Latest / VoraPrep Audio — Professional Licensure & Certification Exam Prep / [EA] SEE3: IRS Audit Outcomes: From Examination to Resolution
Transcript
- Hey, welcome to VoraPrep Audio. Glad you could join me. So let’s picture this, because you’re going to see it on the exam, and you’ll definitely see it in real life. You’re sitting with your client. The IRS field audit just wrapped up, and it didn't go great. The revenue agent slides a report across the table, Form 4549, showing a proposed tax increase of twenty-five grand, plus some pretty chunky penalties. Your client is pale. The agent says, "If you agree, just sign this other form, Form 870, and we can get this all settled today." That moment… what you advise your client to do right then… that’s everything. It determines whether they pay up, fight it out in Appeals, or gear up for Tax Court. And getting it right is what we're going to walk through today. Think of the whole audit resolution process like a series of gates in a canal. To get your boat—your client's case—to a better place, you need the right key for each gate, and you have to use it before the gate closes. The 30-day letter is the key that opens the gate to the Appeals level. The 90-day letter opens that final gate to Tax Court. If you miss a deadline, your ship is just stuck. Now, let's start with the best possible outcome. The dream scenario. The "no change" case. This is when the examiner looks at everything and says, "You know what? This looks right." They issue a formal "No Change" letter, and the audit is over. Huge relief for your client. But your job isn't quite done. You need to tell your client two things. First, keep all those records that just saved them. Keep them until the statute of limitations is up. They are gold. Second, while this doesn't make them audit-proof forever, the IRS has a policy against repetitive audits. If they try to audit your client for the exact same issue in the next year or two, you can show them that no-change letter and often get the new audit stopped in its tracks. It's a really nice tool to have in your back pocket. Okay, but what if the agent *does* find something? This leads us to an "agreed case." The examiner prepares that report, the Form 4549, which breaks down all the adjustments. And then they present Form 870. This form is a really big deal. Its official name is *Waiver of Restrictions on Assessment and Collection of Deficiency in Tax*. Signing it feels like you're just agreeing to the numbers, but you're doing so much more. You're waiving your right to get that formal 90-day letter we'll talk about in a minute. And by waiving that letter, you are giving up your right to go to Tax Court *before* you pay the bill. That is the most important right you give up. Once you sign, the IRS can assess the tax and start the collection process. So why would anyone sign it? Well, there's a strategic reason. It can stop the interest clock from running. If you sign Form 870 and the IRS doesn't send a bill within 30 days, interest on the tax deficiency gets suspended. That can be a nice little perk. But you only sign when you and your client agree that the agent’s position is solid and fighting it would just cost more time and money than it's worth. Once it's signed, it is very, very hard to undo. But what if you don't agree? What if the agent's position is just wrong, or way too harsh? This is where the real strategy comes in. This is the "unagreed case." Your first move, before any formal letters fly, is to ask for an informal conference with the examiner’s manager. It's a simple, low-cost step. You just get a fresh set of eyes on the problem. Sometimes a manager sees things differently and can resolve it right there. It's always worth a shot. If that doesn't work, then you wait. The IRS will mail you a package. It’ll have the agent's report and a letter, Letter 525. Together, this is known as the "30-day letter." This is your formal notice. It says, "Here's what we think you owe, and you have 30 days to appeal it." To actually appeal, you have to file a formal written protest. This isn't just a quick note. It's a detailed document where you lay out your entire case. You’ll state who you are, the tax years involved, which adjustments you're disputing, and then—most importantly—you present your facts and the law you're relying on. It all has to be signed under penalties of perjury. A strong protest is the foundation for everything that comes next. And what comes next is the IRS Independent Office of Appeals. This is a totally different world from the examination division. The examiner's job is to apply the law as it's written. Period. But the Appeals Office has a different mission: to settle cases and avoid litigation. And they have a superpower the examiner doesn't: they can consider the "hazards of litigation." That's the key phrase. It just means the Appeals Officer can look at the case and think, "Hmm, the