The IRS Administrative Appeals Process Explained
When a US Taxpayer disagrees with the outcome of an Internal Revenue Service exam, audit, penalty notice, or tax liability –– they have various processes and procedures available in order to dispute the liability. One of the most misunderstood aspects of the Internal Revenue Service machine is how the administrative appeal process works. This type of administrative appeal is different than appealing a Tax Court case to the US Court of Appeals or filing a Collection Appeal Process Hearing on Form 9423. The administrative appeals process has undergone some changes over the past 25-to-30 years, so let’s take a look at some of the basics and insight into how the process works.
Appeals Officers and Settlement Officers
Not all IRS officers are the same. In general, there are two main categories of appeal officials – an Appeals Officer (AO) and a Settlement Officer (SO). More often than not, the Settlement Officer will be assigned to the more complicated matters and they tend to have more experience and negotiating power than an Appeals Officer, but this is not always the case. In general, the Settlement Officers tend to go through additional training and intend to be less focused on preserving initial findings and more focused on trying to provide a global settlement on matters involving issues such as Assessable Penalties and Collection Due Process Hearings.
Protest Letter (Usually) Comes First
In order to get to appeals, the first stop is usually making a protest with the IRS. In a typical situation that we handle at our firm (we specialize exclusively in international tax matters) – the taxpayer will receive a CP15 Notice for an assessable penalty such as a Form 3520 or Form 8938 violation. These are assessable penalties because they are assessed without providing the taxpayer an opportunity to dispute the issuance of the penalty beforehand. Therefore, the first time the taxpayer really gets an opportunity to put their narrative to paper is when they submit a protest letter. The protest letter should be a thorough submission that explains why the penalty should be abated — but strategies vary on how to most effectively craft the protest based on each person’s specific facts and circumstances. While taxpayers are generally inclined to submit absolutely everything they can in a protest letter — there are other strategies they may want to consider, and of course, the fact that most agents only give these letters a cursory review at best — so submitting a 25-page statement may not be the best strategy.
Appeals is an Informal Hearing
Engaging in an appeals conference is not the same as going to court. The appeals conference tends to be relatively informal and oftentimes the taxpayer will not appear but rather the representative will appear on their behalf and communicate with the Appeals Officer as to why they believe taxpayers should not be penalized and/or have the penalty removed. Even when the Taxpayer wants to appear at the hearing — caution is important. That is because oftentimes it may be a detriment for the Taxpayer’s case — especially if the taxpayer is (understandably) emotional and they end up making statements that actually put them in a worse position.
If The Penalty is Abated…
Depending on the facts and circumstances, it is not uncommon for the appeals officer to remove the penalty –– especially if there are facts sufficient to show that the taxpayer acted with reasonable cause and not willful neglect. In cases involving assessable penalties, some of the key issues tend to involve whether or not there have been prior penalties in the past (and on the same issue) and whether or not there is any unreported income. If the penalties are waived, then the taxpayer and the representative should receive notice generally within 4-to-12 weeks explaining the decision and either identifying that the penalty will be removed and/or a refund will be issued for any payment that was made earlier — payments for disputed penalties are typically made in order to avoid additional interest.
Disagree with the Appeals Conference Outcome?
If you disagree with the outcome of the appeals conference, you still have rights. As provided by the IRS:
If the matter is not resolved in Appeals, we will send you a notice of the penalty amount due. If you disagree, you must first pay the total amount due and file a claim for refund on Form 843.
If the claim is rejected, or the IRS does not take action on the claim within six (6) months after the date you file the claim, you may proceed to litigate in either the U. S. District Court or the U. S. Court of Federal Claims. Publication 1 contains additional information regarding appeal rights.
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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
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