This article, How To Challenge An IRS Audit Notice of Deficiency, discusses the most common types of I.R.S. audits: corporation and individual income tax audits.

I.R.S. Audit Procedure Summary.

I.R.S. cannot charge you any additional tax liability unless:
(1) you consent in writing to be charged; or

(2) I.R.S. certified mails you its Notice of Deficiency, and you fail to file a petition in United States Tax Court within 90 days from the Notice of Deficiency date; or

(3) a Tax Court judge’s decision order after trial and after post trial briefs, or the Tax Court judge’s decision order agreeing with your settlement with I.R.S. lawyers.

Therefore, do not let overly aggressive I.R.S. auditors get away with bragging, or threatening, they have great power to charge you additional tax liability, because they have no such power. Rather, I.R.S. auditors only opine what your tax liability is.

The Typical I.R.S. Audit.

The audit begins by I.R.S. letter noticing you or your business entity that
I.R.S. will audit your/its federal income tax return(s). Sooner or later, I.R.S.’ auditor will mail a Form 4564 “Information Document Request” setting out the evidence items that I.R.S. desires to audit. Usually, I.R.S. auditors’ Information Document Requests are overly broad and improper seeking to examine too many documents, a tactic used as a fishing expedition trying to sniff out what items to audit. I challenge overly broad Information Document Requests and fight I.R.S. management to reduce its produce all documents approach to a proper set of documentation to audit.

After completing several to many Information Document Requests, the I.R.S. auditors will opinion propose by letter audit adjustments, nearly always alleging additional tax liability, penalty liability, and interest liability. This process is known as a “30-Day Letter” because I.R.S. invites you to request an I.R.S. appeals conference within 30 days of the 30-Day letter. I advise against proceeding to I.R.S. Appeals until after an United States Tax Court petition is filed (discussed below), for a variety of tactical reasons. If you desire to know for what tactical reasons, call me for a free telephone consultation. The 30-Day Letter will include various I.R.S. schedules explaining, sometimes well, but more often ambiguously, what I.R.S.’ audit opinions are, those schedules being:

* Form 4549, Income Tax Discrepancy Adjustments

* Forms 886-A, Explanation of Items (separate forms 886-A
for each proposed audit adjustment).

If you agree with what I.R.S. proposes for audit changes, you can end your audit case by signing Form 4549, agreeing to be charged as I.R.S.’ auditor opined, then full pay I.R.S. or face I.R.S.’ mean and angry Collection Division.

How To Challenge An I.R.S. Audit Opinion.

The short answer is you must file an United States Tax Court petition challenging I.R.S.’ Notice of Deficiency audit opinions, within 90 days from the Notice of Deficiency date. I always so file only by certified mail – return receipt requested, or by Federal Express or U.P.S. overnight delivery, and I keep all filing evidence to prove the petition was filed within 90 days of the Notice of Deficiency date. If you so proceed in United States Tax Court, you do not have to first pay the amount I.R.S. demanded in its Notice of Deficiency. Next, I discuss the details.

Sooner or later, if you do not agree with the I.R.S. auditor’s opinions as stated in I.R.S.’ prior 30-Day Letter, I.R.S. will certified mail serve you with a Notice of Deficiency, which begins a 90-Day period from the Notice of Deficiency date, to file an United States Tax Court petition challenging I.R.S.’ audit opinions. To see what a Notice of Deficiency looks like, click the following link (click the upper left back arrow after reading):  Notice of Deficiency 90 Day Letter

It is CRITICAL that you accept all I.R.S. certified mail, or immediately retrieve it from your U.S. Post Office, because all I.R.S. needs do to charge you additional audit tax liability is to certified mail you a Notice of Deficiency to your last known to I.R.S. address, then wait 90 days, then charge you followed by an ugly I.R.S. enforced collection case. In other words, it does not matter if you intentionally or unintentionally fail to accept or retrieve I.R.S.’ certified mailed Notice of Deficiency, the only thing that matters is that I.R.S. certified mails you a Notice of Deficiency to your last address known to I.R.S. {usually the address you stated on your last filed federal income tax return}. You cannot successfully file an United States Tax Court petition after 90 days from the Notice of Deficiency date. The law is clear that the United States Tax Court only has jurisdiction to consider your audit challenges if you file the petition within 90 days from the Notice of Deficiency date. Whenever you move, I advise you certified mail file an I.R.S. form 8822, Change of Address, so you will receive by mail all I.R.S. notices/letters.

The Notice of Deficiency also includes various I.R.S. schedules explaining, sometimes well, but more often ambiguously, what I.R.S.’ audit opinions are, those schedules being:

* Form 4089-B, Notice of Deficiency – Waiver

* Form 4549-A, Income Tax Discrepancy Adjustments

* Forms 886-A, Explanation of Items (separate forms 886-A
for each proposed audit adjustment)

* Other computation schedules like Alternative Minimum Tax,
Exemptions, Penalties, Interest, Sch. A Itemized Deductions,
Capital Gains, Qualified Dividends, etc.

If you would like to see what a real I.R.S. Notice of Deficiency with all the forms and schedules, click the following link (click the upper left back arrow after reading):
Notice of Deficiency With Form 4549-A Form 886-A
At this point, if you agree with I.R.S.’ Notice of Deficiency allegations, you can end your case by signing the Notice of Deficiency enclosed Form 4089-B, Notice of Deficiency – Waiver, and mail it to I.R.S. If you do not agree, then fight on by filing an United States Tax Court petition within 90 days from the Notice of Deficiency date.

You must follow United States Tax Court rules on the contents of your petition, but generally you have to state your allegations of error, a summary of the facts that support your allegations of error, and whatever affirmative defenses you claim you have.

Almost always, I am able to settle audit dispute cases pending in United States Tax Court, with I.R.S. lawyers with no need to prepare for and conduct an expensive trial and post trial briefs usually required in Tax Court litigation.

Do NOT attempt to represent yourself during the I.R.S. audit, and especially in United States Tax Court. Instead, hire the tax lawyer of your choice to represent you. I have 30 plus years experience, and as a tax attorney and CPA with decades of audit experience, I know what to do and when to best defend your interests at the least possible legal expense. Usually, the more you fight an audit, the less you pay. I.R.S. auditors are unreasonable, aggressive, and as such I attempt to get rid of them ASAP, followed by fighting for a good settlement with I.R.S. lawyers once in United States Tax Court.

Although beyond the scope of this article, you can also challenge an I.R.S. audit Notice of Deficiency by full paying the amount stated on the Notice of Deficiency, then filing within two years from the payment date a refund claim to I.R.S. administratively, followed by refund litigation in either United States District Court or the United States Court of Federal Claims. Common reasons for this route is to stop interest expense from accruing, or seeking better case law on the merits compared to United States Tax Court.