Kentucky

Understanding the IRS Appeals Process: A Guide for Businesses and Individuals

Nick Eusanio, Esq., LL.M. Leave a comment

When a taxpayer disagrees with an IRS audit or examination result, the dispute does not necessarily end there. Taxpayers have a right to challenge the proposed adjustments, penalties, or collection actions. The next step is often to take the matter to the IRS Independent Office of Appeals. IRS Appeals is an independent administrative forum designed to resolve tax disputes impartially and without litigation. Understanding the Appeals process can help taxpayers evaluate their options and approach disputes strategically.

What Is the IRS Independent Office of Appeals?

IRS Appeals operates as a separate organization from the IRS’s examination and collections functions. Appeals officers review disputes objectively, focusing on the existing record rather than conducting new audits. The goal is often to reach a compromise, recognizing that both parties may have certain “hazards of litigation.” Appeals is generally the last administrative option before filing in U.S. Tax Court, district court, or the Court of Federal Claims.

When Can a Case Can Go to Appeals?

Taxpayers can seek review by Appeals in various circumstances, including:

  • Disagreements with proposed adjustments from an IRS audit
  • Certain penalty assessments (e.g., accuracy-related, international reporting, or trust fund recovery penalties)
  • Collection actions like liens, levies, or installment agreements
  • Other disputes where Appeals jurisdiction applies

The process typically begins when the IRS issues a Notice of Proposed Adjustment or a 30-day letter giving the taxpayer a chance to ask Appeals for review.

If the taxpayer does not pursue Appeals at that stage, the IRS can issue a statutory notice of deficiency. Then, the taxpayer’s primary recourse is filing a petition in the U.S. Tax Court within 90 days of the notice date.

How Does Appeals Evaluate Cases?

Appeals officers generally analyze disputes through the lens of “hazards of litigation.”

This means they consider how the case might be resolved if it were ultimately litigated in court. The officer evaluates factors like:

  • Strength of the legal arguments and factual evidence
  • Relevant case law, statutes and regulations, and IRS administrative guidance
  • Expected success rate for the parties

The Appeals process often provides opportunities to negotiate settlements because focuses on litigation risk rather than just enforcing the IRS’s original position.

What Happens in the Appeals Process?

Once a case is transferred to Appeals, the process typically involves several stages.

  1. Case Assignment – An Appeals officer is assigned to review the matter. The officer can ask for more information or clarification about the taxpayer’s position.
  2. Appeals Conference – Can occur by telephone, videoconference, or in person. During this conference, the taxpayer or taxpayer’s representative presents arguments challenging relevant audit results.
  3. Settlement Discussions – Appeals officers often explore potential settlement options based on their evaluation of the hazards of litigation. In some cases, disputes are resolved entirely at this stage. In others, partial settlements can narrow the issues that continue in dispute.

Strategic Tips for Successful Appeals

Although Appeals is less formal than litigation, preparation remains critical. Effective Appeals advocacy often involves:

  • File a well-supported and documented written protest
  • Focus on the strongest legal and factual arguments
  • Anticipate and address the IRS’s position
  • Be realistic in evaluating settlement opportunities

In many cases, the Appeals process is the best opportunity to resolve a dispute without costly and time-consuming litigation.

Appeals vs. Tax Court

If a case can’t be resolved in Appeals, taxpayers can pursue litigation in the U.S. Tax Court, federal district court, or the Court of Federal Claims, depending on the type of dispute.

Using the Appeals process before litigation often provides a valuable opportunity to reassess positions and negotiate potential resolutions.

For many taxpayers, the Appeals process is a practical path to resolving disputes and avoiding extra cost and uncertainty from litigation in court.

Get Help from a Tax Appeals Attorney

Tax disputes can involve complex legal and factual issues. This is particularly true where audits involve multi-year adjustments, significant penalties, or technical tax questions.

Professional representation can help taxpayers:

  • Assess the strength or risk of their position
  • Prepare persuasive Appeals protests
  • Negotiate effectively with Appeals officers
  • Decide whether settlement or litigation is the appropriate path

For professional guidance on IRS audit defense and federal tax compliance, connect with DBL Law Partner Nick Eusanio. Nick offers strategic counsel on audit readiness, defense, and proactive tax planning

IRS Enforcement Trends Businesses Should Watch in 2026

Nick Eusanio, Esq., LL.M. Leave a comment

The IRS has experienced significant workforce reductions and budget constraints in recent years. But the IRS continues to pursue enforcement in high-impact areas. This is particularly true for businesses with complex structures, pass-through entities, or cross-border activities. Advanced data analytics and AI help the agency target audits more efficiently, focusing on cases with the greatest revenue potential.

Businesses should track some of the below areas that recent enforcement campaigns have focused on:

These priorities show the IRS’s strategy of deeper, tech-driven examinations on complex returns rather than broad increases in audit volume.

