Question

The IRS revenue agent who audited Mr. and Mrs. Marlow's 2015 Form 1040 assessed a $49,200 tax deficiency. The Marlow's strongly disagree with the result of the audit. What is their first step in contesting the result? They may request that a different revenue agent conduct a second audit.

They must file a petition with the U.S. Tax Court.

They must appeal the result of the audit to the regional Appeals Office of the IRS.

They must pay the deficiency and sue the federal government for a refund.

Answer 1

Points to be remembered in this case:

1. You'll Receive a Notice of Deficiency if You Don't Reply to IRS or Appeal Your Case: Referred to as a "90-day letter" by tax practitioners, the IRS mails you a Notice of Deficiency requesting you to respond to the notice within 90 days (the IRS is required to list the actual deadline on page of of the notice). The IRS requires you to respond to the notice by filing a Tax Court petition in the U.S. Tax Court clerk's office in Washington, D.C. Though it's best to hire a tax lawyer to handle these notices, some taxpayers decide to handle it on their own. If you choose to handle the notice on your own, there is a small tax case procedure available where you can represent yourself in cases where less than $25,000 in tax is in dispute. Unfortunately, the U.S. Court cannot hear your case if you miss the 90-day deadline.
2. Tax Court Judges Travel to Your Area: Though the Tax Court building and clerks are located in Washington, D.C., the judges travel to federal courthouse across the country to conduct trials. When you filed your Tax Court petition, you can pick the city where you want your case to be heard. The Tax Court rules and procedure are streamlined with relaxed rules of evidence, so no jury is present at these types of trials. However, you can call witnesses, and many cases are presented based on a "stipulated record" (which means you and the government agree on certain facts about the case).
3. You Can Go Back to IRS Appeals After Responding to a Notice of Deficiency: Though the only way to respond to a Notice of Deficiency is to file a timely petition U.S. Tax Court, it does not mean that your case will be decided in court. After an IRS lawyer responds to your Tax Court petition (usually denying whatever your petition says), you can request that the lawyer transfers your case to IRS Appeals.
4. You May Be Able to Get an Extension of Time to Respond: The IRS will grant extensions of time to respond to many notices, but there are some types of notices (such as Notices of Deficiency) that you will not be able extend your time to respond to time. Request and confirm your extension request via a written reply (you may want to confirm everything you do with the IRS in writing).
5. Some IRS Actions Can Be Undone: It's still possible to undo some IRS actions after responding to IRS notices on time (such as liens on property or levies on a bank account). However, it's usually more expensive and harder to undo these actions, so it usually requires professional help.
6. You Can Pay the Taxes the Notice of Deficiency Says You Owe, Then Sue for a Refund: If you don't respond to a Notice of Deficiency within 90 days, but have an assessment, you can still appeal against your taxes owed amount in federal district court or the U.S. Claims Courts. Usually, you're required to pay the taxes first and then file a refund claim. If your refund request is not granted, then you can sue for a refund. You can still go into court, and sometimes you're only required to pay a portion of the tax liability.