The IRS Mission

Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Important Change

Fast track mediation.   The IRS now offers fast track mediation services to help taxpayers resolve many disputes resulting from:

• Examinations (audits),
• Offers in compromise,
• Trust fund recovery penalties, and
• Other collection actions.

See Fast track mediation under If You Do Not Agree.

Introduction

The Internal Revenue Service (IRS) accepts most federal tax returns as filed. However, the IRS examines (or audits) some returns to determine if income, expenses, and credits are being reported accurately.

If your return is selected for examination, it does not suggest that you made an error or are dishonest. Returns are chosen by computerized screening, by random sample, or by an income document matching program. See Examination selection criteria, later. You should also know that many examinations result in a refund or acceptance of the tax return without change.

This publication discusses general rules and procedures that the IRS follows in examinations. It explains what happens during an examination and your appeal rights, both within the IRS and in the federal court system. It also explains how to file a claim for refund of tax you already paid.

As a taxpayer, you have the right to be treated fairly, professionally, promptly, and courteously by IRS employees. Publication 1, Your Rights as a Taxpayer, explains your rights when dealing with the IRS.

Taxpayer Advocate Service.    The Taxpayer Advocate Service is an independent program for people who have been unable to resolve their problems with the IRS.

Before contacting the Taxpayer Advocate, you should first discuss any problem with the employee's supervisor to expedite the resolution of your problem. Your local Taxpayer Advocate will assist you if you are unable to resolve the problem with the supervisor.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS. See How To Get Tax Help, near the end of this publication for more information about contacting the Taxpayer Advocate Service.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at
www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Technical Publications Branch
W:CAR:MP:FP:P
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Comments on IRS enforcement actions.   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards have been established to receive comments from small business about federal agency enforcement actions. The Ombudsman will annually evaluate the enforcement activities of each agency and rate their responsiveness to small business. If you wish to comment on the enforcement actions of the IRS, you can:

• Call 1-888-734-3247,
• Send an e-mail to [email protected], or
• Download the appraisal form at www.sba.gov/regfair.

Useful Items You may want to see:

Publication

• 1   Your Rights as a Taxpayer
• 5   Your Appeal Rights and How To Prepare a Protest If You Don't Agree
• 594   The IRS Collection Process
• 910   Guide to Free Tax Services
• 971   Innocent Spouse Relief (And Separation of Liability and Equitable Relief)
• 1546   The Taxpayer Advocate Service of the IRS
• 1660   Collection Appeal Rights
• 3605   Fast Track Mediation
• 3920   Tax Relief for Victims of Terrorist Attacks

Form (and Instructions)

• 843   Claim for Refund and Request for Abatement
• 1040X   Amended U.S. Individual Income Tax Return
• 2848   Power of Attorney and Declaration of Representative
• 4506   Request for Copy or Transcript of Tax Form
• 8379   Injured Spouse Claim and Allocation
• 8857   Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief)

See How To Get Tax Help, near the end of this publication, for information about getting these publications and forms.

Examination of Returns

Your return may be examined for a variety of reasons, and the examination may take place in any one of several ways. After the examination, if any changes to your tax are proposed, you can either agree with those changes and pay any additional tax, or you can disagree with the changes and appeal the decision.

Examination selection criteria.   Your tax return can be selected for examination on the basis of computer scoring. A computer program called the Discriminant Function System (DiF) assigns a numeric score to each individual and some corporate tax returns after they have been processed. If your tax return is selected from DiF, it has received a high score. This means that there is a high potential for an examination of your return to result in change to your income tax liability.

Your return can also be selected for examination on the basis of information received from third-party documentation, such as Forms 1099 and W-2, that does not match the information reported on the tax return. Or, your return can be selected to address both the questionable treatment of an item and to study the behavior of similar taxpayers (a market segment) in handling a tax issue.

In addition, your return can be selected as a result of information received from other sources on potential noncompliance with the tax laws or inaccurate filing. This information can come from a number of sources, including the media, public records, or possibly informants. The information is evaluated for reliability and accuracy before it is used as the basis of an examination or investigation.

