Many view the IRS as an agency shrouded in mystery. The IRS is generally perceived as the omnipotent “big brother” that we should all fear. It is true that the IRS does have the ability to unilaterally impose liens, or garnish wages or levy on assets, whereas almost every other creditor would have these rights only after successfully getting a judgment following a lawsuit. However, that does not mean you do not have rights if you disagree with the IRS, and the IRS does have administrative procedures available when a taxpayer disagrees with an IRS determination. In general, disputes with the IRS from individual taxpayers will usually fall into several categories which include:
- Audits: Although it is customary upon receiving an audit notice to either feel apprehensive or that you are being harassed, the primary purpose of an audit is for the IRS to obtain information to determine the proper amount of tax due. The IRS generally has 3 years from the filing of your return to complete an audit, and in an audit, the burden is on the taxpayer to justify that the income or deductions on your return is proper. Therefore the IRS has wide latitude to ask about items on your return, but that does not mean the IRS can ask for everything under the sun. For example, if the IRS is asking for information that is not relevant to the items under audit or asking for information beyond the scope of the audit (for example, asking for information for a tax year different than the one under audit), you may be justifying in objecting. Moreover, if you need additional time to obtain information requested by the IRS, unless they are under pressure from the 3 year rule mentioned above, they will usually grant extensions so long as you appear cooperative and are not using it merely to delay. Any disagreements or objections to IRS requests or actions should be made in writing so that there is a record in case of a subsequent appeal. Although the IRS can ask for anything relevant to determine the amount of tax due, don’t feel like you absolutely have to give the IRS what they ask. If you do not comply with the IRS’ requested, usually the worst that can happen is they will disallow the item when they make their final assessment of the tax (which you can then challenge as discussed below).
- Deficiency determinations:Following an audit or examination, a taxpayer may disagree with a determination of income or certain other taxes or penalties assessed by the IRS. Typically, when the IRS assesses additional taxes after an examination, they will send a letter stating what changes they are proposing to make which could be on a Letter 915 or “30 day letter.” If there was no examination but the IRS believes additional taxes are due (e.g. perhaps you made a math error), they may send a “balance due” notice instead. If you disagree with the determination by the IRS, you should file a “Protest” with the office issuing the letter within thirty (30) days. The notice you receive from the IRS usually includes a summary explanation of your rights or options if you disagree, and so read those notices carefully, and especially any time limitations stated in the letter. For additional information on preparing Protests, see IRS Publication 5. This type of administrative appeal is relative simple and inexpensive to prepare, but you need to make sure you submit your Protest within the 30 days following the date on the initial notice described above, unless you get a written confirmation that an extension was allowed. If there is no Protest made or the appeal is unsuccessful, the IRS will then issue a “Notice of Deficiency” (AKA a “90/150 day letter”) which is their final decision on the taxes owed. Once the Notice of Deficiency is issued, your only recourse to contest the taxes would be to pursue the matter in Tax Court within the 90/150 day requirement from the Notice.
- Collection Actions:Taxpayer disagrees with actions the IRS intends to take to collect on taxes owed, or is planning to deny or revoke a proposal for tax resolution such as an installment agreement or offer in compromise. Contrary to popular belief, the IRS cannot just seize assets or file liens without giving the statutory required notices, and therefore, the issue in these types of cases is whether the proposed collection action by the IRS is reasonable and/or whether the IRS followed the required procedures. For example, if the IRS filed a federal tax lien, or purports to seize assets from the Taxpayer without complying with the notice requirements in 26 U.S.C. §6331(d), you may have the right to a Collection Due Process Hearing (CDP) with the Office of Appeals or an appeal under the Collection Appeals Program (CAP). More information on disputing collection actions can be found in IRS Publication 1660 and in the Internal Revenue Manual Section 5.1.9. Any collection appeals should also be done within 30 days of the date of the notice or according to the date stated in the notice.
- Disallowing Refund Claims: The deadlines for filing Refund Claims is generally 3 years from the return due date or 2 years from the date the tax was paid. IRS Form 843 is generally used to claim refunds. If you disagree with the determination of the IRS with respect to a refund claim, the procedures for disputing the IRS determination and requesting an Appeals conference can be similar to deficiency procedures and more information can be found in IRS Publication 556.
- Penalty Abatement:If you disagree with a penalty proposed by the IRS, it is important that you respond timely to the deadline stated in your notice and usually to the office that proposed the penalty. You may be able to obtain relief under the provisions for “First Time Penalty Abatement,” ”the “Reasonable Cause Exception,” or other limited basis for relief. The First Time Penalty Abatement Exception provides relief for one tax period for the following penalties: failure to file, failure to pay or failure to deposit penalties. Taxpayer must have a clean compliance history for the preceding three years to qualify. Details on the factors for the First Time Penalty Abatement can be found in the Internal Revenue Manual 18.104.22.168.3.2.1. There are several grounds for claiming penalty abatement for reasonable cause, although they are not frequently granted. See Internal Revenue Manual § 22.214.171.124.2 for more on the Reasonable Cause Exception.
In any written dispute to the IRS, you should always include copies of all documents and any legal authorities supporting your dispute. This may include documents previously sent or received from the IRS, including: the legal notice you received, IRS tax transcripts, receipts, and affidavits or sworn statements from third parties in support of your dispute. You should also send your dispute certified mail with the return receipt.
This is where an attorney who is experienced in such tax issues who can research your specific issue and present your legal arguments in an organized and logical manner setting forth the facts, the law, and legal analysis applying the facts to the law can be helpful. Above all, always make sure the IRS has a current address for you and DO NOT ignore IRS notices, as failure to take advantage of these dispute procedures will effectively waive your rights.
Finally, if you are not satisfied with the administrative remedies with the IRS, you may have an option to seek further relief by litigating the matter in tax court. The procedures and rules are similar to litigation in court. For more information on your rights and options with the IRS, refer to the Taxpayer’s Bill of Rights.