Internal Revenue Service (IRS) Procedures & Appeals

Why this topic matters

Taxation and Regulation (REG) Area I tests how the Internal Revenue Service (IRS) examines returns, how taxpayers dispute results, which courts hear tax cases, and the statutes of limitations for assessment, refunds, and collection. These rules are fixed in the Internal Revenue Code (IRC), so they are dependable exam material.

Examinations

Type	Description
Correspondence examination	Conducted by mail; simple issues (documentation for a deduction)
Office examination	At an IRS office; more complex individual issues
Field examination	At the taxpayer's business; complex business returns

Returns are selected through computer scoring (the Discriminant Function System), information-matching (Forms W-2 and 1099), related examinations, and specific compliance initiatives. Mathematical and clerical errors are corrected by notice without examination rights.

The dispute path

1. Revenue agent's report proposing adjustments. The taxpayer may agree (Form 870) or disagree.
2. 30-day letter: explains appeal rights. The taxpayer can file a written protest (required if the amount exceeds $25,000 for a field exam; a small case request otherwise) and request a conference with the IRS Independent Office of Appeals. Appeals considers the hazards of litigation and can settle.
3. 90-day letter (statutory notice of deficiency): if unresolved or no response, the IRS issues this notice. The taxpayer has 90 days (150 days if addressed outside the United States) to petition the US Tax Court. If no petition is filed, the tax is assessed.

Which court?

Court	Pay tax first?	Jury?	Appeal to
US Tax Court	No — the only prepayment forum	No	US Court of Appeals for the taxpayer's circuit
Tax Court small case (S case) — disputes of $50,000 or less per year	No	No	No appeal; not precedential
US District Court	Yes — pay, claim a refund, then sue	Yes (the only jury option)	US Court of Appeals for the circuit
US Court of Federal Claims	Yes	No	US Court of Appeals for the Federal Circuit

Final appeal is to the US Supreme Court by writ of certiorari (rarely granted). The Tax Court follows the precedent of the circuit to which a case would be appealed (the Golsen rule).

Burden of proof

• Generally on the taxpayer.
• Shifts to the IRS if the taxpayer introduces credible evidence, has complied with substantiation and record-keeping requirements, cooperated with reasonable IRS requests, and (for entities) meets net worth limitations.
• The IRS bears the burden for civil fraud (clear and convincing evidence), for penalties (burden of production), and for income reconstructed solely from statistical information.

Statutes of limitations

Situation	Period for the IRS to assess
General rule	3 years from the later of the due date or the date the return was filed (early returns are treated as filed on the due date)
Omission of more than 25% of gross income reported (or certain foreign asset omissions over $5,000)	6 years
Fraudulent return, willful evasion, or no return filed	Unlimited
Collection after assessment	10 years from assessment

Refund claims

• File by the later of 3 years from the date the return was filed or 2 years from the date the tax was paid.
• Individuals use Form 1040-X; corporations use Form 1120-X.
• Bad debts and worthless securities: 7 years from the due date of the return for the year the loss occurred.
• The amount refundable is limited to tax paid within the lookback period.

Guidance and rulings

• Private letter rulings apply only to the taxpayer who requested them.
• Revenue rulings and procedures are published guidance; Treasury Regulations interpret the IRC (legislative regulations carry the force of law).
• Technical advice memoranda address issues during an examination.

Collection tools and relief

• Federal tax lien (a claim against property) and levy (seizure), after notice and the right to a collection due process hearing.
• Installment agreements and offers in compromise (based on doubt as to liability, doubt as to collectibility, or effective tax administration).
• Innocent spouse relief, separation of liability, and equitable relief for joint filers.
• Taxpayer Bill of Rights: the right to be informed, to quality service, to pay no more than the correct amount, to challenge the IRS, to appeal, to finality, to privacy, to confidentiality, to retain representation, and to a fair and just system.
• The Taxpayer Advocate Service helps taxpayers facing hardship or unresolved problems.

How it is tested

• Identify the court a taxpayer should use given their goals (no prepayment, jury trial).
• Apply the 3-year, 6-year, and unlimited assessment periods.
• Compute the refund claim deadline.
• Follow the sequence from examination to 30-day letter to 90-day letter.