Most tax advice focuses on how to fight the IRS. But in the world of tax strategy, knowing when not to fight is just as important. While the IRS Independent Office of Appeals offers a fair shot at a settlement, the process carries specific risks that could leave you with a higher bill than the one you started with.
Before you file your protest letter, consider these four significant risks.
1. The "New Issues" Trap
When you appeal an audit, you are essentially asking a more senior, highly trained Appeals Officer to look at your tax return. While the original auditor may have only been looking at your "Travel and Entertainment" expenses, the Appeals Officer has the authority to review the entire case file.
- The Risk: If the Appeals Officer spots a glaring error the original auditor missed (like a misclassified asset or an ineligible credit), they can raise a "New Issue."
- The Result: You could go into an appeal trying to save $5,000 and walk out owing an additional $15,000 because a new problem was discovered. If your tax return has "weak spots" you'd rather not have scrutinized by a specialist, an appeal might be a dangerous move.
2. Interest is a "Silent Killer"
A common misconception is that filing an appeal "freezes" your debt. It does not. * Daily Compounding: Interest on unpaid tax debt compounds daily.
- The Timeline: IRS appeals are not fast; they can take anywhere from six months to two years to resolve.
- The Math: If you appeal a $50,000 debt and lose 18 months later, you won't just owe $50,000. You will owe $50,000 plus a year and a half of compounded interest and late-payment penalties. If your case is weak, the cost of the delay may be more expensive than the potential settlement.
3. "Hazards of Litigation" Work Both Ways
Appeals Officers settle based on the "Hazards of Litigation" (the chance the IRS might lose in court). However, this is a double-edged sword.
- If the IRS has a very strong legal position and you have no documentation to support your side, the "hazard" to the IRS is zero.
- In these cases, the Appeals Officer has no incentive to offer a discount. If you can't prove your case with facts or law, you are simply wasting time and accruing more interest.
4. Losing the "Small Case" Advantage
For disputes under $50,000, you can request a "Small Case" (S-Case) in Tax Court. These are faster and less formal. However, if you spend a year in the administrative appeals process first and then decide to go to court, you may find that the IRS has used that time to further "build their file" against you, making a win in court even harder.
When Should You Walk Away?
You should seriously consider skipping the appeal and seeking a different resolution if:
- You have "Red Flags" on other parts of your return that weren't audited.
- Your records are non-existent, and you have no "reasonable cause" for the errors.
- Your primary goal is just to pay over time. If you agree you owe the money but just can't pay it all at once, you don't need an appeal—you need an Installment Agreement or an Offer in Compromise.
The Strategic Choice
The decision to appeal should be a math problem, not an emotional one. Weigh the potential savings against the certain accrual of interest and the risk of new issues.
Not sure if your case is worth the risk? Let’s sit down for a consultation. We can perform a "pre-appeal" review to see if there are any skeletons in your tax closet before the IRS finds them.
