At the audit, the taxpayer will need to substantiate the information on the return. This means that the taxpayer will need plenty of documentary evidence. The taxpayer will need cancelled checks, receipts, bank statements, and all other documented financial records related to the tax return. Of course, the taxpayer can also testify in person about information on the return. While some of the proof may not be sufficient for the actual audit, it may be accepted on appeal or even before the tax court, though the audit appeal may be the easiest, quickest, and least expensive route to at least partial success.
There are three principal reasons for appealing an audit:
- The appeals process is relatively simple and costs the taxpayer nothing (unless the individual hires a tax attorney or accountant, which are not required).
- In most cases, appeals result in some tax, penalty, or interest savings, although appeals rarely result in a total victory for the taxpayer.
- An appeal can delay for months a tax bill based on the audit; this can buy individuals time to raise the money they may owe under the audit.
The IRS agent’s financial conclusions are not absolutely binding. Taxpayers can appeal by sending a protest letter to the IRS within 30 days of receiving the audit report. In fact, taxpayers may question the auditor’s report at a number of levels:
- before an appeals’ officer
- before the agent’s manager
- before the U.S. Tax Court
If a taxpayer requests an appeal, the taxpayer will be granted a meeting with an Appeals Officer. This person will not be part of the IRS division that performed the taxpayer’s audit. There are important time limitations related to each of these levels of ap-peal. Taxpayers need to make sure they know what they are and that they stay within them so that their rights to appeal an audit are not lost through such a technicality.
Although it is very unusual, the appeals officer may raise issues the auditor may have missed. So, if a taxpayer is concerned that a particular item will be discovered and the taxpayer will owe even more in taxes, it may be advisable for the taxpayer to go directly to Tax Court where new issues cannot be raised. Before the taxpayer bypasses an appeal, however, it is wise for the taxpayer to consult a tax or legal professional.
If the appeal does not result in a change in the audit report, an aggrieved taxpayer can file a petition in tax court. For audit bills less than $50,000, this is a fairly inexpensive and simple process. If the audit bill is more than $50,000, taxpayers are well advised to seek the services of a tax attorney. It is generally a good idea to contest an audit report. Appeals and litigation in tax court result in a lower tax bill for about half the people who challenge their audit report.
In some cases, a particularly aggrieved taxpayer may consider taking his appeal to the U.S. Supreme Court. However, it is unlikely that the Supreme Court will hear the case unless the tax issue is one that will have a far-reaching effect.