The word “appeal” means different things in different contexts. Usually in the legal arena, an appeal is when the losing party to a lawsuit takes their case to a higher court. Each state has its own Court of Appeals, and the federal courts have their appeals court in different circuits, such as the Ninth Circuit Court of Appeals, which covers the federal District Courts in the western states. The ultimate court of appeal at the state level is the State Supreme Court. Each state has one. The ultimate court of appeal in the federal system is the United States Supreme Court.
In the tax area, “appeal” or “appeals”refers to something different than appeal of a lawsuit. It refers to an administrative process. It is the appeal of an IRS administrative decision. Typically the decision being appealed is a proposed tax assessment. Assessment is the internal IRS bookkeeping entry that evinces your legal obligation to pay taxes. If the IRS proposes to assess a tax against you, say after an audit, you may want consider availing yourself to the appeals process within the IRS.
If you lose your IRS appeal and the IRS assesses the tax against you, you may contest the assessment in court. If you lose that decision, you may wish to appeal the court decision to the United States Court of Appeals. The appeal to the United States Court of Appeals generally is not what people mean when they refer to IRS appeals.
The IRS appeals is an informal administrative procedure. The IRS has a separate division for appeals. The IRS officer working in appeals is in a peculiar position. He or she is both an advocate for the IRS position and the judge deciding the case.
You might ask how fair can such a system be where the prosecutor and judge are the same person. Sometimes it’s not fair. But it’s an expedited system that sometimes does work. Remember, the IRS doesn’t like litigating tax cases either, and the appeals process is how it attempts to weed out its own mistakes before they end up in court. If your argument is a good one, you will get the attention of the IRS appeals officer.
One thing to bear in mind is that the appeals process is not required by law. It is a process the IRS has instigated to help catch its own mistakes. You have no right to an IRS appeal. You have a right to contest the tax liability in court, but the IRS appeals process is a gratuity.
To win you case in IRS appeals, you need to have both the law and the facts on your side. Although the process is informal, the manner of deciding the case is not much different from what a judge does. The rules of evidence don’t apply (hearsay is admissible) and there are no rules of civil procedure. A letter usually suffices to present your case. But the tax code, IRS regulations, and case law are the deciding authorities. Smooth talking alone do not win cases in appeals.
If your appeal involves an amount between $2,500 and $25,000, use IRS Form 12203 to start the appeal. Otherwise you must write a letter. The process is simple and it costs nothing. Plus, usually there is no collection activity during the pendency of the appeal. The downside is the Appeals Officer is free to open new issues that were missed during the audit, although this is rare. Also, the appeal process can take months and meanwhile interest continues to run.
Before or during the appeals process, you might want to consider using the Freedom of Information Act to obtain a copy of the auditor’ file, which might contain additional information explaining the IRS’ position.