How to Fight the IRS and Win: Audits & Settlements
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Summary:
If you are the target of an IRS audit, you can “fight the IRS” — and maybe even win — by using their appeals process along with other dispute resolution channels. A win against the IRS can come in the form of getting taxes, fees, and penalties waived in some form or reaching a settlement.
Fighting the Internal Revenue Service (IRS) is fighting the law, and we all know how that song goes. The IRS wields a tremendous amount of power, and just the mere mention of the word “audit” can put you under intense pressure.
Fortunately, if you’re unhappy with an IRS audit, there are steps you can take to push back against these results. Needless to say, the IRS is a powerful agency with a lot of resources at its disposal. So, it is important to approach any disputes with the agency in a respectful and organized manner. Keep reading to learn how you can fight against an IRS audit and what you may receive if you win.
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Steps to take while being audited
If you’re one of the unlucky people to have an IRS notice come in certified mail for an audit requested by the IRS office, don’t worry. Though it may feel like the IRS has all the power, you still have an opportunity to appeal the decision.
Here are some steps you can take during the audit to ensure your IRS appeals process goes smoothly.
- Don’t offer other years’ tax information. Most of the time, you’re being audited for a specific period of time, not your entire life. Make sure only to share information about the year or years you are being audited for and nothing more. A document you didn’t mean to submit could trigger an additional tax audit for other years.
- Be brief. Keep your answers brief and limit them to “Yes,” “I don’t know,” or “No” when you can. Too much information can trigger the IRS to delve more into your tax life, including the years you aren’t being audited for.
- Have all required support. Gather all your documents and support, including things you don’t think you need. A well-organized folder of supporting documents can not only support your case but prove to the IRS agent that you are all above board.
- Understand how the IRS thinks about substantial compliance. People lose things all the time, and you might not have everything in terms of official supporting documents. That said, bring documents that might not be official but will still support your tax return, particularly if they relate to your deductions.
How to appeal the audit results
If you did get audited and the results are not what you hoped for, rest assured that the story doesn’t end there. In order to appeal the results, you’ll need to decide which process makes the most sense for your situation:
- Appeals mediation and fast-track settlement
- Filing and small case request
- Filing a formal protest
Depending on the total tax amount you’re disputing, you may be limited to one option or the other. And keep in mind that this needs to be done within 30 days of your audit results.
Appeals mediation and fast-track settlement
In certain IRS cases, you may request an expedited dispute resolution process called Fast Track Settlement (FTS). This involves a mediator, the taxpayer, and the IRS, who hope to come up with a mediated solution before lodging formal requests. If the mediation does not bear fruit, then an official request or protest must be made.
Filing a small case request
A small case request for appeals is only applicable if the total tax, penalties, and interest are below $25,000 for a tax period. You’ll then have to write a brief statement requesting an appeals conference and listing what charges you wish to dispute.
Filing a formal protest
If the total tax, penalties, and interest exceeds $25,000, you’ll need to file a formal pretest. The IRS asks for a written “formal protest statement” that must include the following:
- Taxpayer’s name, address, and daytime telephone number.
- A statement that the taxpayer wants to appeal the IRS findings to the Appeals Office.
- A copy of the letter proposed tax adjustment.
- The tax periods or years involved.
- A list of the changes that the taxpayer does not agree with and the reason for disagreement.
- The facts that support the taxpayer’s position on any issue that it does not agree with.
- The law or authority, if any, on which the taxpayer is relying.
- The taxpayer must sign the written protest, stating that it is true, under the penalties of perjury as follows:”Under the penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete.”
Once you have submitted this, you will have two options to proceed: an appeals conference or, if that doesn’t suffice, tax court.
If you think you’ll need professional help when fighting the IRS, you may want to consider hiring a tax relief firm. Take a look at the options below to get started.
1. Appeals conference
Appeals conferences are similar to the mediation program in that they are less formal than court but more formal than a mediation session. If you would like someone to represent you in the appeals process, you will need to grant power of attorney to your lawyer, tax professional (like a certified public accountant), or enrolled agent.
