On average, a couple of thousand taxpayers experience a unique sense of anxiety each day. While sorting their mail, they find a white envelope from the IRS: Today is not a good day. These taxpayers' income tax returns were selected for audit. After the initial shock wears off, the taxpayers (hopefully) engage professional help and respond to their individual IRS notices, and audits of their tax returns (or examinations, as the IRS likes to call them) begin.
Each taxpayer shares information with the revenue agent (RA) assigned to the audit. After examining the tax return and its supporting documentation, the RA compiles a Revenue Agent Report (RAR) to summarize the audit findings. If the RA is proposing an assessment as a result of the audit, the RAR will describe how the adjustment to the taxpayer's tax liability was determined. Sometimes the taxpayer agrees with the RAR and pays the additional tax owed. Other times, the taxpayer disagrees with some (or all) of the RAR's findings.
If the taxpayer does not agree with the proposed assessment in the RAR, the taxpayer can take two possible paths to resolve the tax dispute. The judicial path allows the taxpayer to challenge the proposed assessment in Tax Court, or to pay the proposed assessment amount, file a refund request with the IRS, and, if it is denied, file a refund suit challenging it in the appropriate federal district court or the Court of Federal Claims. However, going to court is generally time-consuming and expensive for both the taxpayer and the IRS. Alternatively, the taxpayer can first seek an administrative resolution with the IRS Office of Appeals. According to a U.S. Government Accountability Office study from 2018, Appeals is effective at resolving 85% of all cases within one year of an appeals request (see Tax Administration: Opportunities Exist to Improve Monitoring and Transparency of Appeal Resolution Timeliness, Rep't No. GAO-18-659). In addition, if a favorable result in not achieved in Appeals, the taxpayer can still pursue a resolution in court.
For Appeals to consider the case, the taxpayer must generally file a written protest of the RAR within 30 days of the date of the letter notifying the taxpayer of the agent's findings. Time is of the essence for taxpayers who choose this path, given the short window for filing a timely appeal. This article helps make best use of these 30 days by providing a blueprint for how to win on paper — by writing a logically organized and easy-to-understand legal argument that persuades the IRS Appeals officer to rule in the taxpayer's favor.
OVERVIEW OF IRS APPEALS
Founded in 1927, the Independent Office of Appeals (renamed effective July 1, 2019, under Sec. 7803(e)) is a working group within the IRS that is intentionally independent from the core operations of tax enforcement. This group's mission is to impartially resolve tax disputes that remain at the conclusion of an audit. While pursuing an appeal within the IRS may seem counterintuitive because taxpayers most often think of the IRS as a tax collecting agency, the Service staunchly defends the independence of Appeals. The IRS recognizes this independence is crucial in supporting the overall goal of strengthening taxpayer compliance and confidence in the IRS while resolving tax disputes outside of court.
The appeals process is outlined in the IRS Internal Revenue Manual (IRM). First, the taxpayer files a written protest of (or, if the taxpayer qualifies to do so, makes a small case request regarding) the proposed adjustments in the RAR with Appeals. The Appeals officer reviews the arguments of the taxpayer and the RA and holds an Appeals conference or hearing with the taxpayer. Finally, the Appeals officer makes an independent decision on the dispute. The appeals process is not a continuation of the examination. Therefore, the Appeals officer focuses only on the items in the RAR where the taxpayer and the RA disagree. New issues for the examined tax returns cannot be raised in Appeals. Nevertheless, Appeals can request additional documentation in support of stated positions as well as introduce alternative legal arguments to resolve disputes.
An Appeals officer considers the hazards of litigation in evaluating an appeal (Regs. Sec. 601.106(f)(2); IRM §184.108.40.206(1)). Hazards of litigation stem from uncertainties related to the facts and/or the application of the law (IRM §220.127.116.11.3). Factual hazards can result for any variety of reasons, including but not limited to the following:
- Facts and/or their substantiation are missing or incomplete;
- Facts from different sources conflict or are otherwise inconsistent;
- The taxpayer interprets the facts differently than the RA does; and
- The credibility of expert witnesses is suspect.
