Administrative Review

To ensure that taxpayers voluntarily comply with the tax laws, IRS performs audits on a number of taxpayers. The IRS has many methods in which returns are selected for audits.  Some of the methods include audit by infection (related returns), the Discriminate Information Function (computerized scoring system for returns using many factors) and issue-related reasons.  The IRS has identified the Earned Income Tax Credit, an issue frequently seen in the clinic, as an issue-related reason for conducting audits. Consequently, low-income taxpayers who take the EITC are frequently being audited.  In fact the U.S. General Accounting Office reported that in the past several years, forty percent of all individual return audits are made up of taxpayers in the lowest income bracket.

The IRS uses four methods of examinations: correspondence exams, office exams, field exams and employment tax audits. Clients of the clinic are most often audited by correspondence exams.  The other three methods are rarely seen in the clinic. Correspondence exams are conducted through the mail. Usually, the IRS will request that the taxpayer explain or send supporting documents to substantiate or clarify certain claims and matters.

In many instances, clients who come to the the clinic for assistance have already passed the audit stage, either because they have ignored the IRS notices or because they have not provided the IRS with sufficient evidence to resolve the dispute.

Audits are resolved in one of two ways: taxpayer’s agreement with the IRS’ findings or taxpayer’s disagreement with the findings. Clients who come to the clinic usually do not agree with the results of the examination. The IRS will issue a notice to the taxpayer called the 30-day Letter that will state the findings of the examiner and the taxpayer’s appeal rights.  Taxpayer will have 30 days from the date of the 30-day Letter to request a conference with the Appeals Office.  If the taxpayer does nothing, then she will be sent a 90-day Letter (Statutory Notice of Deficiency).

Resources

Documents

• Administrative 30-day Letter
• Statutory Notice of Deficiency

Documents at IRS.gov

• Your Appeal Rights and How To Prepare a Protest If You Don’t Agree
• Examination of Returns, Appeals Rights and Claims for Refund

If the IRS and a taxpayer disagree on the treatment of an item following an audit, the taxpayer will receive a letter that contains instructions on how to appeal the IRS proposed deficiency.  This letter also is received if the taxpayer ignores the IRS audit.  This letter is commonly referred to as the 30-day letter because it gives the taxpayer 30 days in which to appeal the decision of the examining agent.   To appeal the examiner’s proposed adjustments, a “Protest” is submitted requesting a conference with the Appeals Office to discuss the disputed issues. Because this is not a statutory letter, extensions may be granted to request an appeals conference.

Resources

Documents

• 30 Day Letter

Documents at IRS.gov

• Your Appeal Rights and How To Prepare a Protest If You Don’t Agree
• Examination of Returns, Appeals Rights and Claims for Refund

A protest accompanies a request for a conference with the IRS’ Appeals Office following receipt of the administrative 30-day letter.  Depending on the circumstances and amounts involved, different actions may be required in order to request an appeals conference:

1. If the total amount of proposed additional tax, proposed over assessment or claimed refund exceeds $10,000 for any taxable period, a written protest setting forth the facts, law, and arguments relied upon by the taxpayer, made under penalties of perjury, is required.
2. If the total amount of proposed additional tax, proposed over assessment, or claimed refund exceeds $2,500 but does not exceed $10,000.   A brief written protest of disputed issues is required.
3. An oral protest is sufficient to obtain Office of Appeals consideration in field audit cases involving $2,500 or less and in all office interview or correspondence examination cases.  However, it is customary for the Clinic to submit a written protest.

A protest should include the following:

1. Taxpayer’s name, address and Social Security number
2. Taxpayer’s Representative’s name and a copy of Form 2848 Power of Attorney
3. Copy of or reference to the 30-day Letter and the audit report identifying the tax years involved and the proposed changes
4. Statement that the protest is timely
5. Request for an Appeals conference
6. List of the changes made by the IRS to the taxpayer’s return that taxpayer disagrees with and why taxpayer disagrees
7. Facts supporting taxpayer’s position
8. Law or authority on which taxpayer bases his position
9. Taxpayer’s signature or representative’s statement that she prepared the protest and knows the facts alleged to be true (to the best of their knowledge)
10. Supporting documents may be attached

Appeal of Claim Disallowance

In addition, a request to the IRS for them to allow some additional claim on a return or to reconsider a disallowance of a prior claim may result in the IRS not granting that request and issuing what is termed a “Claim Disallowance” letter. The student should contact the IRS and clarify precisely what was denied. In many instances, while the letter indicates a denial of the claim, in fact the claim was allowed in part.  Then the student must determine if the amount disallowed was erroneous.

As in many actions with the IRS, those decisions can be appealed to the Appeals Division The Form 12203 is the general form used to appeal a matter to the Appeals Division except for appeals of offers in compromise (see OIC section for appeals of officers).

Generally, the IRS allows 30 days from the date of the “Claim Disallowance” letter to request Appeal’s consideration.  Therefore, the cover letter and the form 12203 should be returned within the 30 days even if there is not sufficient time to prepare an appeals notebook. Once the Form 12203 is returned timely, the student should immediately prepare the appeals notebook following the example format for appeals notebooks found on this website and have it ready, when an appeals officer is assigned.

Should the IRS overlook the request for a face-to-face conference with Atlanta Appeals, upon contact by an appeals officer in a city other than Atlanta, the student should without further discussion of the underlying issues in the case, request a face-to-face conference with Atlanta Appeals.