taxpayer has a pretty good point here. If we went to court, there's a chance we could lose." Based on that risk, they can compromise. They can settle. So if an examiner disallowed a hundred percent of your client's travel expenses because the receipts were a little messy, an Appeals Officer might look at the whole picture—the credit card statements, the calendar—and say, "Okay, let's allow fifty percent. Let's be reasonable and close this case." That flexibility makes Appeals the best place to resolve most disputes. But... what if you can't reach a deal in Appeals? Or what if you never responded to the 30-day letter in the first place? Then, the IRS will issue the most important document in this whole process: the Statutory Notice of Deficiency, or SND. Everyone just calls it the "90-day letter." This letter is your official, legal, one-time-only ticket to the U.S. Tax Court. And it starts a clock. A very strict clock. You have exactly 90 calendar days from the date on that letter to file a petition with the Tax Court. Not 91. It cannot be extended. If the letter is addressed to someone outside the U.S., they get 150 days. But that's it. If you miss that deadline, the Tax Court door slams shut. Your only option then is to pay the full tax bill first and then sue for a refund in a different court, which is a much harder road. Let's walk through our example with Maria, the sole proprietor. The examiner disallows $40,000 in expenses and wants her to sign a Form 870 agreeing to an $11,200 deficiency. You know she has good secondary evidence, so a 100% disallowance is just way too aggressive. So, first step: you advise Maria *not* to sign the Form 870. Signing it would be giving up. You'd be accepting the worst possible outcome without a fight. Next, you wait for the 30-day letter to arrive. Once it does, you get to work on that formal written protest. You lay out your argument, you cite the law—like the *Cohan* rule, which allows for reasonable estimates—and you attach all of Maria's secondary evidence. Then you get your conference with the Appeals Officer. You present your case, and the officer considers those hazards of litigation. They see your evidence and realize a judge might side with you. So they offer a settlement. They agree to allow $25,000 of the expenses. The deficiency drops from over $11,000 down to about $4,200, and the penalties are gone. To close the deal, Maria signs a Form 870-AD. That 'AD' is important. It's used at the Appeals level and it's much more binding than the regular Form 870. It means both you and the IRS agree to not reopen these issues ever again, barring something like fraud. You’ve achieved a huge win for your client. The correct path was to reject the initial offer and prepare a protest for Appeals. On the exam, a tempting wrong answer might be, "Advise Maria to sign the Form 870 to stop the interest." Don't fall for it. Yes, it stops interest, but it also forfeits the right to go to Appeals, where you can save thousands on the actual tax and penalties. The potential savings almost always dwarf the small amount of interest you’d pay during the appeal process. To keep the unagreed path straight, just remember the mnemonic M-A-T. M-A-T. First, you try the Manager conference. If that doesn't work, you go to Appeals, which you get to by protesting the 30-day letter. And your final stop is Tax Court, which you can only get to with your ticket, the 90-day letter. And please, don't confuse the 30-day and 90-day letters. It's a critical mistake. The 30-day letter is an administrative invitation to talk. Its deadline is usually flexible. The 90-day letter is a legal countdown to court. Its deadline is absolute. Mixing them up can cost your client their most important rights. So on exam day, read the question carefully. If it mentions a 30-day letter, your mind should immediately go to filing a protest and going to Appeals. If the question mentions a 90-day letter or a 'Statutory Notice of Deficiency,' the answer has to be about that strict, unextendable deadline to petition the Tax Court. Look, navigating this process is a huge part of what we do. An audit can end with no change, which is great. It can end with an agreed-upon change, where you sign a Form 870. Or, if it's an unagreed case, you start on that path from the manager, to Appeals via the 30-day letter, and finally to Tax Court with the 90-day letter. Knowing which document you're holding and what it empowers you to do next is the key to protecting your client and getting the best result. And as you're working through these concepts, remember that VoraPrep is a full exam-prep app. It’s got lessons like this one, thousands of practice questions, and even an AI tutor to help when you get stuck. You can get started for free at Vora Prep dot com. You're building a really valuable skill set here. Keep putting in the reps. You've got this. I'll talk to you in the next one.