How to Challenge an IRS Audit

Chart showing sequence of legal appeals to an IRS audit.

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Getting audited is no business owner's idea of a good time. But all is not lost: if you disagree with the IRS's evaluation of your overdue taxes, back-interest charges, or fines, you have several choices about how to fight back. "A revenue agent's assessment is not the final word if the taxpayer chooses not to pay the bill," says Cornelius Coleman, a director of the national tax service at Coopers & Lybrand in New York City. "You can tell the IRS that you don't agree with its assessment and that you intend to appeal it."

What are your chances of getting a reprieve? According to Coleman, who once served as an IRS regional commissioner, 70% of taxpayers simply pay up upon being audited. Of those that decide to fight back, about 50% get the assessment reduced or eliminated. Here's how:

To Challenge Audit Go To:
Tax Court
No taxes paid during appeal.

Unfortunately, this process is time-consuming and requires help from a lawyer or CPA.

or

Administrative Appeal
No taxes paid during appeal.

It's a popular option: there's no lawsuit, simply an IRS review of written arguments from the company and its representatives.

If you lose in administrative appeal, go to

Tax Court
or

Federal District Court
Must pay taxes, then file for a refund.

Refund is automatically denied, so you file a lawsuit. The good news: your case is decided by a federal judge, not an IRS representative.

If you lose in tax court, go to :

Circuit Court of Appeals
Must pay tax.

If you've lost in tax court, your final recourse is the circuit court of appeals. (The process gets more and more costly, so it pays to keep fighting only when the payoff will easily outweigh legal costs.)