Legal hazards proceed from disagreements about what constitutes relevant legal authority and how to apply it appropriately to the facts. Examples of legal hazards include but are not limited to the following:
- Key terms are not explicitly defined in the law but rely on a facts-and-circumstances determination;
- Implicit cross-references in the law are overlooked;
- Measuring terms within the law are applied incorrectly;
- Conjunctive and disjunctive terms are interpreted incorrectly;
- Regulatory guidance from Treasury is outdated, scant, or altogether lacking;
- Rulings from Treasury are invalid because they have been superseded or obsoleted;
- One party relies on a court decision that is currently under appeal to a higher court; and
- Guidance from case law is mixed because appellate rulings are split on an issue.
The Appeals officer may also factor in other extenuating circumstances, such as the impact that an IRS loss in court would have on establishing unfavorable precedent for pending cases.
The Appeals officer estimates how these hazards influence the probability of each party's success if the dispute were to go to court. Based on those estimates, the Appeals officer has the authority to settle a tax dispute for less than the full amount of the proposed assessment (Regs. Sec. 601.106(f)(2); IRM §18.104.22.168.3).
REQUIREMENTS FOR A WRITTEN PROTEST
The taxpayer's protest of the RAR serves double duty: It formally requests a conference with Appeals for resolution of the tax dispute, and it presents legal arguments against each disputed adjustment in the RAR. According to IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don't Agree, a formal written protest must include the following elements:
- The taxpayer's name, address, and daytime telephone number;
- A statement explaining the taxpayer's desire to appeal the proposed assessment in the RAR to Appeals;
- A copy of the RAR showing the proposed changes;
- The tax periods or years involved;
- A list of the changes with which the taxpayer does not agree, the reasons the taxpayer does not agree, the facts supporting the taxpayer's positions on these issues, and the primary legal authority on which the taxpayer is relying; and
- A signature on the written protest, stating that the contents of the protest are true, under the penalties of perjury.
The legal arguments that make up No. 5 in the above list constitute the heart of the written protest. A persuasive protest will contain well-written, compelling legal arguments against the assessed taxes that are logically organized and easy to understand.
WHAT ARE COMPELLING LEGAL ARGUMENTS?
The taxpayer's primary goal in writing the protest of the RAR is to win on paper. In a perfect world, the taxpayer's written protest will persuade the Appeals officer that the taxpayer owes no additional tax. While no one can guarantee an ideal resolution for every protest, the following guidelines will aid in writing a compelling protest that achieves the best possible result. (See the sidebar, "Practice Notes," for a succinct summary of the key guidelines to follow in drafting a written protest.)
The protest should be written with the Appeals officer in mind. Strive to make that person's job easier. Present a comprehensive legal analysis that highlights the strengths of the taxpayer's arguments while also showing how its weaknesses are minimal relative to the weaknesses in the government's position. Such an analysis can help frame the Appeals officer's thinking regarding the hazards of litigating this tax dispute. It can also provide the Appeals officer with a template for drafting the Appeals Case Memorandum that documents the outcome of the Appeals process.
RARs often address multiple tax issues. It's common for taxpayers to agree on certain issues while disagreeing on others. When this happens, it is still ideal to take the full case to Appeals. There will be one final determination for the tax year as opposed to two, which simplifies carrying the resolved federal tax issues through to affected state tax returns. Further, the tax bill on the agreed-upon issues will be delayed until the conclusion of the Appeals process. Finally, taxpayers may be able to establish credibility and generate goodwill with the Appeals officer by opening the protest with a concession of agreed-upon issues.
Following the concession of those issues, the protest should focus on the contested issues by starting with the facts. If there is no material dispute over the facts, explicitly state that in the protest. For any facts that are in dispute, present the taxpayer's interpretation of those facts in contrast to the RA's interpretation. The protest should refer to and include copies of supporting documents so that it stands on its own. It is better to provide redundant documentation than to incorrectly assume that relevant documentation was included in the file transferred from Examinations to Appeals.
New facts should not be brought up in Appeals, as that is cause for the protest to be returned to Examinations (IRM §22.214.171.124(2)(i)). However, new substantiation in support of already documented facts is permitted to provide the Appeals officer with the necessary information to rule on the dispute. Finally, the protest should clearly identify any weaknesses and defects in the RA's understanding of the facts due to the factual hazards discussed earlier.
