An Overview of IRS Practice and Procedure

Federal taxation is governed by rules known as IRS Practice and Procedure. This framework dictates how the Internal Revenue Service interacts with taxpayers, from the initial review of a tax return and the audit process to administrative appeals and the collection of owed tax. The system is based on voluntary compliance, with taxpayers expected to file accurate returns and pay the correct amount of tax. These procedures provide a roadmap for handling disagreements, exchanging information, and following required timelines.

Taxpayer Rights and Representation

The foundation of the taxpayer’s relationship with the IRS is the Taxpayer Bill of Rights, a set of ten principles codified in the Internal Revenue Code. These rights ensure fair treatment and include the Right to Be Informed about tax laws and the Right to Quality Service. Other protections include the Right to Pay No More Than the Correct Amount of Tax and the Right to Challenge the IRS’s Position and Be Heard. Should you disagree with a decision, you have the Right to Appeal an IRS Decision in an Independent Forum.

A taxpayer can exercise their Right to Retain Representation at any point when dealing with the IRS. Professionals with unlimited practice rights include Certified Public Accountants (CPAs), attorneys, and Enrolled Agents (EAs), all of whom are subject to competency and ethical standards.

To authorize a professional to act on your behalf, you must file Form 2848, Power of Attorney and Declaration of Representative. This document grants your representative the authority to receive confidential tax information and perform actions like signing agreements. The form requires a clear description of the specific tax matters and periods the representative is authorized to handle, as general language like “all taxes” will be rejected.

The IRS Examination Process

An IRS examination, or audit, is a review of an individual’s or organization’s financial information to ensure it was reported correctly. The process begins when the IRS notifies a taxpayer by mail. There are three primary types of examinations.

The most common is the correspondence audit, conducted entirely by mail. The IRS sends a letter requesting documentation to verify specific items on a return, such as charitable donations or business expenses. These audits are resolved by mailing the requested records to the designated IRS service center.

A more involved examination is the office audit, which requires the taxpayer to bring records to a local IRS office for a meeting. These audits are broader than correspondence audits and may cover more complex issues. An examiner has the authority to expand the scope of the audit if other potential issues arise during the review.

The most comprehensive examination is the field audit, where IRS agents visit the taxpayer’s home or place of business. These audits are reserved for complex cases and involve a thorough review of the taxpayer’s books and records on-site.

During an audit, an examiner may use an Information Document Request (IDR), or Form 4564, to request specific documents by a set deadline. A failure to respond completely can lead to a more formal enforcement process, potentially escalating to a summons. The IRS has three years from the date a return is filed to assess additional tax, known as the statute of limitations. If more time is needed, the IRS may ask the taxpayer to sign Form 872, which voluntarily extends this deadline.

An examination concludes in one of three ways: a “no change” result where the return is accepted as filed; an “agreed case” where the taxpayer accepts the proposed changes; or an “unagreed case.” In an unagreed case, the IRS issues a formal report and a “30-day letter” explaining the right to appeal.

The Administrative Appeals Process

If you disagree with an audit’s findings, you can begin the administrative appeals process after receiving a “30-day letter.” This process offers an opportunity to resolve the dispute in a fair and impartial forum provided by the IRS Independent Office of Appeals, which is separate from the examination division.

To initiate an appeal, you must file a protest in response to the 30-day letter. For smaller disputes, this may be a simple “small case request,” while larger cases require a formal written protest. The protest must state that you wish to appeal, identify the tax periods involved, and list each proposed adjustment you dispute.

The protest must also present the facts supporting your position and cite any law or legal authority you are relying on. This document becomes the foundation of your case. New information that was not provided to the original examiner should not be introduced at the appeals stage, as this may cause the case to be sent back to the examination division.

Once the protest is processed, the case is assigned to an Appeals Officer who schedules an informal conference. The officer has the authority to consider the “hazards of litigation,” meaning they can evaluate the strengths and weaknesses of both sides’ arguments to reach a settlement. If no agreement is reached, the Office of Appeals will issue a Notice of Deficiency, or “90-day letter,” giving you 90 days to petition the U.S. Tax Court.

The IRS Collection Process

Once a tax liability is formally assessed and overdue, the IRS begins its collection process, which starts with a series of automated notices. The first notice, often a CP14, informs the taxpayer of the balance due and demands payment. If the debt is not paid, a sequence of reminder notices will follow.

If these notices are unsuccessful, the IRS can use more forceful tools, starting with a Federal Tax Lien. A lien is a legal claim against all of a taxpayer’s current and future property, including real estate and financial assets. To make the claim public and establish priority against other creditors, the IRS files a Notice of Federal Tax Lien in public records, which can harm a taxpayer’s credit.

The other major enforcement tool is a levy, which is the actual seizure of property to satisfy the debt. The IRS can levy financial assets like wages and bank accounts, as well as physical property. A levy on a bank account freezes funds up to the amount of the tax debt for 21 days, after which the bank must send the money to the IRS.

Before seizing assets, the IRS must send a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” via certified mail. This notice gives the taxpayer 30 days to request a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals. If no hearing is requested, the IRS is legally cleared to begin levying assets.

Resolving Tax Liabilities

Taxpayers who cannot pay a tax debt in full have several resolution options. One of the most common is an Installment Agreement (IA), which allows for monthly payments over time. A taxpayer can file Form 9465, Installment Agreement Request, or apply for a payment plan online for debts under certain thresholds.

For those in significant financial distress, an Offer in Compromise (OIC) allows a qualified taxpayer to resolve their liability for less than the full amount owed. The IRS may accept an OIC if there is doubt as to whether the tax is owed or can be collected. An OIC may also be granted if collecting the full amount would cause economic hardship.

The OIC application requires Form 656, Offer in Compromise, and detailed financial disclosures on Form 433-A (for individuals) or 433-B (for businesses). The IRS uses this information to calculate a minimum acceptable offer. The application requires a non-refundable fee of $205 and an initial payment, though these may be waived for low-income taxpayers.

If a taxpayer can prove that paying their tax debt would prevent them from meeting basic living expenses, they may qualify for Currently Not Collectible (CNC) status. This is a temporary suspension of collection activities, not a permanent solution. To qualify, a taxpayer must provide financial information showing that their allowable monthly expenses exceed their income. The debt remains and continues to accrue interest and penalties, and the IRS will periodically review the taxpayer’s financial situation.