Publication 556: Examination, Appeals, & Refund Claims

IRS Publication 556, “Examination of Returns, Appeal Rights, and Claims for Refund,” is a guide from the Internal Revenue Service (IRS) for taxpayers. It explains the audit process, the right to appeal an IRS decision, and how to claim a tax refund. The publication outlines the general rules and procedures for these processes from start to finish. It also clarifies that an examination does not automatically mean a taxpayer has been dishonest or that more tax will be due, as the process could result in no change or even a refund.

The IRS Examination Process

The selection of a tax return for examination, or audit, is not random. The IRS uses computer programs to score returns based on information from sources like Forms W-2 and 1099, with higher-scoring returns being more likely to be selected. A return may also be chosen if its information conflicts with other data or is related to a return already under examination.

Once selected, an examination can take one of three forms. The most common is a correspondence examination, conducted entirely by mail, where the IRS requests additional information or explains a proposed change. Taxpayers can respond by mail with the requested documents or an explanation.

A more involved office examination takes place at an IRS office. A taxpayer is notified by mail and asked to bring specific records to the meeting where an examiner will review the documents and discuss any proposed changes. The most comprehensive type is a field examination, where an IRS agent conducts the audit at the taxpayer’s home, place of business, or accountant’s office.

At the conclusion of an examination, there are three possible outcomes. A “no change” result means the IRS accepts the return as filed. An “agreed” outcome means the taxpayer concurs with the proposed changes and any resulting tax, penalty, or interest. The third outcome is “unagreed,” where the taxpayer disputes the findings and has the right to appeal the decision.

Preparing a Claim for Refund

A taxpayer may file a claim for a refund if they believe they have overpaid their taxes, such as by discovering an overlooked deduction. Generally, a claim must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later. For a return that was due but never filed, it must be filed within three years of its due date to receive a refund.

To claim a refund for an individual income tax return, a taxpayer must file Form 1040-X, Amended U.S. Individual Income Tax Return. When completing this form, you must report the figures from the original return, the changes being made, and the corrected amounts. A detailed explanation for each change and the reason for the claim is required.

For refund claims related to other taxes like estate, gift, or certain excise taxes, Form 843, Claim for Refund and Request for Abatement, is used. This form requires identifying the tax type and the period for the claim. Similar to Form 1040-X, a thorough written explanation of the grounds for the claim is necessary.

For any claim, you must clearly show the computation of the refund and provide all necessary supporting documents. For example, if a refund is claimed for a newly discovered medical expense, copies of the medical bills and proof of payment should be attached.

Initiating the Appeals Process

When a taxpayer disagrees with an IRS examination’s outcome, they can appeal the decision to the IRS Independent Office of Appeals. The purpose of the Appeals Office is to resolve tax disputes impartially without formal court proceedings. The process for initiating an appeal depends on the total amount of tax, penalties, and interest in dispute.

For cases where the total amount in dispute is $25,000 or less, a taxpayer can use a “small case request.” This is a straightforward process that does not require a formal written protest. The taxpayer can make this request by sending a letter to the IRS that identifies the specific adjustments they disagree with and provides the reasons for their disagreement.

For disputes exceeding $25,000, a formal written protest is required. This detailed document must include:

• The taxpayer’s name and address.
• A statement that the taxpayer wishes to appeal the findings to the Office of Appeals.
• The tax periods involved.
• A list of the specific changes being disputed.

The core of the formal protest is a statement of facts and a statement of the law or authority on which the taxpayer relies. The statement of facts must be declared true under penalties of perjury, meaning the taxpayer is swearing that the facts presented are accurate to the best of their knowledge.

Submitting Your Documents to the IRS

For a refund claim using Form 1040-X, the form can often be filed electronically. If filing by mail, the form’s instructions provide the specific mailing address based on your location. For a claim made on Form 843, the instructions for that form will specify the correct mailing address, which varies by the type of tax. When mailing a claim, it is advisable to use a method that provides proof of mailing, such as certified mail.

When submitting a formal written protest to initiate an appeal, the package should be sent to the address provided in the letter that accompanied the examination report. This letter, often called a 30-day letter, will give the taxpayer a deadline for filing the protest. Missing this deadline can result in the loss of appeal rights.

Once documents are submitted, you should receive an acknowledgment from the IRS. For a refund claim, the IRS processes claims within a few months, but it can take longer. If a refund is not paid within 45 days of the filing date, the IRS may be required to pay interest on the refund amount. For an appeal, the Office of Appeals will contact you or your representative to schedule a conference.

Taxpayer Rights and Representation

Throughout any interaction with the IRS, taxpayers are protected by a set of fundamental rights known as the Taxpayer Bill of Rights. These rights include the Right to Be Informed, the Right to Quality Service, the Right to Pay No More Than the Correct Amount of Tax, and the Right to Appeal an IRS Decision in an Independent Forum.

Taxpayers also have the right to retain an authorized representative to act on their behalf. This can be an attorney, a Certified Public Accountant (CPA), or an Enrolled Agent. These professionals are qualified to represent taxpayers before the IRS and can handle all communications and negotiations.

To authorize a representative, a taxpayer must file Form 2848, Power of Attorney and Declaration of Representative. This form grants the representative the authority to receive confidential tax information and to perform any actions the taxpayer could, such as signing agreements. The IRS will then communicate directly with the authorized representative for the tax matters and periods specified on the form.