Publication 556 - Examination of Returns, Appeal Rights, and Claims for Refund

Publication 556

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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.

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Appeal Within the IRS

You can appeal an IRS tax decision to a local Appeals Office, which is separate from and independent of the IRS office taking the action you disagree with. 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.

If agreement is not reached at your appeals conference, you may be eligible to take your case to court. See Appeals to the Courts, later.

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Protests and Small Case Requests

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. In addition, for the appeal procedures for a spouse or former spouse of a taxpayer seeking relief from joint and several liability on a joint return, see Rev. Proc. 2003-19, which is on page 371 of the Internal Revenue Bulletin 2003-5 at www.irs.gov/pub/irs-irbs/irb03-05.pdf.

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You need to file a written protest in the following cases.

All employee plan and exempt organization cases without regard to the dollar amount at issue.
All partnership and S corporation cases without regard to the dollar amount at issue.
All other cases, unless you qualify for the small case request procedure, or other special appeal procedures such as requesting Appeals consideration of liens, levies, seizures, or installment agreements.

If you must submit a written protest, see the instructions in Publication 5 about the information you need to provide. The IRS urges you to provide as much information as you can, as it will help speed up your appeal. That will save you both time and money.

Be sure to send the protest within the time limit specified in the letter you received.

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If the total amount for any tax period is not more than $25,000, you may make a small case request instead of filing a formal written protest. In figuring the total amount, include a proposed increase or decrease in tax (including penalties), or claimed refund. If you are making an offer in compromise, include total unpaid tax, penalty, and interest due. For a small case request, follow the instructions in our letter to you by sending a letter:

Requesting Appeals consideration,
Indicating the changes you do not agree with, and
Indicating the reasons why you do not agree.

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Representation

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.

You can also bring witnesses to support your position.

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Generally, the same confidentiality protection that you have with an attorney also applies to certain communications that you have with federally authorized practitioners. See Confidentiality privilege under If Your Return Is Examined, earlier.

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Appeal to the Courts

If you and the IRS still disagree after the appeals conference, you may be entitled to 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 may be able to 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.

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The Government cannot ask you to waive your right to sue the United States or a Government officer or employee for any action taken in connection with the tax laws. However, your right to sue can be waived if:

You knowingly and voluntarily waive that right,
The request to waive that right is made in writing to your attorney or other federally authorized practitioner, or
The request is made in person and your attorney or other representative is present.

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For court proceedings resulting from examinations started after July 22, 1998, the IRS generally has the burden of proof for any factual issue if you have met the following requirements.

You introduced credible evidence relating to the issue.
You complied with all substantiation requirements of the Internal Revenue Code.
You maintained all records required by the Internal Revenue Code.
You cooperated with all reasonable requests by the IRS for information regarding the preparation and related tax treatment of any item reported on your tax return.
You had a net worth of $7 million or less and not more than 500 employees at the time your tax liability is contested in any court proceeding if your tax return is for a corporation, partnership, or trust.

The burden of proof does not change on an issue when another provision of the tax laws requires a specific burden of proof with respect to that issue.

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In the case of an individual, the IRS has the burden of proof in court proceedings based on any IRS reconstruction of income solely through the use of statistical information on unrelated taxpayers.

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The IRS has the burden of initially producing evidence in court proceedings with respect to the liability of any individual taxpayer for any penalty, addition to tax, or additional amount imposed by the tax laws.

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These are the expenses that you pay to defend your position to the IRS or the courts. You may be able to recover reasonable litigation or administrative costs if all of the following conditions apply.

You are the prevailing party.
You exhaust all administrative remedies within the IRS.
Your net worth is below a certain limit (see Net worth requirements, later).
You do not unreasonably delay the proceeding.
You apply for administrative costs within 90 days of the date on which the final decision of the IRS Office of Appeals as to the determination of the tax, interest, or penalty was mailed to you.
You apply for litigation costs within the time frames provided by Tax Court Rule 231.

Prevailing party, reasonable litigation costs, and reasonable administrative costs are explained later.

Note.If the IRS denies your award of administrative costs, and you want to appeal, you must petition the Tax Court within 90 days of the date on which the IRS mails the denial notice.

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Generally, you are the prevailing party if:

You substantially prevail with respect to the amount in controversy or on the most significant tax issue or set of issues in question, and
You meet the net worth requirements, discussed later.