Notice of IRS contact of third parties.   The IRS must give you reasonable notice before contacting other persons, that in examining or collecting your tax liability the IRS may contact third parties such as your neighbors, banks, employers, or employees. The IRS must also give you notice of specific contacts by providing you with a record of persons contacted on both a periodic basis and upon your request.

This provision does not apply:

• To any pending criminal investigation,
• When providing notice would jeopardize collection of any tax liability,
• Where providing notice may result in reprisal against any person, or
• When you authorized the contact.

If Your Return Is Examined

Some examinations are handled entirely by mail. Examinations not handled by mail can take place in your home, your place of business, an Internal Revenue office, or the office of your attorney, accountant, or enrolled agent. If the time, place, or method is not convenient for you, the examiner will try to work out something more suitable. However, the IRS makes the final determination of when, where, and how the examination will take place.

Throughout the examination, you can act on your own behalf or have someone represent you or accompany you. If you filed a joint return, either you or your spouse, or both, can meet with the IRS. You can have someone represent or accompany you. This person can be any federally authorized practitioner, including an attorney, a certified public accountant, an enrolled agent (a person enrolled to practice before the IRS), an enrolled actuary, or the person who prepared the return and signed it as the preparer.

If you want someone to represent you in your absence, you must furnish that representative with written authorization. Make the authorization on Form 2848 or any other properly written authorization. If you want to consult an attorney, a certified public accountant, an enrolled agent, or any other person permitted to represent a taxpayer during an interview for examining a tax return or collecting tax, IRS will suspend the interview and reschedule it. IRS cannot suspend the interview if you are there because of an administrative summons.

Paid preparer authorization.   If you checked the box in the signature area of your Form 1040 to authorize the IRS to discuss your tax return with your paid preparer, this authorization does not replace Form 2848. The box you checked on Form 1040 only authorizes the preparer to receive information about the processing of your return and the status of your refund during the period your return is being processed. For more information, see the instructions for Form 1040.

Confidentiality privilege.   Generally, the same confidentiality protection that you have with an attorney also applies to certain communications that you have with federally authorized practitioners.

This confidentiality protection cannot be used by you in any administrative or court proceeding with an agency other than the IRS.

Confidential communications are those that:

• Advise you on tax matters within the scope of the practitioner's authority to practice before the IRS,
• Would be confidential between an attorney and you, and
• Relate to noncriminal tax matters before the IRS, or
• Relate to noncriminal tax proceedings brought in federal court by or against the United States.

The confidentiality privilege does not apply to any written communication that:

• Takes place between a federally authorized practitioner and a corporate director, shareholder, officer, employee, agent, or representative, and
• Promotes the corporation's participation in a tax shelter.

A tax shelter is any entity, plan, arrangement, or transaction, a significant purpose of which is the avoidance or evasion of income tax.

Tape recordings.   You can make an audio recording of the examination interview. Your request to record the interview should be made in writing. You must notify the examiner 10 days in advance and bring your own recording equipment. The IRS also can record an examination. If the IRS initiates the recording, you must be notified 10 days in advance and you can get a copy of the recording at your expense.

Transfers to another district.   Generally, your return is examined in the IRS district where you live. But if your return can be examined more quickly and conveniently in another district, such as where your books and records are located, you can ask to have the case transferred to that district.

Repeat examinations.   The IRS tries to avoid repeat examinations of the same items, but sometimes this happens. If your tax return was examined for the same items in either of the 2 previous years and no change was proposed to your tax liability, please contact the IRS as soon as possible to see if the examination should be discontinued.

The Examination

An examination usually begins when you are notified that your return has been selected. The IRS will tell you which records you will need. If you gather your records before the examination, it can be completed with the least effort.

Any proposed changes to your return will be explained to you or your authorized representative. It is important that you understand the reasons for any proposed changes. You should not hesitate to ask about anything that is unclear to you.

The IRS must follow the tax laws set forth by Congress in the Internal Revenue Code. The IRS also follows Treasury Regulations, other rules, and procedures that were written to administer the tax laws. The IRS also follows court decisions. However, the IRS can lose cases that involve taxpayers with the same issue and still apply its interpretation of the law to your situation.

