Publication 556: Examination of Returns, Appeal Rights, and Claims for Refund; Publication 556 Main Contents

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Table of Contents

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 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 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.

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

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 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.

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.

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.

If you owe interest to the IRS on an underpayment for the same period the IRS owes you interest on an overpayment, you will be charged interest on the amount of the underpayment (up to the amount of the overpayment) at the overpayment interest rate. As a result, the net rate is zero for that period.

The IRS may abate (reduce) the amount of interest you owe if the interest is due to an unreasonable error or delay by an IRS officer or employee performing a ministerial or managerial act (discussed later). Only the amount of interest on income, estate, gift, generation-skipping, and certain excise taxes can be reduced.

The amount of interest will not be reduced if you or anyone related to you contributed significantly to the error or delay. Also, the interest will be reduced only if the error or delay happened after the IRS contacted you in writing about the deficiency or payment on which the interest is based. An audit notification letter is such a contact.

The IRS cannot reduce the amount of interest due to a general administrative decision, such as a decision on how to organize the processing of tax returns.

Abatement of Interest for Individuals in Disaster Areas or Affected by Terrorist Attacks

If you live in an area declared a disaster area by the President after 1996 or you have been affected by a terrorist attack, the IRS may abate (reduce) interest on income tax for the length of any extension period granted for filing income tax returns and paying income tax.

If you were granted an extension, but were charged interest on income tax owed during the declared disaster period, the IRS may retroactively abate your interest. To the extent possible the IRS can do the following.

For more information on disaster area losses, see Disaster Area Losses in Publication 547, Casualties, Disasters, and Thefts. For more information on tax relief resulting from terrorist attacks, see Publication 3920.

In certain circumstances, the IRS will allow you to pay less than the full amount you owe. If you think you may qualify, you should submit your offer by filing Form 656, Offer in Compromise. The IRS may accept your offer for any of the following reasons.

If your offer is rejected, you have 30 days to ask the Appeals Office of the IRS to reconsider your offer.

The IRS offers fast track mediation services to help taxpayers resolve many issues including a dispute regarding an offer in compromise. For more information, see Publication 3605.

Generally, if you submit an offer in compromise, the IRS will delay certain collection activities. The IRS usually will not levy (take) your property to settle your tax bill during the following periods.

Also, if the IRS rejects your original offer and you submit a revised offer within 30 days of the rejection, the IRS generally will not levy your property while it considers your revised offer.

Because people sometimes disagree on tax matters, the Service has an appeals system. Most differences can be settled within this system without expensive and time-consuming court trials.

However, your reasons for disagreeing must come within the scope of the tax laws. For example, you cannot appeal your case based only on moral, religious, political, constitutional, conscientious, or similar grounds.

In most instances, you may be eligible to take your case to court if you do not reach an agreement at your appeals conference, or if you do not want to appeal your case to the IRS Office of Appeals. See Appeals to the Courts, later, for more information.

You can appeal an IRS tax decision to a local Appeals Office, which is separate and independent of your local IRS office, service or compliance center. The Appeals Office is the only level of appeal within the IRS. Conferences with Appeals Office personnel are held in an informal manner by correspondence, by telephone, or at a personal conference.

If you want an appeals conference, follow the instructions in the letter you received. Your request will be sent to the Appeals Office to arrange a conference at a convenient time and place. You or your representative should be prepared to discuss all disputed issues at the conference. Most differences are settled at this level.

In most instances, if agreement is not reached at your appeals conference, you can, at any time, take your case to court. See Appeals to the Courts, later.

When you request an Appeals conference, you may also need to file either a formal written protest or a small case request with the office named in the letter you received. Also see the special appeal request procedures in Publication 1660.

You can represent yourself at your appeals conference, or you can be represented by any federally authorized practitioner, including an attorney, a certified public accountant, an enrolled actuary, or an enrolled agent.

