REG Chapter 3 Part 1: Audits, Appeals and Judicial Process

Explain the audit and appeals process as it relates to federal tax matters

This is going to be especially painful so hang tight. I will do my best to cut out the technical terms and give you the meat and potatoes. Here is what the AICPA expects of you on the exam as it pertains to this subject matter.

  1. Explain the audit and appeals process as it relates to federal tax matters.
  2. Explain the different levels of the judicial process as they relate to federal tax matters.
  3. Identify options available to a taxpayer within the audit and appeals process given a specific scenario.
  4. Identify options available to a taxpayer within the judicial process given a specific scenario.


The first step in all of this is examination. Quick side note – all of this relates to dealing with the IRS so there is a lot of back and forth. Where was I? Oh yes examination!

Basically the IRS will select you in a hunger games style lottery (totally joking) and inform you that your return is under review. They might ask for some documentation or just come with changes and request additional taxes due. They will give you specified reasoning behind the proposed changes and detail why they believe you should give up more of your hard-earned money.

Say Yes To The Dress

If you agree with the IRS and think you messed up and actually owe more taxes then by all means send in the money. This ends the entire process and your account will be settled.

It’s A No For Me

If you disagree with the IRS examiner’s findings and don’t think you owe the tax then you can explain why and send in supporting documentation. They can either agree with you or you can both settle for something in-between. If there is still no agreement then you’ll have to go to the next level.

30 Day and 90 Day Letter

If you can’t come to an agreement then the IRS will go ahead and forward your case for processing. You’ll receive a letter notifying you of your right to appeal the proposed changes within 30 days. If you ignore that notice then the IRS will send you a 90-day letter, which is also known as a notice of deficiency.

Appeal With The IRS

If you chose to appeal then you have the option of appealing within the IRS. You can do this at the local Appeals Office and it’s super informal. If an agreement is still not met then you may be eligible to take your case to court.

Take It To Court

If you can’t come to an agreement with the IRS agent or the appeals office then its time to take your case to court – but this is where it gets complicated. When taking your tax case to court you have 3 options:

  1. The United States Tax Court
  2. The United States Court of Federal Claims, or
  3. A United States District Court.

Tax Court

The best option is to take your case to tax court. Why? Well for one you don’t have to pay the tax owed when you’re appealing before the tax court. It’s actually a requirement because the tax court won’t hear your case if the tax is already paid. You can take your case to tax court if you disagree with the IRS over:

  • Income tax
  • Estate tax
  • Gift tax
  • Employment tax involving IRS employment status determinations, or
  • Certain excise taxes of private foundations, public charities, qualified pension and other retirement plans, or real estate investment trusts.

Remember: 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 (Remember that 90 day letter?) from the date the notice is mailed to you. Basically, you can’t take your case to the tax court if you already paid the tax.

Federal Claims Court and District Court

Generally, the District Courts and the Court of Federal Claims hear tax cases only after you have paid the entire tax and penalties, and filed a claim for a credit or refund. This is different from tax court because you have to pay the tax first (they won’t hear your case until you do). This can be costly and will require legal counsel for the District Court. You many take your case to Federal Claims without counsel but it will still be costly either way.

US Court of Appeals

If you still don’t agree with the case and you want to take it even further then you can take it to the US Court of Appeals.

  • US Court of Appeals hears appeals from Tax Court and District Court
  • US Court of Appeals for the Federal Circuit hears appeals from the U.S. Court of Federal Claims

The Supreme Court

The last and final option is the Supreme Court. This is highly unlikely (and exponentially expensive at this point). The Supreme Court makes the final decision so if you win then you win, If you lose then the show is over.

What We Learned

  1. IRS Examines your tax return – you say yes or no or make some arrangements.
  2. If you disagree then you can take it to the Appeals Office of the IRS (optional).
  3. If that doesn’t work then take it to court.
  4. In Tax Court, you don’t pay the tax until you lose
  5. In Federal Claims and District Courts, you must pay the tax before they hear the case
  6. US Appeals Court (Can we get much higher?)
  7. Supreme Court (final stop).

Once again here are my sources: For some great stuff from the IRS about the appeals process click here.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

1 comment on “REG Chapter 3 Part 1: Audits, Appeals and Judicial Process

  1. Pingback: REG Chapter 3 Part 4: Authoritative Hierarchy – The Daily CPA

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