IRS Appeals: To Docket or not to Docket

IRS Appeals: To Docket or not to Docket

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When a taxpayer does not agree with the results of an IRS audit he has the right to challenge those results. He can do so in one of two ways: 1) by filing a written protest directly with the Appeals office; and 2) by petitioning the U.S Tax Court. This post discusses why option 2 is almost always the preferred method of appealing an IRS audit assessment.

The Notice of Deficiency

Most cases arrive in Tax Court as a result of a taxpayer’s challenge of what is known as a Notice of Deficiency (“NOD”).

Generally, an NOD  is issued by the IRS’s audit division after an audit takes place and the IRS and the taxpayer cannot agree on all of the proposed adjustments.

The NOD is also called a 90 day letter because the taxpayer receiving it has 90 days from the date of its issuance to file a Tax Court petition disputing the deficiency assessment.

Prior to receiving the 90 day letter a taxpayer will have be given the opportunity to file a formal written protest of the proposed assessment directly with the IRS appeals office.

The written protest is to be filed within 30 days of receipt of the notice of proposed assessment.

Petitioning the Tax Court v. Filing a Written Protest

As a general rule, we do not file written protests of proposed assessments.

Instead we wait for the NOD to be issued and then petition the Tax Court for a review of the deficiency assessment in order to get the case put on the Court’s busy trial docket.

Once we do that, pressure is immediately put on IRS personnel to settle the case.

IRS examiners, Judges, and government attorneys have extremely large case workloads and desperately want cases to be settled before trial.

Redirection of Docketed Tax Court Case to IRS Appeals Office

When the clerk of the Tax Court receives a petition it is immediately assigned to a Judge and placed on the court calendar.

The case is then sent to the IRS Appeals office for one last shot at negotiation and settlement.

It is important to note that the Tax Court is under no obligation whatsoever to redirect the case to Appeals. The fact that it does so in nearly every instance is evidence of its great desire to get cases settled. 

Experienced litigators will tell you that when they know their opponent does not want to go to trial it means that they are probably going to get by way of settlement most of what their client wants from the other side.

Once the case is docketed and redirected to Appeals for settlement purpose, the taxpayer and his lawyer are now put on notice of 3 things:

  1. The IRS does not want to go to trial;
  2. Government counsel will be upset if IRS appeals officers do not reach a settlement with the taxpayer;  and
  3. In the interest of avoiding a trial and the wrath of counsel, an Appeals officer is likely to concede issues that the IRS would not have conceded had a Tax Court Petition not been filed.

This knowledge is manna from heaven and few taxpayers and even some tax lawyers do not know hwo to take full advantage of it.

Hazards of Litigation and the Appeals Process in Docketed Cases

Unlike their lower level counterparts in the Audit division, IRS Appeals officers  are permitted can consider what is known as “hazards of litigation” in arriving at a settlement with the taxpayer.

The term “hazards of litigation” simply means the IRS’s chances of losing a particular issue or set of issues at trial.

Consequently, one of the most important things a tax lawyer does in a docketed case is create doubt in the mind of the Appeals officer that the IRS will prevail at trial.

This is a decidedly different function than what a tax lawyer, CPA or Enrolled Agent is called upon to do when representing his or her client in an audit examination.

An IRS examination (PDF) is, or at least endeavors to be, an objective exercise: The taxpayer presents records and documents in support of the entries he made on his tax return and the IRS evaluates those records and documents for accuracy and adequacy.

On the other hand, the appeals process, especially in docketed cases, is more subjective. Taxpayers who are represented by tax lawyers who know this have a distinct advantage over taxpayers who are not.

If a case is not docketed (i.e a written protest was filed rather than a Tax Court petition), an Appeals officer will generally not be as concerned with hazards of litigation because the case is not on a direct path to trial.

So get the case docketed and then attempt to negotiate a favorable settlement.

Get a Tax Lawyer Involved Early

You should have an attorney file your Tax Court petition and handle the subsequently redirected appeals review. We say this not because we ourselves are lawyers, or because we believe that lawyers are the only people who can handle such matters or because all lawyers have a meticulous grasp of the intricacies of the tax code.

We say it because the mere presence of a lawyer in the case signals to the IRS that you are ready, willing and able to take the case to trial.

Having a tax lawyer on board early in the Appeals process increases the IRS’s hazards of litigation thereby increasing your chances of a favorable settlement outcome.

United States District Court: Refund Jurisdiction

The Tax Court is a pre-payment forum. In other words, a taxpayer can dispute an IRS assessment without having already paid it.

But the Tax Court is not the only Court in which a taxpayer may have his claim heard.

Taxpayers have option of paying the IRS’s proposed assessment in full (in most cases) and then making a formal claim for refund.

When the claim for refund is denied or ignored the taxpayer may then bring a lawsuit in federal district court.

The issues involved in deciding whether to pursue a claim in Tax Court or federal district court are complex, varied and beyond the scope of this article.

I will address them in a future blog post.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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  1. From the perspective of someone who thinks about the economic analysis of law, I found this post especially fascinating.

    We say it because the mere presence of a lawyer in the case signals to the IRS that you are ready, willing and able to take the case to trial.

    I agree. The presence of the lawyer also signals to the IRS Appeals Officer (AO) that a credentialed and presumably knowledgeable professional believes there is at least some merit in the case.

    It seems to me that representation by experienced enrolled practitioners with appropriate credentials serves some important public policy functions, because

    a) if the taxpayer’s position lacks merit, consulting with a tax lawyer can result in sensible advice to concede the IRS is right, and to stop wasting IRS resources as well as his own time with groundless arguments

    b) if the lawyer does take a taxpayer’s case and agrees to represent him, the AO can reasonably expect that settlement discussions won’t likely require him to waste unproductive time explaining basic tax law and procedural fundamentals, as he might have to do with a taxpayer representing himself.

    You wrote above: This post discusses why option 2 is almost always the preferred method of appealing an IRS audit assessment.

    The logic of your arguments for filing a petition to get the case on the docket rather a written appeal seems very convincing as a general policy that it leaves me wondering why you said “almost always” rather than “always.”

    Are there ever any exceptions?

  2. Mary,

    Thanks again for your always interesting observations.

    Just because a tax lawyer is on the ship, doesn’t mean the tax preparer has been thrown overboard.

    The two often work together in preparing for the appeal and for trial, if necessary.

    I didn’t say “always” because, even though I have not encountered such a situation yet, there might be a circumstance where filing the written protest is preferable to filing a tax court petition.

    I am still learning.

  3. As a retired Appeals Officer I think the above information is a way for a taxpayer to spend useless money. In my 33 year career I found very few tax professionals who properly represented a taxpayer at the Appeals level. They usually thought they could “talk” their way out of an issue. They should have just did the necessary research. Nobody knows the story better than the taxpayer so I certainly gave their testimony much weight. Appeals Officers really don’t care what IRS Counsel would like. If I sustained an issue I never heard from them. They could resolve the case if they wanted after they got the case back.

  4. Dennis,

    Your attitude about taxpayer representation is entirely consistent with the IRS culture I have encountered.

    Even though the Taxpayer Bill of Rights explicitly states that taxpayers have the right to representation, IRS officials do everything in their power to dissuade taxpayers from hiring counsel.

    How sad and corrupt is that?

    Having said that, I agree that many so-called tax professionals don’t know what they are doing.

    That is why I recommend that taxpayers hire only experienced tax professionals with good track records.

    It is indeed excellent advice never to hire a bad tax professional.

    And you shouldn’t hire a bad doctor, plumber or carpenter.