You will not be treated as the prevailing party if the United States establishes that its position was substantially justified. The position of the United States is presumed not to be substantially justified if the IRS:

Did not follow its applicable published guidance (such as regulations, revenue rulings, notices, announcements, private letter rulings, technical advice memoranda, and determination letters issued to the taxpayer) in the proceeding (This presumption can be overcome by evidence.), or
Has lost in courts of appeal for other circuits on substantially similar issues.

The court will generally decide who is the prevailing party.

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These include the following costs.

Reasonable court costs.
The reasonable costs of studies, analyses, engineering reports, tests, or projects found by the court to be necessary for the preparation of your case.
The reasonable costs of expert witnesses.
Attorney fees that generally may not exceed $170 per hour for calendar year 2007. The hourly rate is indexed for inflation. See Attorney fees, later.

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These include the following costs.

Any administrative fees or similar charges imposed by the IRS.
The reasonable costs of studies, analyses, engineering reports, tests, or projects.
The reasonable costs of expert witnesses.
Attorney fees that generally may not exceed $170 per hour for calendar year 2007. See Attorney fees, later.

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Administrative costs can be awarded for costs incurred after the earliest of:

The date the first letter of proposed deficiency is sent that allows you an opportunity to request administrative review in the IRS Office of Appeals,
The date you receive notice of the IRS Office of Appeals' decision, or
The date of the notice of deficiency.

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An individual taxpayer may be able to recover litigation or administrative costs if the following requirements are met.

For individuals — your net worth does not exceed $2 million as of the filing date of your petition for review. For this purpose, individuals filing a joint return are treated as separate individuals.
For estates — your net worth does not exceed $2 million as of the date of the decedent's death.
For charities and certain cooperatives — you do not have more than 500 employees as of the filing date of your petition for review.
For all other taxpayers — as of the filing date of your petition for review, your net worth does not exceed $7 million, and you must not have more than 500 employees.

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You can also receive reasonable costs and fees and be treated as a prevailing party in a civil action or proceeding if:

You make a qualified offer to the IRS to settle your case,
The IRS does not accept that offer, and
The tax liability (not including interest, unless interest is at issue) later determined by the court is equal to or less than the amount of your qualified offer.

You must also meet the remaining requirements, including the exhaustion of administrative remedies and the net worth requirement, discussed earlier, to get the benefit of the qualified offer rule.

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This is a written offer made by you during the qualified offer period. It must specify both the offered amount of your liability (not including interest) and that it is a qualified offer.

To be a qualified offer, it must remain open from the date it is made until the earliest of:

The date it is rejected,
The date the trial begins, or
90 days from the date it is made.

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This period begins on the day the IRS mails you the first letter of proposed deficiency that allows you to request review by the IRS Office of Appeals. It ends 30 days before your case is first set for trial.

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For the calendar year 2007, the basic rate for attorney fees is $170 per hour and can be higher in certain limited circumstances. Those circumstances include the level of difficulty of the issues in the case and the local availability of tax expertise. The basic rate will be subject to a cost-of-living adjustment each year.

Attorney fees include the fees paid by a taxpayer for the services of anyone who is authorized to practice before the Tax Court or before the IRS. In addition, attorney fees can be awarded in civil actions for unauthorized inspection or disclosure of a taxpayer's return or return information.

Fees can be awarded in excess of the actual amount charged if:

You are represented for no fee, or for a nominal fee, as a pro bono service, and
The award is paid to your representative or to your representative's employer.

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The Tax Court can review IRS employment status determinations (for example, whether individuals hired by you are in fact your employees or independent contractors) and the amount of employment tax under such determinations. Tax Court review can take place only if, in connection with an audit of any person, there is an actual controversy involving a determination by the IRS as part of an examination that either:

One or more individuals performing services for that person are employees of that person, or
That person is not entitled to relief under Section 530(a) of the Revenue Act of 1978 (discussed later).

The following rules also apply to a Tax Court review of employment status.

A Tax Court petition to review these determinations can be filed only by the person for whom the services are performed,
If you receive a Notice of Determination by certified or registered mail, you must file a petition for Tax Court review within 90 days of the date of mailing that notice (150 days if the notice is addressed to you outside the United States),
If during the Tax Court proceeding, you begin to treat as an employee an individual whose employment status is at issue, the Tax Court will not consider that change in its decision,
Assessment and collection of tax is suspended while the Tax Court review is taking place,
There can be a de novo review by the Tax Court (a review which does not consider IRS administrative findings), and
At your request and with the Tax Court's agreement, small tax case procedures (discussed later) are available to simplify the case resolution process when the amount at issue (including additions to tax and penalties) is $50,000 or less for each tax period involved.

