3.2 IRS Audits, Appeals, and the Judicial Process

Three ways an examination actually happens

REG Area I, Group C, Topic 1 asks you to explain the audit and appeals process and the levels of the judicial process. Start with how the Internal Revenue Service looks at a return. Publication 3498, The Examination Process, and the related mail-exam publication describe the same three settings every review course uses:

• Correspondence examination. The IRS writes, usually about one or two issues (a charitable-contribution substantiation gap, a Form 1099 mismatch, a credit). You answer by mail. It is still an examination.
• Office examination. The taxpayer or a representative brings specified records to an IRS office.
• Field examination. A revenue agent comes to the taxpayer's business, home, or representative's office. Scope is broader; books, interviews, and site observations are in play.

In office and field work the written ask is an information document request (IDR), commonly Form 4564. A well-drawn IDR names the records, the issue, the period, and a response date. Ignoring IDRs does not make the issue go away; it produces a proposed adjustment built on what the examiner has, which is often third-party information returns. An IDR is not a summons, but repeated non-response can lead to summons practice. REG wants the function: the IDR is how Examination develops the file before it writes a report.

If you agree with the report, you sign the agreement form and the case closes. If you do not, the path splits into a preliminary notice and, later, a statutory notice. Mixing those two letters is the classic REG miss.

30-day letter versus 90-day letter

The 30-day letter is a preliminary notice that transmits the examination report and offers the Independent Office of Appeals. IRS examples include Letter 525 (General 30-Day Letter), Letter 915 (Examination Report Transmittal), and Letter 950 (30-Day Letter—Straight Deficiency). You generally have 30 days from the letter date to file a protest and request Appeals. Agreeing, protesting, or failing to respond are the three choices. The 30-day letter is not a ticket to Tax Court. It is not jurisdictional in the Tax Court sense. Miss it, and Examination will usually move to the next statutory step rather than hold the file open as a courtesy.

The 90-day letter is the statutory notice of deficiency authorized by IRC § 6212. IRS examples include Letter 531 and CP3219N. The notice states the proposed deficiency and tells the taxpayer that a petition may be filed with the United States Tax Court without first paying. The period is 90 days from the mailing date (150 days if the notice is addressed to a person outside the United States). That clock is generally jurisdictional. A protest letter to Examination, a phone call, or a late Appeals request does not stop it.

If you do not petition and do not pay, the IRS assesses after the 90 days and collection can begin. That is the fork between the deficiency process you are mapping here and the later collection process (liens, levies, Collection Due Process). REG does not need the entire CDP syllabus. Remember the sequence: deficiency fight first; collection tools after assessment.

Appeals and Fast Track, without collapsing them

The IRS Independent Office of Appeals is a separate function whose job is to settle cases without litigation, considering the hazards of litigation, independently of the exam team. A timely protest to a 30-day letter is how a typical unagreed exam reaches Appeals before a notice of deficiency.

Fast Track Settlement is different. An Appeals employee trained in mediation helps Examination and the taxpayer try to settle while the case remains in Examination's jurisdiction. It is voluntary. If Fast Track fails, traditional Appeals rights remain. Do not describe Fast Track as "skipping Appeals" or as a court. It is an early, in-exam mediation overlay.

Three trial forums

Once a deficiency is in dispute, three Article III / Article I trial forums matter. Tax Court is the no-prepayment forum. The other two are refund forums that generally require full payment first (the Flora full-payment rule), then a refund claim, then a suit if the claim is denied or ignored.

The United States Tax Court is an Article I court with nationwide jurisdiction to redetermine deficiencies. Its homepage states the mission in one sentence: it resolves disputes between taxpayers and the IRS. Jurisdiction in a deficiency case requires a valid notice of deficiency and a timely petition. There is no jury. Simplified "S case" procedures exist when the amount in dispute, including penalties, is $50,000 or less per year; that is a procedure choice, not a fourth forum.

Golsen rule. Tax Court is a national trial court, but appeals go to regional circuits. In Golsen v. Commissioner, 54 T.C. 742 (1970), the Tax Court held that it will follow a Court of Appeals decision that is squarely on point when appeal from that Tax Court decision would lie to that circuit alone. If the relevant circuit has not spoken, Tax Court follows its own precedent. Residence at the time of the petition can therefore change the outcome of a legal issue without changing the Code.

Burden of proof, at teaching altitude. The taxpayer generally bears the burden of proving deductions and the correctness of the return (Tax Court Rule 142(a)). IRC § 7491(a) may shift the burden to the IRS on a factual issue if the taxpayer introduces credible evidence, has met substantiation requirements, and has cooperated with reasonable requests for information and interviews. The IRS bears the burden of proof on fraud (clear and convincing evidence) and, for individuals, the burden of production on penalties under § 7491(c). Do not turn that into a claim that the IRS always has the burden after an IDR.

Worked scenario: 90-day letter, 20 days left

A client brings you a statutory notice of deficiency dated 70 days ago. Twenty days remain on the 90-day clock. The 30-day letter, if one was issued, is spent. Fast Track is no longer the move; Examination has already issued the SNOD.

Counsel the client in this order:

1. Calendar the ninetieth day. The petition must be filed with Tax Court before that date if the client wants a no-prepayment forum. Twenty days is enough if you move; it is not enough to "think about Appeals."
2. Petition Tax Court without paying if the client wants to contest the deficiency and cannot or will not full-pay. Attach the notice. Do not mail a protest to the revenue agent and assume that stops the clock.
3. Or full-pay, file a refund claim, and later sue in District Court (jury possible) or the Court of Federal Claims. That path remains open, but it is a different lawsuit with a prepayment price.
4. Do not wait for a CDP notice to relitigate the deficiency as if it were still unassessed. After day 90 with no petition, the IRS assesses. Collection notices are about how the government collects, not a replay of the 90-day letter.

The REG skill is naming the letter, naming the forum, and knowing which clock is running.