Most taxpayers agree to changes proposed by examiners, and the examinations are closed at this level. If you do not agree, you can appeal any proposed change by following the procedures provided to you by the IRS. A more complete discussion of appeal rights is found later.

If You Agree

If you agree with the proposed changes, you can sign an agreement form and pay any additional tax you may owe. You must pay interest on any additional tax. If you pay when you sign the agreement, the interest is generally figured from the due date of your return to the date of your payment.

If you do not pay the additional tax when you sign the agreement, you will receive a bill that includes interest. If you pay the amount due within 10 business days of the billing date, you will not have to pay more interest or penalties. This period is extended to 21 calendar days if the amount due is less than $100,000.

If you are due a refund, you will receive it sooner if you sign the agreement form. You will be paid interest on the refund.

If the IRS accepts your tax return as filed, you will receive a letter in a few weeks stating that the examiner proposed no changes to your return. You should keep this letter with your tax records.

If You Do Not Agree

If you do not agree with the proposed changes, the examiner will explain your appeal rights. If your examination takes place in an IRS office, you can request an immediate meeting with the examiner's supervisor to explain your position. If an agreement is reached, your case will be closed.

If you cannot reach an agreement with the supervisor at this meeting, or if the examination took place outside of an IRS office, the examiner will write up your case explaining your position and the IRS' position. The examiner will forward your case to the district office for processing.

Fast track mediation.   The IRS now offers fast track mediation services to help taxpayers resolve many disputes resulting from:

• Examinations (audits),
• Offers in compromise,
• Trust fund recovery penalties, and
• Other collection actions.

Most cases that are not docketed in any court qualify for fast track mediation. Mediation can take place as early as a conference you request with the examiner's supervisor. The process involves an Appeals Officer who has been trained in mediation. You may represent yourself at the mediation session, or someone else can act as your representative. For more information, see Publication 3605.

Within a few weeks after your closing conference with the examiner and/or supervisor, you will receive a package with:

• A letter (known as a 30-day letter) notifying you of your right to appeal the proposed changes within 30 days,
• A copy of the examination report explaining the examiner's proposed changes,
• An agreement or waiver form, and
• A copy of Publication 5.

You generally have 30 days from the date of the 30-day letter to tell the IRS whether you will accept or appeal the proposed changes. The letter will explain what steps you should take, depending on which action you choose. Be sure to follow the instructions carefully. Appeal Rights are explained later.

If you do not respond to the 30-day letter, or if you later do not reach an agreement with an Appeals officer, the IRS will send you a 90-day letter, which is also known as a notice of deficiency.

You will have 90 days (150 days if it is addressed to you outside the United States) from the date of this notice to file a petition with the Tax Court. Filing a petition with the Tax Court is discussed later under Appeals to the Courts and Tax Court.

The notice will show the 90th (and 150th) day by which you must file your petition with the Tax Court.

Suspension of interest and penalties.   Generally, the IRS has 3 years from the date you filed your return (or the date the return was due, if later) to assess any additional tax. However, interest and certain penalties will be suspended if the IRS does not mail a notice to you, stating your liability and the basis for that liability, within an 18-month period beginning on the later of:

• The date on which you timely filed your tax return, or
• The due date (without extensions) of your tax return.

If the IRS mails a notice stating your liability and the basis for that liability after the 18-month period, interest and certain penalties applicable to the suspension period will be suspended.

Note.   The suspension only applies to timely filers of individual income tax returns for tax years ending after July 22, 1998. Also, for tax years beginning after 2003, the suspension period will apply if the IRS does not mail the notice stating your liability and the basis for that liability within a 1-year period (rather than 18 months).

The suspension period begins the day after the close of the 18-month period and ends 21 days after the IRS mails a notice to you stating your liability and the basis for that liability. Also, the suspension period applies separately to each notice stating your liability and the basis for that liability received by you.

The suspension does not apply to a:

• Failure-to-pay penalty,
• Penalty, interest, addition to tax, or additional amount with respect to any tax liability shown on your return,
• Fraudulent tax return, or
• Criminal penalty.

