Unit - 4 Examination of Returns & Appeals Process

Examination of Returns & Appeals Process

4.1 Examination of Returns

1. Selection Methods DIF Scoring: Computer program selects returns with high error likelihood.
2. Third-Party Matching: Compares data (e.g., W-2, 1099) with taxpayer reports.
3. Market Segment Studies: Examines groups of taxpayers for compliance trends.

Taxpayer Rights

• Reasonable Notice: IRS must notify before contacting third parties (exceptions: criminal cases, jeopardy to collection).
• Representation: Allowed by authorized practitioners (CPAs, attorneys, enrolled agents).
• Examination Location: Can request a convenient time/place for in-person audits.

Statute of Limitations

• General: 3 years from filing date (or 2 years from payment, whichever later).
• Extended: 6 years for >25% income misstatement.
• No Limit: Fraudulent returns or unfiled returns.

Procedures & Outcomes

• Revenue Agent’s Report (RAR): Details audit findings; equivalent to a 30-day letter.
• Agreement: Sign to accept changes; pay interest from due date or receive a bill.
• Abatement: IRS may reduce interest for unreasonable delays/errors (use Form 843).

Notices

• CP 12: Math error correction notice (refund in 6–8 weeks).
• CP 2000: Proposed changes due to mismatched third-party data.
• CP 90: Final Notice of Intent to Levy (right to a hearing).

4.2 Appeals Within the IRS

1. Process Triggers

• 30-Day Letter: Proposes changes; taxpayer has 30 days to appeal.
• 90-Day Letter (Notice of Deficiency): Taxpayer must petition Tax Court within 90 days (150 days if overseas).

Appeals Requirements

• Small Cases (≤$25K): Simplified protest.
• Formal Protest (>$25K): Requires detailed written submission (facts, law, perjury declaration).
• Partnership/S Corp Cases: Always require formal protest.

Audit Reconsideration

• Accepted: New information, computational errors, unfiled returns.
• Rejected: Prior signed agreements, court-finalized liabilities.

Key Deadlines

• Refund Claims: 3 years from filing or 2 years from payment.
• Collection Statute: 10 years from assessment.

4.3 Appeals to the Courts

1. Court Options

• U.S. Tax Court: Pre-payment jurisdiction (requires Notice of Deficiency).
  • Small Tax Case Division: ≤$50K; no further appeals.
• District Court/Court of Federal Claims: Post-payment jurisdiction; jury trials available in District Court.

Burden of Proof

• Shifts to IRS if taxpayer:
  • Complies with substantiation/records.
  • Cooperates with IRS requests.
  • Net worth ≤$7M (for entities).

IRS Acquiescence

• Acquiescence: IRS accepts court decision for similar cases.
• Nonacquiescence: IRS rejects decision but follows it in applicable circuits.

4.4 Penalties

1. Types

• Negligence: 20% penalty (careless/reckless disregard).
• Fraud: 75% penalty.
• Frivolous Return: $5,000 penalty.

Abatement & Relief

• Reasonable Cause: Request abatement for IRS errors (write "Request under Sec. 6404(e)" on Form 843).
• Passport Revocation: For debts >$62K (including liens/levies).

Key Forms

• Form 843: Claim refund/abatement.
• Form 1040X/1120X: Amended returns for refunds.

Key Numbers & Dates

• DIF: Discriminant Function System for audit selection.
• $25K: Threshold for small case appeals.
• $50K: Small Tax Court division  = speedy judgment.
• $62K: Passport revocation threshold.
• 3 Years: General assessment/refund statute.
• 10 Years: Collection statute after assessment.
• 30/90 Days: Response windows for IRS letters.