Resources

Documents

• Sample Appeals Memorandum.doc 
• Appeal of Claim Disallowance Cover Letter
• Request for Appeals Review (Form-12203)

Treasury Regulations

• Treas.Reg. §601.105:  Examination of returns and claims for refund, credit or abatement; determination of correct tax liability
• Treas.Reg. §601.106: Appeals Function

Documents at IRS.gov

• Your Appeal Rights and How To Prepare a Protest If You Don’t Agree
• Examination of Returns, Appeals Rights and Claims for Refund

Taxpayers who do nothing in response to a pre-assessment letter will receive a Statutory Notice of Deficiency, commonly referred to as a 90-Day Letter. A taxpayer also will receive a Statutory Notice of Deficiency if he does not agree to the findings of the Office of Appeals following a protest. § 6212.

The 90-Day Letter that is a Statutory Notice of Deficiency should not be confused with other 90-day letters, including the one required when innocent spouse relief is denied. § 6015.

The statutory notice of deficiency grants the taxpayer 90 days within which to petition the Tax Court to re-determine the liability that is proposed by the examining agent. If the issue involves filing status and if the taxpayer was married during the year in question but did not file a joint return, consider having the taxpayer file a joint return before the petition is filed. See IRC § 6013(b)(2)(B). Once a petition is filed, a joint return is no longer permitted to be filed.

Because the 90-day period is prescribed by statute, it cannot not be extended. For this reason and to preserve the rights of the client, it is extremely important not to miss the 90-day deadline. If a student overlooks this time limit he or she may receive a failing grade in the clinic course.

The 90-day period within which a petition may be filed is counted from the date the notice of deficiency is mailed to the taxpayer’s last known address. The IRS is required by law to include on the notice the last day a petition may be filed. IRC § 6213. During the 90-day period, the IRS is barred from any assessment or collection activity. If taxpayer files a petition, this continues until a Tax Court decision is final. IRC § 6503(a)(1). Failure to file a petition with the Tax Court will result in the deficiency being assessed.  This is one of the steps the IRS takes before collection efforts begin.

Resources

Documents

• 90-Day Letter
• Petition to U.S. Tax Court

Internal Revenue Code

• IRC §6212 Notice of Deficiency
• IRC §6213 Restrictions applicable to deficiencies; petition to Tax Court
• IRC §6503 Suspension of Running off Period of Limitation

An Appeals notebook contains a legal memorandum stating the taxpayer’s position and the supporting documents.  The memorandum must be reviewed by the clinic director and the entire notebook is reviewed by the associate director.

The completed notebook is sent to the appeals officer reviewing the case a couple weeks before the scheduled conference.  An extra copy of the entire notebook must be retained in the client’s file and the legal memorandum must be saved on the T-drive in the client’s folder.

Resources

Documents

• Appeals Memorandum
• Appeals Notebook Cover Letter
• Appeal of Claim Disallowance Cover Letter
• Protest to 30-Day Letter

Protest to 30-Day Letter

The IRS’ Appeals Division is the administrative appeals office for the IRS. Taxpayers may appeal most IRS decisions with the local Office of Appeals. The Office of Appeals is independent of the IRS office that took the action that the taxpayer disagrees with.  A request for an appeals conference is sent with a protest if the IRS did not send the client a Statutory Notice of Deficiency. If a Statutory Notice of Deficiency has been sent,the appeals conference will be prompted by the petition filed by the taxpayer in Tax Court.

Conferences with the appeals officer are held in an informal manner by correspondence, by telephone or in person. Any conference with the IRS regarding your client will require the attendance/participation of the associate director. Therefore, you should confirm that the associate director is available before scheduling any conference. Also, please note that professional attire is required at all conferences conducted in-person.

Collection determinations may also be reviewed by the Office of Appeals. The Office of Appeals will determine if the collection procedures are reasonable, whether all avenues have been considered and whether the IRS has complied with required procedures. There are two methods in which collection determinations may be appealed: administratively or statutorily.

The Collections Appeals Procedure (CAP) is an administrative appeal that allows taxpayers who were subject to a lien, levy or seizure or who were defaulting on their installment agreements to request an appeals conference. The Collection Due Process (CDP) hearings were created by the 1998 Reform Act to give taxpayers a statutory right to appeal collection actions. If the appeal is denied, a petition can be filed in the Tax Court. See the links below for further explanation of these two procedures.

The Office of Appeals reviews the matters in controversy without any bias. It is the mission of the Office of Appeals to resolve these matters and avoid litigation. An appeals officer is allowed to take into account the hazards of litigation in reaching her decision. Approximately 85 percent of the cases reviewed by the Office of Appeals are settled.

Although taxpayers may request a conference upon receipt of an administrative 30-day letter, most of the appeals conferences involving the clinic clients stem from statutory notices. These statutory notices include a Notice of Deficiency, a Notice of Lien, a Notice Before Levy, and a determination denying innocent spouse relief.

Once the administrative file is assigned to an appeals officer. The student attorney twill be contacted to schedule a conference. The conference is an opportunity for the IRS and the taxpayer to try to settlement the case prior to a trial in the U.S. Tax Court.

After the appeals officer makes his or her decision, the student attorney may notify the client of the decision but should clarify to the client that the appeals officer’s decision is not final in docketed cases until a stipulation is filed with the Tax Court. Once the Tax Court receives the stipulation, we must still await a final decision from the Tax Court.

If the appeal results from filing a petition to receiving a decision from the Tax Court generally takes several months. If the client is entitled to a refund because of the appeal, he or she may not receive the refund until 10 to 12 weeks after the decision of the Tax Court is rendered. The student attorney needs to inform the client that the process takes several months.

Resources

• Appeals Notebook (above)
• Collection Appeals Procedure (CAP)
• Collection Due Process
• Decision Tree