If you later agree.   If you agree with the examiner's changes after receiving the examination report or the 30-day letter, sign and return either the examination report or the waiver. Keep a copy for your records. You can pay any additional amount you owe without waiting for a bill. Include interest on the additional tax at the applicable rate. This interest rate is usually for the period from the due date of the return to the date of payment. The examiner can tell you the interest rate(s) or help you figure the amount.

You must pay interest on penalties and on additional tax for failing to file returns, for overstating valuations, for understating valuations on estate and gift tax returns, and for substantially understating tax liability. Interest is generally figured from the date (including extensions) the tax return is required to be filed to the date you pay the penalty and/or additional tax.

If you pay the amount due within 10 business days after the date of notice and demand for immediate payment, you will not have to pay any additional penalties and interest. This period is extended to 21 calendar days if the amount due is less than $100,000.

How To Stop Interest From Accruing

If you think that you will owe additional tax at the end of the examination, you can stop the further accrual of interest on the amount you think you will owe. You can do this by sending money to the IRS to cover all or part of the amount you think you will owe. Interest will stop accruing on any part of the amount you cover when the IRS receives your money.

You can send an amount either in the form of a deposit (cash bond) or as a payment of tax. Both a deposit and a payment stop any further accrual of interest. However, making a deposit or payment of tax will stop the accrual of interest on only the amount you sent. Because of compounding rules, interest will accrue on accrued interest, even if you have paid the underlying tax.

To stop the accrual of interest on both tax and interest, you must make a deposit or payment for both the tax and interest that has accrued as of the date of deposit or payment.

Payment or Deposit

Deposits differ from payments in two ways:

1. You can have all or part of your deposit returned to you without filing for a refund. However, if you request and receive your deposit and the IRS later assesses a deficiency for that period and type of tax, interest will be figured as if the funds were never on deposit. Also, your deposit will not be returned if one of the following situations applies:
   1. The IRS assesses a tax liability.
   2. The IRS determines, that by returning the deposit, it may not be able to collect a future deficiency.
   3. The IRS determines that the deposit should be applied against another tax liability.
2. Deposits do not earn interest. No interest will be included when a deposit is returned to you.

Notice not mailed.   If you send money before the IRS mails you a notice of deficiency, you can ask the IRS to treat it as a deposit. You must make your request in writing.

If, after being notified of a proposed liability but before the IRS mails you a notice of deficiency, you send an amount large enough to cover the proposed liability, it will be considered a payment unless you request in writing that it be treated as a deposit.

If the amount you send is at least as much as the proposed liability and you do not request that it be treated as a deposit, the IRS will not send you a notice of deficiency. If you do not receive a notice of deficiency, you cannot take your case to the Tax Court. See Tax Court, later.

Notice mailed.   If, after the IRS mails the notice of deficiency, you send money without written instructions, it will be treated as a payment. You will still be able to petition the Tax Court.

If you send money after receiving a notice of deficiency and you have specified in writing that it is a deposit in the nature of a cash bond, the IRS will treat it as a deposit if you send it before either:

• The close of the 90-day or 150-day period for filing a petition with the Tax Court to appeal the deficiency, or
• The date the Tax Court decision is final, if you have filed a petition.

Using a Deposit To Pay the Tax

If you agree with the examiner's proposed changes after the examination, your deposit will be applied against any amount you may owe. The IRS will not mail you a notice of deficiency and you will not have the right to take your case to the Tax Court.

If you do not agree to the full amount of the deficiency after the examination, the IRS will mail you a notice of deficiency. Your deposit will be applied against the proposed deficiency unless you write to the IRS before the end of the 90-day or 150-day period stating that you still want the money to be treated as a deposit. You will still have the right to take your case to the Tax Court. See If You Do Not Agree, discussed earlier.

Installment Agreement Request

You can request a monthly installment plan if you cannot pay the full amount you owe. To be valid, your request must be approved by the IRS. However, if you owe $10,000 or less in tax and you meet certain other criteria, the IRS must accept your request.

Before you request an installment agreement, you should consider other less costly alternatives, such as a bank loan. You will be charged interest on the amount you owe and you may be charged a late payment penalty on any installment not paid by its due date. There is also a $43 fee if your installment agreement is approved.

For more information about installment agreements, see Form 9465, Installment Agreement Request.

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