taxpayer allowing him the opportunity to discuss or rebut, or the case can be reassigned to a new Appeals officer in order to maintain the integrity of the Appeals process.

The Appeals officer will review the strengths and weaknesses of the issues involved in your case and give then an independent and fresh look.  Appeals conferences are conducted in a relaxed, informal nature and can be conducted by correspondence, or in person.  If I feel my client has a strong case and significant dollars are involved, I usually prefer an in-person hearing (provided it can be done locally) because of the eye contact and other intangibles.  Approximately 80% of the cases reviewed are resolved by Appeals.   

If an examining agent feels strongly that his interpretation of the tax law is correct, he has little, if any, authority to settle the issue without making a full adjustment in the government’s favor.  He knows that the person reviewing his report will not accept it if he fails to include the full amount of the adjustment.  An Appeals officer, on the other hand, has substantially more latitude and flexibility when it comes to settling a case.  He does not have to rule in terms of right or wrong according to the point of law.  Therefore, his job is to weigh the “hazards of litigation” if the case were to go to court.

To use a not unlikely scenario, assume, there have been ten court decisions on a certain tax issue and the IRS has prevailed half the time (yes, different courts can and very often disagree on interpretation of a point of law), he might conclude that the IRS has a 50-50 chance of prevailing if the present case were to go to court.  Accordingly, he might be willing to settle the case for 51% of the tax proposed by the agent, without regard to the specific points of law involved.  These are Appeals decision-making procedures that tax professionals like myself who represent clients before the IRS must understand.