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Presenting a Case to an IRS Appeals Officer

Conferences with appeals officers may be done by mail, by telephone, or as an in-person meeting at the appeals office. The following discussion presumes a face-to-face meeting.

Some appeals officers sit back and wait for you to present your case, while others run the show by asking questions. Unless the appeals officer directs otherwise, start with a short statement outlining your case.

Point out the specific items in the examination report and the auditor’s work papers that are erroneous.

  1. Did the auditor ignore documents or leave out the facts you presented?
  2. Did he or she misquote you in the work papers?

How to address an issue with an appeals officer:

SAMPLE:

“The auditor was incorrect in finding that I was not entitled to deduct on my tax return costs related to the part of my apartment that I use as a home office for my part-time sales business.

I can show, by my testimony and with documents, that my home office deduction is legitimate. The documents include:

  • The floor plan of my apartment, showing the space used exclusively for my home office
  • A photo of my home office
  • My business diary showing that I spent more than 50% of my working hours in the business at my home office, and
  • Bills and canceled checks for the expenses I incurred in running my home office.”
CAUTION

Don’t mention the auditor’s lack of intelligence or meanspiritedness. The appeals officer may take offense at IRS-bashing or be a friend of the auditor. Instead, characterize what you see as errors as “misunderstandings” or “oversights.”

After the appeals officer hears your side, he or she may call the auditor, but usually not in your presence. This doesn’t mean the officer will automatically take the auditor’s word over yours.

Theoretically, statements made by you to an appeals officer could be considered “admissions against interest,” meaning they could later be used by the government against you in a court case. But seldom does an IRS lawyer ask an appeals officer to testify as to what a taxpayer said at an appeals hearing.

So, in most appeals hearings, you should acknowledge the weaknesses, as well as emphasize the strengths, of your case.

Appeals officers appreciate the candor, but don’t overdo it!

Legal Issues

Most audits turn on factual issues, like verification of claimed deductions, not on whether you had a legal right to take them. But the auditor may have disallowed an item based on a legal issue.

One common tax law issue, for example, is whether your enterprise is a legitimate business or a nondeductible hobby.

Appeals officers know the gray areas of tax law more than “black and white legal issue” auditors do.

If you researched a legal issue or consulted a tax pro and came up with something favorable, show it to the officer. Ask for comment on it. If the officer isn’t swayed, ask why not.

Negotiating a Settlement

The odds are great that you will reach a settlement of your case with an appeals officer.

INTERNAL REVENUE MANUAL:

“A settlement may either resolve each issue on the basis of the probable result in litigation or involve mutual concessions of issues based upon the relative strength of the opposing positions where there is substantial uncertainty of the outcome in litigation.”

In plain English, the appeals officer wants to deal if there’s a possibility of the IRS losing in court. Be sure to write down exactly what you agree to, and compare it to the final settlement papers that the appeals officer prepares.

Ask That Penalties Be Removed

One way to start a settlement discussion is to ask the appeals officer to drop any penalties recommended by the auditor.

This is the easiest item for an appeals officer to give in on.

You’ll need an excuse, such as:

  1. You or your tax preparer made an honest mistake,
  2. You weren’t trying to cheat the government,
  3. You’ve never been audited before,
  4. You didn’t understand the tax form, or something similar.

Accept Some Adjustments

TIP:

Unless you believe that the auditor was completely wrong on every adjustment, let the appeals officer know that you will accept some changes, without specifying which ones just yet.

This breaks the ice and shows the officer you can be reasonable—unlike some of the irrational and irate taxpayers who come through his door. The appeals officer should warm to you. And it is good psychology, any way you slice it.

Speak the IRS Lingo

Don’t negotiate in terms of how many dollars the audit change would cost you. Use the words “adjustments” or “disallowances” instead, just like the audit report does. It amounts to the same thing. Talk in terms of percentages of disallowances.

EXAMPLE:

An auditor disallowed 80% of Monika’s entertainment expenses for her Internet consulting business. The reason was that Monika didn’t produce any writings showing the business purpose for each entertainment expense.

Monika acknowledged to the appeals officer that her records were incomplete, but emphasized that her records did show that she paid the various expenses and that she was in a legitimate business.

Monika offered to accept a 20% disallowance of the entertainment expenses. The appeals officer proposed to allow 50% of the deduction. They talked more and finally agreed on 35%—a far cry from the auditor’s disallowance of 80%.

Monika never spoke in terms of dollars, only percentages.

Notice that negotiating is an art, not a science. Both sides came out with less than what they wanted, but each side got something.

Bishop Toups

Bishop L. Toups is an estate planning, elder law, and tax attorney in Southwest Florida. He helps clients with their various estate planning needs and helps clients navigate the Medicaid system here in Florida. He also represents clients nationwide and worldwide in front of the IRS. Bishop is also a V.A. accredited attorney and helps Veterans obtain benefits from the Department of Veterans Affairs.