How the Audit and Litigation Cycle Works

How the Audit and Litigation Cycle Works

For those of us who’ve never been audited, we can only imagine the sense of panic we would feel upon receiving an IRS notification. One way to keep the panic at bay is to have knowledge about the situation you are about to face.

Tax Audit Cycle

Notification of an audit will lead to one of three types of audits.

  • Correspondence: The correspondence audit occurs when the IRS is asking for more information. This doesn’t mean the taxpayer has erred, though. Instead, it’s possible the IRS has made a mistake, which would trigger the correspondence audit. Look over any letter carefully, and make sure you understand it fully. Don’t be afraid to ask for advice.
  • Meeting: The IRS may request an audit where the taxpayer must visit an IRS office in person. A tax attorney may attend this meeting with you, as well as help you prepare for the meeting.
  • Field: A field audit occurs when the IRS visits the taxpayer’s office or home, examining records on site. Having the correct documentation prepared and understanding exactly what is being requested can greatly help you deal with this serious audit situation.

Tax Litigation Cycle

After the audit process, the IRS will send the taxpayer a 30-day letter which is eventually followed by a formal notice of deficiency that tax debt is being legally assessed at the end of the notice period (90-day letter). Upon receipt of this letter, the taxpayer has 90 days to file a tax court petition before the IRS will be able to legally enforce the tax obligation if they choose not to file suit.

The taxpayer’s option to contest an IRS assessment is either by preemptively filing a protest in response to a 30-day letter, or by filing a formal tax court petition if they disagree with the amount of tax, penalties and interest the IRS is attempting to assess on a 90-day letter.

An experienced tax litigation lawyer can give the taxpayer advice on the exact legal strategy he or she should employ throughout the appeal / litigation. Occasionally, some tax issues are not appropriate to appeal or litigate, but an experienced tax attorney can help you determine the best path to follow.

What is most important to understand is that the IRS often get either the facts or underlying law wrong in reaching the proposed assessment of additional tax penalties and interest they seek to collect on the 90-day letter. Even if the taxing authority is patently wrong on the facts or the law of your case, your only recourse is to file a tax court petition or a protest before the statutory notice period lapses or the proposed assessment will become legally collectible.

Filing either a protest or a tax court petition will get your case into the IRS appeals process where 98% of cases get settled without the need for expensive litigation. IRS appeals personnel weigh the hazards of litigation in reaching a decision to settle without going to tax court.   If the law and the fact are indeed on your side, you have much to gain in the appeals / litigation process.

Our office is so successful in the appeals process that we have never had to make an actual appearance in tax court.

If a case does not settle in IRS appeals the case will proceed to tax court. An opportunity to settle with the IRS Office of Chief Counsel prior to litigation is the next best option for taxpayers in order to avoid the expense of actual litigation in tax court.

If the case does not settle with the Office of Chief Counsel the case will proceed to tax court unless the issue is conceded prior to the first court date. The clear majority of cases actually heard by the U.S. tax court are decided in the government’s favor, largely because of the IRS’s settlement policies and track record of conceding losing cases prior to tax court.

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