The goal of the appeals conference is to reach a settlement between both parties. However, if this is not reached, you will need to go to court.
Pro Tip
If you would like representation but can’t afford any, then you might want to contact an IRS Low Income Tax Clinic (LITC). They might be able to provide you with low costs or pro-bono representation.
2. Tax court
You may be able to file a petition with the U.S. Tax Court to review the changes proposed by the IRS. If your case still has not been resolved after different steps in the appeals process, you should receive a notice of determination letter, which, as outlined by the IRS, is:
“A determination of tax-exempt status under IRC 7428 if the IRS has not made a determination after 270 days; the 6 abatement of interest if the IRS has not mailed a final determination within 180 days of a claim for abatement under IRC 6404; or an innocent spouse relief request if the IRS has not issued a final determination letter after six months since filing Form 8857, Request for Innocent Spouse Relief.”
The IRS notice will give you a time frame to petition the U.S. Tax Court, which in most cases is 90 days within the U.S. and 150 days for those outside the U.S. You’ll then be scheduled for a trial date. However, you will be encouraged to return to an appeals conference settlement during this time. If this cannot happen, you can then fight your case.
Pros and cons of an IRS audit appeal
Receiving an IRS notice that you’ll be audited is never fun, but that’s why the IRS has an appeals process in place. And while it may not seem like it, there are both risks and benefits to this process that anyone considering an appeal must consider.
Can you win?
Though it may sound difficult, you can win your case. If you follow the steps while being audited and appeal correctly, you should be fine as long as you are correct and the IRS is wrong.
It also depends on how you define “winning.” You can reduce your tax liability with your appeal rights, but if you don’t go to tax court, you might have to settle. Do you consider a settlement winning? This depends on your situation, but a settlement is still a decent victory against the IRS.
Can I sue the IRS for emotional distress?
Yes, you can sue the IRS for emotional distress, although it’s incredibly rare. In order to have a reasonable case against the IRS for emotional distress, IRS agents must have first made errors and then repeatedly followed up and harassed you regarding those errors.
Does the IRS really settle for less?
Yes, the amount of money the government spends on court dates and lawyers to defend their case in tax court makes them inclined to settle. You can also request an offer in compromise if your tax debt is creating financial hardship, which is also a type of settlement.
What is tax settlement?
Tax settlement occurs when you come to an agreement with the IRS which allows you to pay less than your total unpaid tax debt. You don’t have to go to court to get a settlement. The federal program for this is called an offer in compromise (OIC).
Who can get an offer in compromise?
Offers in compromise are available for taxpayers who can’t afford to pay their full tax liability, as well as penalties and interest. Of course, the IRS won’t simply take your word for it. When you apply for an offer in compromise, the IRS evaluates your ability to pay, with a focus on your income, expenses, and asset equity.
Additionally, you must meet a few other requirements. To qualify for an offer in compromise, the following must be true:
- You’re up to date on your tax return filings.
- You made all estimated tax payments for this tax year.
- You have a tax bill for at least one IRS debt on your offer.
- You’re not in a current bankruptcy proceeding.
However, an offer in compromise is the IRS’ last resort. The IRS will not turn to tax settlement offers until they’ve explored all other options, such as monthly installment plans.
Although you can negotiate directly with the IRS, you can also use hire a professional tax relief company to represent you.
Key Takeaways
- You can fight the results of an IRS audit by following the appeal process.
- If you want to appeal, the first step is to try to reach a fast-track settlement through a mediation process. If this doesn’t bear fruit, you will need to file a protest.
- You can file a formal protest or a small case request depending on your total tax amount. If your tax amount is under $25,000, a small case request is the best way to go as it requires less documentation.
- As tax court is expensive, the IRS will send you to appeals court first to try and get a settlement instead.
- Another way to “win” when facing tax debt is to negotiate a settlement by filing an offer in compromise. You can do this yourself or hire a tax professional to represent you.
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