If your representative attends a conference without you, he or she can receive or inspect confidential information only if you have filed a power of attorney or a tax information authorization. You can use a Form 2848 or any other properly written power of attorney or authorization.

If you and the IRS still disagree after the appeals conference, you can take your case to the United States Tax Court, the United States Court of Federal Claims, or the United States District Court. These courts are independent of the IRS.

If you elect to bypass the IRS' appeals system, you also can take your case to one of the courts listed above. However, a case petitioned to the United States Tax Court will normally be considered for settlement by an Appeals Office before the Tax Court hears the case.

If you unreasonably fail to pursue the IRS' appeals system, or if your case is intended primarily to cause a delay, or your position is frivolous or groundless, the Tax Court may impose a penalty of up to $25,000. See Appeal Within the IRS, earlier.

You can take your case to the United States Tax Court if you disagree with the IRS over:

For information on Tax Court review of an IRS refusal to abate interest, see Failure to abate interest may be reviewable by Tax Court, earlier.

To take your case to the Tax Court, the IRS must first send you a notice of deficiency. Then, you can only appeal your case if you file a petition within 90 days from the date this notice is mailed to you (150 days if it is addressed to you outside the United States).

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

After the notice is withdrawn, you cannot file a petition with the Tax Court based on the notice. Also, the IRS can later issue a notice of deficiency in a greater or lesser amount than the amount in the withdrawn deficiency.

Generally, the Tax Court hears cases before any tax has been assessed and paid; however, you can pay the tax after the notice of deficiency has been issued and still petition the Tax Court for review. If you do not file your petition on time, the proposed tax will be assessed, a bill will be sent, and you will not be able to take your case to the Tax Court. Under the law, you must pay the tax within 10 days. After 10 days the tax is subject to immediate collection. This collection can proceed even if you think that the amount is excessive. Publication 594 explains IRS collection procedures.

If you filed your petition on time, the Court will schedule your case for trial at a location convenient to you. You can represent yourself before the Tax Court or you can be represented by anyone admitted to practice before that Court.

Generally, the District Court and the Court of Federal Claims hear tax cases only after you have paid the tax and filed a claim for a credit or refund. As explained later under Claims for Refund, you can file a claim with the IRS for a credit or refund if you think that the tax you paid is incorrect or excessive. If your claim is totally or partially disallowed by the IRS, you should receive a notice of claim disallowance. If the IRS does not act on your claim within 6 months from the date you filed it, you can then file suit for a refund. You must file suit for a credit or refund no later than 2 years after the IRS informs you that your claim has been rejected.

You can file suit for a credit or refund in your United States District Court or in the United States Court of Federal Claims. However, you cannot appeal to the United States Court of Federal Claims if your claim is for credit or refund of a penalty that relates to promoting an abusive tax shelter or to aiding and abetting the understatement of tax liability on someone else's return.

For information about procedures for filing suit in either court, contact the Clerk of your District Court or of the United States Court of Federal Claims.

Any court with proper jurisdiction, including the Tax Court, can order the IRS to refund any part of a tax deficiency that the IRS collects from you during a period when the IRS is not permitted to assess, or to levy or engage in any court proceeding to collect that tax deficiency. In addition, the court can order a refund of any part of a tax deficiency that is not at issue in your appeal to the court. The court can order these refunds before its decision on the case is final.

Once you have paid your tax, you usually have the right to file a claim for a credit or refund if you believe the tax is too much. You can claim a credit or refund by filing Form 1040X.

File your claim by mailing it to the Internal Revenue service center where you filed your original return. File a separate form for each year or period involved. Include an explanation of each item of income, deduction, or credit on which you are basing your claim.

Corporations should file Form 1120X, Amended U.S. Corporation Income Tax Return, or other form appropriate to the type of credit or refund claimed.

See Publication 3920 for information on filing claims for tax forgiveness for individuals affected by terrorist attacks.

Generally, you must file a claim for a credit or refund within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. If you do not file a claim within this period, you may no longer be entitled to a credit or a refund.

