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IRS Audit &
Appeals Procedures

Master the complete process of IRS examinations, taxpayer rights, and the appeals pathway from initial notice to Tax Court.

CPA Regulation (REG)

What Is an IRS Audit?

An IRS audit (formally called an examination) is a review of a taxpayer's return and financial information to verify that income, deductions, and credits are reported accurately under the Internal Revenue Code.

DIF Score
Discriminant Index Function: a computer-generated score rating audit potential
Examination
The IRS's formal term for an audit of a filed tax return

Three Types of IRS Audits

Correspondence
Conducted entirely by mail. The IRS requests specific documents or clarifications on individual line items.
Office
Taxpayer visits an IRS office. More complex issues involving multiple items or income sources.
Field
Revenue agent visits the taxpayer's home, business, or accountant's office. The most comprehensive audit type.

The Statute of Limitations

The IRS has a limited window to assess additional tax after a return is filed. These time limits are critical for both taxpayers and practitioners.

1
General rule: 3 years from the date the return was filed or the due date, whichever is later.
2
Substantial omission: 6 years if the taxpayer omits more than \( 25\% \) of gross income from the return.
3
Fraud or no return: unlimited. There is no time limit if the return was fraudulent or never filed.

The Audit Process Flowchart

Return Selected Examination Begins Agree? Yes Case Closed No 30-Day Letter Issued (Preliminary Notice) Appeals or 90-Day Letter (Statutory Notice of Deficiency)

The 30-Day Letter

After an examination, if the IRS proposes changes the taxpayer disagrees with, the IRS issues a 30-day letter (also called a preliminary or proposed notice). This gives the taxpayer 30 days to respond.

1
Accept the findings: sign the agreement form and pay the additional tax, interest, and penalties.
2
Request an appeals conference: file a written protest with the IRS Appeals Office within 30 days.
3
Do nothing: the IRS will issue a 90-day letter (Statutory Notice of Deficiency).

The 90-Day Letter: Statutory Notice

The 90-day letter (Statutory Notice of Deficiency) is a formal, legal notice that the IRS intends to assess additional tax. It is the taxpayer's ticket to Tax Court.

90 Days
Taxpayer has exactly 90 days (150 days if abroad) to petition the U.S. Tax Court.
No Payment Required
Tax Court allows you to dispute the deficiency without paying the tax first.

30-Day vs 90-Day Letter

30-Day Letter 90-Day Letter
Formal Name Preliminary Notice Statutory Notice of Deficiency
Required by Law? No (administrative) Yes (\( \text{IRC } \S 6212 \))
Response Deadline 30 days 90 days (150 if abroad)
Opens Access To IRS Appeals Office U.S. Tax Court
Payment Required? Not yet Not to petition Tax Court

The IRS Appeals Process

The IRS Appeals Office is an independent division within the IRS. Its mission is to resolve tax disputes without litigation by considering the hazards of litigation for both sides.

1
File a protest within 30 days of the 30-day letter. Include a statement of facts, law, and arguments.
2
Appeals conference: an informal meeting with an Appeals Officer who has settlement authority.
3
Settlement or no agreement: if no agreement is reached, the IRS issues the 90-day letter.

Judicial Remedies: Three Courts

U.S. Tax Court
No payment required before filing. Only court where you can dispute before paying. No jury trial.
U.S. District Court
Must pay first, then sue for refund. Only court offering a jury trial.
Court of Federal Claims
Must pay first, then sue for refund. No jury trial. Bench trial by a single judge.

How to Navigate an Audit

1
Receive the audit notice: identify the type (correspondence, office, or field) and items under review.
2
Gather documentation: organize records, receipts, and support for each questioned item.
3
Respond to the examiner: provide requested information. Consider authorizing a CPA or attorney (Form 2848).
4
If you disagree: request an appeals conference within 30 days of the 30-day letter.
5
If appeals fails: petition Tax Court within 90 days of the 90-day letter, or pay and sue for refund.

Example: Correspondence Audit

Taylor receives a letter from the IRS questioning a \( \$5{,}000 \) charitable deduction claimed on Schedule A. The IRS requests documentation to support the deduction.

1
Type: This is a correspondence audit: one item, handled by mail.
2
Action: Taylor gathers the donation receipt and bank statement showing the \( \$5{,}000 \) payment and mails copies to the IRS.
3
Outcome: If the IRS accepts the documentation, the case is closed with no changes.

Example: Disagreement and Appeals

Jordan is audited and the IRS proposes an additional \( \$40{,}000 \) in tax. Jordan disagrees with the IRS's characterization of certain business expenses.

1
The IRS issues a 30-day letter with a proposed deficiency of \( \$40{,}000 \).
2
Since the amount exceeds \( \$25{,}000 \), Jordan must file a formal written protest to request an appeals conference.
3
At appeals, the officer determines the IRS has only a \( 50\% \) chance of prevailing. They settle for \( \$20{,}000 \).

Example: Tax Court Petition

Alex receives a 90-day letter (Statutory Notice of Deficiency) proposing \( \$18{,}000 \) in additional tax. Alex cannot afford to pay upfront but wants to fight the case.

Option A: Tax Court
File a petition within 90 days. No need to pay the \( \$18{,}000 \) first. No jury trial available.
Option B: District Court
Pay the full \( \$18{,}000 \), then file a refund claim and sue. Jury trial available.

Common Mistakes to Avoid

✕ Missing the 90-Day Deadline
Failing to petition Tax Court within 90 days means losing the right to challenge without paying first. This deadline is absolute.
✕ Confusing the Two Letters
The 30-day letter is administrative (appeals). The 90-day letter is statutory (Tax Court). Mixing them up leads to wrong actions.
✕ Ignoring the Written Protest Rule
Disputes over \( \$25{,}000 \) require a formal written protest. A simple letter is insufficient and may be rejected.

Summary: Courts Compared

Tax Court District Court Fed. Claims
Pay First? No Yes Yes
Jury Trial? No Yes No
Judges Tax specialists Generalists Generalists
Small Case Option \( \le \$50{,}000 \) N/A N/A
Appeal Goes To Circuit Court Circuit Court Federal Circuit

Question 1 of 5

The IRS's general statute of limitations for assessing additional tax is:

Question 2 of 5

Which court allows a taxpayer to dispute a tax deficiency without first paying the disputed amount?

Question 3 of 5

A taxpayer receives a 30-day letter proposing \( \$35{,}000 \) in additional tax and penalties. To request an appeals conference, the taxpayer must:

Question 4 of 5

The 90-day letter (Statutory Notice of Deficiency) is significant because it:

Question 5 of 5

Which court is the only forum offering a jury trial for federal tax disputes?