If you receive an audit letter this year it probably means you’re being audited for a tax return filed before tax year 2005. That means you were also hit with a penalty and interest for overdue taxes. If you are like millions of Americans and just pay the bill, because you think it is too much trouble to appeal, think again. The U.S. Government Accountability Office (GAO) recently released the results of a study that seems to indicate that it may be worth your time to appeal if you have a legitimate claim. Out of almost 104,000 appeals filed in 2004, 41% pf the taxpayers won some sort of relief. Sixty nine percent of the 14,647 taxpayers filing penalty appeals earned some sort of break for their efforts.
You have a choice: pay the taxes, penalties and interest; or appeal the IRS claim:
- Whatever you do, don’t ignore the audit notice! The Internal Revenue Service is a bill collector with teeth. If you do owe money, the sooner you pay what you owe, the less interest and penalties you’ll owe.
- Educate yourself. Read IRS Publication 1, "Your Rights as a Taxpayer."
- Don’t rush ahead with the audit if you are not prepared. Some audits are conducted in person and others on the telephone. Ask for a postponement if you need more time to gather records.
- Be friendly and treat the auditor as a human being. Auditors are people just like you and want to do their job. Act like the auditor is your boss and treat him or her with respect.
- Organize your records. Remember you have to prove that you don’t owe more money. So gather and organize all of the documentation you will need to prove your position. Explain clearly why you don’t owe the taxes the IRS claims you do, and offer proof for your statements. Make sure you review your records so when you are asked questions you can answer intelligently.
- Be truthful but never volunteer information – respond to questions you are asked and nothing more.
- Keep original documents. Don’t let the IRS auditor keep your originals—they are yours.
- If you’re wrong, admit it and pay the tax – the sooner the better.
- If you disagree with the outcome of the audit, ask the appeals office to review your case.
If you decide to file an appeal the process will probably take about a year. The first thing to do is to educate yourself: There are many types of appeals. Some of the more common types include penalty appeals, innocent spouse disputes, equitable relief, and cases where a taxpayer experiencing financial hardship asks the IRS to accept less than the full tax amount owed. To learn more about appeals read IRS Publication 5 and Publication 556.
Once you file your appeal, go back and read all of the tips above numbers 1-10 again. Appeals officers are more experienced and generally more knowledgeable about tax law than auditors, collection staffers, and anyone answering the phone line at the IRS. They are authorized to settle appeals based on their assessment of the legal merits of your case – if the appeals officer thinks you have a good chance of winning in court they will try to settle with you. The appeals office has a very successful track record of resolving appeals so you will want to be very prepared and organized, or you can hire a tax attorney.
If you lose your appeal and are not satisfied with the outcome, you can take the IRS to court. If there is a lot at stake, it is probably a good idea to hire an attorney at this point, although you may choose to go it alone.
Have you talked your way out of an IRS penalty? Have any good tips for an IRS audit? Share your experiences about IRS audits and appeals in the comment section below.
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