If the due date to file a return or a claim for a credit or refund is a Saturday, Sunday, or legal holiday, it is filed on time if it is filed on the next business day. Returns you filed before the due date are considered filed on the due date. This is true even when the due date is a Saturday, Sunday, or legal holiday.

The IRS may postpone for up to 1 year certain tax deadlines, including the time for filing claims for refund, for taxpayers who are affected by a terrorist attack occurring after September 10, 2001. For more information, see Publication 3920.

If you file your claim within 3 years after filing your return, the credit or refund cannot be more than the part of the tax paid within the 3 years (plus any extension of time for filing your return) before you filed the claim.

The limits on your claim for refund can be affected by the type of item that forms the basis of your claim.

For information on special rules on filing claims for an individual affected by a terrorist attack, see Publication 3920.

Periods of financial disability.

The period of limitations on credits and refunds (3 years from the time you file your return or 2 years from the time you paid your tax) can be suspended during periods when you, an individual taxpayer, cannot manage your financial affairs because of physical or mental impairment that is medically determinable and either:

Has lasted or can be expected to last continuously for at least 12 months, or
Can be expected to result in death.

The period for filing a claim for refund will not be suspended for any time that someone else, such as your spouse or guardian, was authorized to act for you in financial matters.

To claim that you were financially disabled, the following statements are to be submitted with the claim for credit or refund of tax:

A written statement signed by a physician, qualified to make the determination, that sets forth:
1. The name and a brief description of your physical or mental impairment,
2. The physician's medical opinion that your physical or mental impairment prevented you from managing your financial affairs,
3. The physician's medical opinion that your physical or mental impairment resulted in or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months, and
4. To the best of the physician's knowledge, the specific time period during which you were prevented by such physical or mental impairment from managing your financial affairs, and
A written statement by you or the person signing the claim for credit or refund that no person, including your spouse, was authorized to act on your behalf in financial matters during the period described in paragraph (1)(d) of this section. Alternatively, if a person was authorized to act on your behalf in financial matters during any part of the period described in paragraph (1)(d), the beginning and ending dates of the period of time the person was so authorized.

The period of limitations will not be suspended on any claim for refund that (without regard to this provision) was barred as of July 22, 1998.

Claims are usually processed shortly after they are filed. Your claim may be denied, accepted as filed, or it may be examined. If a claim is examined, the procedures are almost the same as in the examination of a tax return.

However, if you are filing a claim for credit or refund based only on contested income tax or on estate tax or gift tax issues considered in previously examined returns and you do not want to appeal within the IRS, you should request in writing that the claim be immediately rejected. A notice of claim disallowance will then be promptly sent to you. You have 2 years from the date of mailing of the notice of disallowance to file a refund suit in the United States District Court or in the United States Court of Federal Claims.

The IRS must explain to you the specific reasons why your claim for refund is disallowed or partially disallowed. Claims for refund are disallowed based on a preliminary review or on further examination. Some of the reasons your claim may be disallowed include the following.

If your claim is disallowed for these, or any other reason, the IRS must send you an explanation.

Your refund may be reduced by an additional tax liability. Also, your refund may be reduced by amounts you owe for past-due child support, debts you owe to another federal agency, or past-due legally enforceable state income tax obligations. You will be notified if this happens. For those reductions, you cannot use the appeal and refund procedures discussed in this publication, but you may be able to take action against the other agency.

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can:

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703–368–9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703–487–4608.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we evaluate the quality of our telephone services in several ways.

Walk-in. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

CD-ROM. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1–877–233–6767 or on the Internet at www.irs.gov. The first release is available in mid-December and the final release is available in late January.

IRS Publication 3207, Small Business Resource Guide, is an interactive CD-ROM that contains information important to small businesses. It is available in mid-February. You can get a free copy by calling 1–800–829–3676 or visiting the IRS web site at www.irs.gov.

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Publication 556
Main Contents