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Can You Challenge a Federal or California Tax Audit?

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    The goal of a tax audit is to find impropriety in tax filings. If the federal or California Taxing Authorities (CDTFA, EDD & FTB) look for wrongdoing hard enough, they are more than likely going to find it, even where it might not actually exist. Many tax audits unfairly scrutinize the taxpayer to the point of inequity. If you were the subject of a federal or California audit and believe that the results were inaccurate, you may be wondering what you can do about it. Let me tell you that both federal and state audits either get the facts or the law at issue flat out wrong leaving you as your only recourse to either contest the results of the audit or roll over and pay them even where you do not feel they treated you fairly. 

    You are legally entitled to appeal the results of a either a federal or state audit where you think they got it wrong. If you, or more appropriately and effectively, your legal counsel, files a federal tax court petition, your initial appeal will be heard by the IRS’ office of appeals which is supposed to be independent from the rest of the IRS. Determining whether to appeal the findings of an audit requires careful analysis of the strength of your case, likely financial upside in doing so and the specific facts and circumstances of your case. Reputable tax counsel will not advise you to appeal if doing so is not in your likely best interests just to make a buck. Our office would never put our needs to make a living above your best interests as some of our unscrupulous competitors are known to do.

    To help you make the best decision for you and yours, we strongly encourage you to speak with our ethical and competent dually licensed Tax Attorneys and CPAs. The process of appealing a tax audit can be complex, time consuming and therefore expensive. The Law Offices of David W. Klasing can be your guide through the traps and pitfalls that you would not commonly be aware of your own. To speak with us today, call our offices at (800) 681-1295 or schedule online here.

    How Do You Challenge the Results of a Federal of State Tax Audit?

    When the IRS or a California governmental tax authority finishes an audit, they will send you a formal assessment of their findings from the audit, including any additionally imposed taxes or penalties. If you wish to appeal the findings of the audit, do not sign the audit report. Each Federal or California taxing authority has their own specific procedures for filing an appeal. For federal purposes, mail back the audit report without a signature. You will typically then receive a second letter that will detail your options for appeal. This first letter colloquially known as the 30-Day Letter, as it indicated by the 30-day deadline that you will have to file your protest letter.

    A formal protest must contain certain information about you and your taxpayer status. You should be prepared to include the following information:

    • Your name, address, and contact information
    • An affirmative statement declaring your intentions to appeal the findings of the audit to the IRS’ Office of Appeals
    • Copies of both letters that you received from the IRS
    • Your specific disagreements with each item you are contesting and your rationale for contesting them
    • Any law or authority that you are citing in support of your position
    • The penalties-of-perjury statement
    • Your signature (below the penalties-of-perjury statement)

    The IRS allows for individuals owing less than $2,500 to then ask their auditor simply for an appeal. Anything more than $2,500 requires a “small case request” letter be written to the IRS. If you owe more than $25,000, you must also submit IRS Form 12203, known as a “Request for Appeals Review.”

    Our office recommends that you take all three measures, regardless of how much you owe. This gives your case the lowest chance of being inappropriately disregarded. For help writing the small case request letter or completing Form 12203, contact our attorneys today.

    Beware, the IRS auditor may follow or lead with a 90-day letter called a statutory notice of deficiency. If you receive a statutory notice of deficiency, you must file a tax court petition within 90 days of receipt of the notice. If you fail to do so, the tax court will deny jurisdiction over your matter, and you will be stuck with the audit report assessment of additional tax penalties and interest even where you believe the IRS got the facts or the law at issue in your case completely wrong.

    Resolving a Tax Audit Appeal Through a Settlement

    When your audit protest is heard by an agent of the IRS Office of Appeals, the appeals officer is authorized to consider the hazards of litigation in reaching a settlement position. If the appeals officer is of the opinion that the IRS has a 50% chance of prevailing in tax court, they are authorized to compromise or settle the case for ½ of the original tax, penalties and interest delineated on the original audit report with the caveat that you will no longer have the option to bring a lawsuit against the IRS.

    The agents of the Office of Appeals have a normal prerogative to avoid engaging the IRS in lawsuits that they might ultimately lose. They often chose to avoid litigation because each individual court case has the potential to cost the IRS a significant amount of money by similarly situated future and current taxpayers, but very little opportunity to realize additional assessments of tax penalties and interest as to the case at bar. This explains why the IRS has a 98% settlement rate when faced with litigation. By that end if your counsel can convince the appeals officer that the facts and law are on your side and that they would prevail at tax court, you should prevail in your appeal without having to bear the expense of litigating in tax court.

    Your IRS settlement offer may arrive by mail months after your appeal hearing. It will ask you to sign and return the settlement, just as the audit summary letter did. You should not sign a settlement offer before carefully considering all the options at your disposal, as it symbolizes the ultimate resolution of your case. Once you sign and mail your settlement offer, you no longer have any legal recourse against the federal government in Tax Court. Consult our dually licensed Tax Attorneys and CPAs if you have received a settlement offer so that you can make a fully informed decision.

    Deciding Whether to Appeal a Federal or California Tax Audit

    Many taxpayers who are audited choose not to appeal the results of the Federal or California Tax Audit. But the data collected on the success rates of warranted appeals of audits suggests that taxpayers stand to benefit significantly from a warranted appeal attempt. The total amount of tax, penalties and interest is often reduced by almost half in the average audit appeal. You also do not have to pay the assessed tax, penalties and interest imposed by the audit during the appeals process, but interest will continue to accrue on any balance that is ultimately assessed.

    There are clearly significant advantages to appealing a tax audit. So why do so many people choose to simply pay the tax penalties and interest assessed and move on?

    The simple answer is that there are good reasons and bad reasons. One good reason might be the avoidance of accumulation of additional interest on the ultimate balance owed. While you do not have to pay the balance of the audit during the appeals process, the interest on the amounts you ultimately wind-up owing does not stop accruing, and if you lose your case, you will end up owing more interest than you would have if you had paid the amounts assessed immediately. Some taxpayers also hope to avoid the discovery of further noncompliance that was not uncovered initially.

    However, many people choose not to appeal their audit results because they are tired of the stress and want the process to be done. It is true that the process of an audit can be trying. However, California and the IRS rely on your desire to avoid dragging your case out when they assess additional tax, penalties, and interest. Allowing their erroneous findings to go uncontested might feel acceptable in the short term, but that inaction plays into their strategy in the long term and might motivate an additional follow up audit in the future.

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    The seasoned dually licensed Tax Attorneys and CPAs at The Tax Law Offices of David W. Klasing have been battling the IRS and California Taxing Authorities (CDTFA, EDD & FTB) for years, and we know what it takes to get our clients justice. For a consultation about your appeal options over an unfair audit, give us a call today at (800) 681-1295 or schedule online here.

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