For each disputed issue, the protest should build a legal argument of the taxpayer's position that is reasonable and supported by law. Frivolous legal analyses for the sake of argument have no place in a written appeal. Legal arguments should be based on references to primary authority that speak to the issue at hand and carry the weight of law. Thoroughly apply the law to the relevant facts so the legal arguments can stand on their own. All reasonable legal arguments in the taxpayer's favor should be written into the protest, including alternative fallback positions supported by legal theories or arguments that may not have been presented during the audit.
After noting points of agreement with the RAR arguments, identify and address key points of disagreement with the RA's positions to ensure the Appeals officer can focus on the heart of the dispute. Make note of any consensus regarding which legal authority applies, but also note the taxpayer's disagreement on the interpretation and application of that authority. Finally, the protest should clearly identify any weaknesses and defects in the RA's arguments in the RAR that relate to the legal hazards discussed earlier.
WRITING TO WIN: LOGIC, ORGANIZATION, READABILITY
To be effective, the protest should present a logical, legal argument that results in a persuasive dispute of the RAR's findings. One well-accepted logical flow for a tax argument is to first cite relevant portions of the Internal Revenue Code, followed by citations to supporting authority from Treasury and the IRS, and concluding with analyses of case law that relates to the issue.
The protest should be organized in a way that promotes understanding. Headings that identify different sections of the protest may help the Appeals officer better follow the arguments being made. White spaces that separate the different sections of the appeal provide the officer with visual breaks from reading to facilitate the comprehension of the arguments presented. Bulleted lists can be effective in presenting facts that are relevant to each legal argument. Tables can be used to present the key elements of both the taxpayer's and the RA's arguments to effectively differentiate them. Finally, diagrams can be used to describe complex transactions to promote better understanding.
The protest should be written so that it is easy to read and understand. Plain language is more effective than using words that require the reader to refer to a dictionary. In addition, a concisely written protest contributes to understandability. Edit the written protest multiple times to make the writing more concise and eliminate opportunities for misinterpretation. Stick to the facts, and don't offer opinions.
Finally, do not include personal attacks on the RA or dwell on how the audit was conducted. Keep commentary professional and courteous, and focus on developing only points that will help win the case and not detract from it.
PROVIDING A ROAD MAP
The protest of an RAR should be written with the goal of winning on paper. A well-written protest will help the Appeals officer effectively evaluate the taxpayer's arguments against the audit findings and persuade the Appeals officer that the taxpayer's interpretation of the law is correct. Finally, a well-written protest will assist the Appeals officer in drafting the Appeals Case Memorandum with relative ease. In most instances, both the IRS and the taxpayer want to avoid a lengthy and costly court battle. A well-executed written protest can help this cause within the IRS Appeals process.
- Strive to win on paper. Write compelling legal arguments against the assessed items that are logically organized and easy to understand.
- Read the Revenue Agent Report (RAR) carefully to address the hazards of litigation in the revenue agent's proposed tax assessment.
- Incorporate all the required elements of a written protest in the tax appeal.
- Write with the Appeals officer in mind, to promote a thorough understanding of the dispute and provide a model for drafting the Appeals Case Memorandum.
- Focus on contested issues, identifying and addressing the key points of disagreement with the RAR and documenting arguments the Appeals officer could use to rule in your favor.
- Present a logical legal argument that connects all the dots and results in a persuasive dispute of the RAR's findings.
- Organize the appeal to promote understanding by using headings, white space, bulleted lists, tables, and diagrams.
- Write an appeal that is easy to read and understand by using plain English and an economy of words.
About the authors
Kate Mantzke, CPA, Ph.D., is the Donna R. Kieso Professor of Accountancy. Brad Cripe, CPA, Ph.D., is the assistant department chair, the Gaylen and Joanne Larson Professor of Accountancy, and director of Graduate Studies and Accreditation. Suzanne Youngberg, CPA, MST, is an instructor and the MST adviser in the Department of Accountancy. They are all faculty members in the Department of Accountancy at Northern Illinois University in DeKalb, Ill.
To comment on this article or to suggest an idea for another article, contact Sally P. Schreiber, a JofA senior editor, at Sally.Schreiber@aicpa-cima.com or 919-402-4828.
- "DC Currents: Taxpayer First Act Changes the Dynamic Between IRS and Practitioners," The Tax Adviser, Oct. 2019
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