For further information, see Publication 3953, Questions and Answers About Tax Court Proceedings for Determination of Employment Status Under IRC Section 7436.

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This section relieves an employer of certain employment tax responsibilities for individuals not treated as employees. It also provides relief to taxpayers under audit or involved in administrative or judicial proceedings.

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As discussed later, at Relief from joint and several liability on a joint return under Claims for Refund, you can request relief from liability for tax you owe, plus related penalties and interest, that you believe should be paid by your spouse (or former spouse). You also can petition (ask) the Tax Court to review your request for innocent spouse relief or separation of liability if either:

The IRS sends you a determination notice denying, in whole or in part, your request, or
You do not receive a determination notice from the IRS within 6 months from the date you file Form 8857.

If you receive a determination notice, you must petition the Tax Court to review your request during the 90-day period that begins on the date the IRS mails the notice. See Publication 971 for more information.

Note.Your spouse or former spouse may file a written protest and request an Appeals conference to protest your claim of innocent spouse relief or separation of liability.

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Tax Court

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

Income tax,
Estate tax,
Gift tax, or
Certain excise taxes of private foundations, public charities, qualified pension and other retirement plans, or real estate investment trusts.

For information on Tax Court review of a determination of employment status, see Jurisdiction for determination of employment status, earlier.

For information on Tax Court review of an IRS refusal to abate interest, see Tax Court can review failure to abate interest, earlier under Examination of Returns.

For information on Tax Court review of Appeals determinations with respect to lien notices and proposed levies, see Publication 1660.

You cannot take your case to the Tax Court before the IRS sends you a notice of deficiency. You can only appeal your case if you file a petition within 90 days from the date the 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.

Note.If you consent, the IRS can withdraw a notice of deficiency. Once withdrawn, the limits on credits, refunds, and assessments concerning the notice are void, and you and the IRS have the rights and obligations that you had before the notice was issued. The suspension of any time limitation while the notice of deficiency was issued will not change when the notice is withdrawn.

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 21 days (10 business days if the amount is $100,000 or more). 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.

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If the amount in your case is $50,000 or less for any 1 tax year or period, you can request that your case be handled under the small tax case procedure. If the Tax Court approves, you can present your case to the Tax Court for a decision that is final and that you cannot appeal. You can get more information regarding the small tax case procedure and other Tax Court matters from the United States Tax Court, 400 Second Street, N.W., Washington, DC 20217. More information can be found on the Tax Court's website at www.ustaxcourt.gov.

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In certain cases, you can file a motion asking the Tax Court to redetermine the amount of interest on either an underpayment or an overpayment. You can do this only in a situation that meets all of the following requirements.

The IRS has assessed a deficiency that was determined by the Tax Court.
The assessment included interest.
You have paid the entire amount of the deficiency plus the interest claimed by the IRS.
The Tax Court has found that you made an overpayment.

You must file the motion within one year after the decision of the Tax Court becomes final.

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District Court and Court of Federal Claims

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 generally must file suit for a credit or refund no later than 2 years after the IRS informs you that your claim has been rejected. However, you can file suit if it has been 6 months since you filed your claim and the IRS has not yet delivered a decision.

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. For information on District Court review of Appeals determinations with respect to lien notices and proposed levies, see Publication 1660.

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Refund or Credit of Overpayments Before Final Determination

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 that deficiency, or to levy or engage in any court proceeding to collect that deficiency. In addition, the court can order a refund of any part of an overpayment determined by the Tax Court that is not at issue on appeal to a higher court. The court can order these refunds before its decision on the case is final.

Generally, the IRS is not permitted to take action on a tax deficiency during:

The 90-day (or 150-day if outside the United States) period that you have to petition a notice of deficiency to the Tax Court, or
The period that the case is under appeal if a bond is provided.

Previous Page | Table of Contents | Top of Page | Index | Next Page Right Arrow

Appeal Rights(p8)

Appeal Within the IRS(p8)

Protests and Small Case Requests(p8)

Written protest.(p9)

Small case request.(p9)

Representation(p9)

Confidentiality privilege.(p9)

Appeals to the Courts(p9)

Prohibition on requests to taxpayers to give up rights to bring civil action.(p9)

Burden of proof.(p9)

Recovering litigation or administrative costs.(p10)

Jurisdiction for determination of employment status.(p11)

Tax Court review of request for relief from joint and several liability on a joint return.(p11)

Tax Court(p12)

Small tax case procedure.(p12)

Motion to request redetermination of interest.(p12)

District Court and Court of Federal Claims(p12)

Refund or Credit of Overpayments Before Final Determination(p13)