5 Signs Your IRS Audit Results Are Worth Appealing

Receiving a Letter 525 (30-Day Letter) at the end of an IRS audit can be a gut-punch. It outlines the "Proposed Changes" to your tax return—and usually, those changes come with a hefty bill.

However, the auditor is not always right. IRS auditors are human; they make mistakes in calculating numbers, interpreting complex tax laws, and reviewing evidence. If any of the following five signs apply to your case, you likely have a strong basis for an appeal.

1. The Auditor Ignored Your Documentation

This is the most common reason for a successful appeal. If you provided clear receipts, bank statements, or logs that prove your deductions, but the auditor disallowed them anyway, you have a solid case.

• The Appeals Advantage: Appeals Officers are trained to look at the "substance" of a transaction. If your records are organized and support your claims, an Appeals Officer is more likely to accept them than a hurried field auditor.

2. The IRS Misinterpreted the Tax Law

Tax law is notoriously dense. Sometimes an auditor applies a general rule to a specific situation where an exception should apply.

• Example: The auditor might claim a business expense isn't "ordinary and necessary" for your industry, even though specific tax court precedents say otherwise. If you can point to a specific Revenue Ruling or Tax Court Case that supports your position, an appeal is a must.

3. There Was a "Hazard of Litigation" for the IRS

Unlike auditors, Appeals Officers have the authority to settle cases based on the "Hazards of Litigation." * This means if the IRS thinks there is a 50% chance they would lose if you took them to court, they might offer to settle for 50% of the tax owed. If your case has a strong legal argument but a few missing receipts, an appeal can lead to a compromise that an auditor simply isn't allowed to offer.

4. The Auditor Used "Indirect Methods" to Calculate Income

If you didn't have perfect records, the auditor might have used "indirect methods"—like looking at your lifestyle, bank deposits, or industry averages—to estimate that you made more money than you reported.

• These estimates are often inflated. If you can prove that those bank deposits were actually non-taxable (like a gift, a loan repayment, or a transfer between accounts), you can successfully overturn the audit results.

5. Penalties Were Automatically Assessed

IRS software often automatically tacks on "Accuracy-Related Penalties" (usually 20% of the underpayment).

• However, if you acted in good faith and had reasonable cause for the error (such as relying on a professional tax preparer or dealing with a complex new law), you can appeal to have these penalties "abated" or removed.

Your Next Step: Filing Form 12203

If you identify with any of these signs, your next step is usually filing Form 12203 (Request for Appeals Review). You generally have 30 days from the date on your audit report to act.

Pro Tip: Do not wait until the 90-day Letter of Deficiency arrives. Appealing during the 30-day window keeps the process informal and saves you the stress of a formal Tax Court petition.