If any of the above areas may impact your business operations, be sure relevant documentation is organized and in proper form. Focus on contemporaneous transfer pricing studies, detailed partnership agreements, other intercompany agreements (service, licensing, IP, etc.), accurate and current organizational charts, and substantiation for any ERC positions. A bit of preparation can be critical if detailed IRS information requests arrive.

For professional guidance on IRS audit defense and compliance strategies, check out our resources here: IRS Audit Defense Help.

If your business is navigating complex tax reporting, cross-border compliance, or heightened IRS scrutiny, connect with DBL Law Partner Nick Eusanio for strategic guidance on audit readiness, defense, and proactive tax planning.

Are Personal Injury Settlements Taxable in Kentucky or Ohio?

Nick Eusanio, Esq., LL.M. Leave a comment

When it comes to personal injury settlement proceeds, the U.S. federal and state income tax treatment can significantly affect how much of your recovery you keep. Whether you’re a personal injury plaintiff, attorney, or tax advisor, thoughtful structuring and characterization of a settlement is essential.

Here’s a high-level summary of how federal, Ohio, and Kentucky income tax law treats personal injury settlement proceeds, and how to structure a settlement agreement for tax efficiency.

💡Personal Injury Settlements Can Be Tax-Free

Under Internal Revenue Code (IRC) § 104(a)(2), certain damages received on account of personal physical injuries or physical sickness are not taxable. So, these proceeds aren’t included in federal gross income under IRC § 61, which otherwise broadly includes “all income from whatever source derived.”

To support tax-free payments, especially for Kentucky or Ohio taxpayers, attention to the relevant legal framework and aligning structuring and documentation of the settlement are critical.

🔍 The Federal Income Tax Framework: IRC and Treasury Regulations

Under federal income tax law:

  • IRC § 61 is the starting point, which states that gross income includes all income of a taxpayer unless a specific exclusion applies.
  • IRC § 104(a)(2) excludes from gross income damages received (other than punitive damages) on account of personal physical injuries or physical sickness.
  • Treas. Reg. § 1.104-1(a), (c) confirms that the exclusion applies to both lump-sum and periodic payments and clarifies the scope of injuries that qualify.
    • For instance, it is also possible to exclude settlement amounts attributable to emotional distress, but that emotional distress 🧠 must be directly related to the personal physical injury sustained, unless the amount is for reimbursement of actual medical expenses related to the emotional distress and such amount wasn’t previously deducted under IRC § 213.
    • 💭 Note: Punitive damages and damages unrelated to physical injury—like reputational harm or contract claims—are taxable.

🏛️ State Income Tax Law: Ohio and Kentucky Generally Follow Federal Law

  • Ohio Revised Code § 5747.01(A) and Kentucky Revised Statutes §§ 141.010 and 141.019 state that both Ohio and Kentucky generally conform to the federal definition of gross income, with certain state-specific adjustments.
  • So, if your settlement proceeds are excluded under IRC § 104(a)(2), they are also excluded from Ohio and Kentucky state income tax, unless a specific modification exists (which does not in Ohio or Kentucky income tax law).

📝 How to Structure the Settlement Agreement

The tax characterization of a settlement isn’t solely based on what the payment is called—it depends on what the payment is actually for. Still, clear language in the agreement helps support favorable tax treatment.

Recommended provisions to include:

  1. Purpose – Clearly state that the agreement is a settlement instead of pursuing a potential or existing claim or legal action under statutory or common law involving personal physical injuries or physical sickness.
  2. Characterize Settlement Proceeds into Appropriate Buckets –  
    State amounts of any payments attributable to personal physical injuries or sickness and affirm that the parties intend those payments to be excluded from gross income under IRC § 104(a)(2) and Treas. Reg. § 1.104-1(a), (c). Specifically allocate any settlement proceeds to other buckets if relevant, like punitive damages which are taxable.

⚖️ Final Word

Not every settlement dollar is tax-free. But with smart planning and a well-structured agreement, plaintiffs in Kentucky and Ohio can often shield personal injury settlements from both federal and state income taxes.

Tax advice should always be tailored to the specific facts of the case—so if you’re drafting a settlement agreement or receiving a payout, consult with a tax attorney who knows how to structure these arrangements properly.

Should My Small Business Accept Credit Cards? What Can I Do to Offset the Credit Card Processing Fee the Network Charges?

Nick Eusanio, Esq., LL.M. Leave a comment

Generally, your small business should accept credit card payments; it just makes business sense.

Many small business owners and entrepreneurs ask the question: “Should my small business accept credit cards?” Generally, from a pure business/financial standpoint, the answer is yes, for these reasons:

  1. Don’t Lose Business – By not accepting credit card payments, a business risks losing customers. A customer who wants to pay by credit card may not want or be able to pay by any other method. Perhaps the customer doesn’t carry cash or checks, or just deems paying by credit card more convenient or secure. It simply does not make sense to turn away a would-be paying customer, just because the credit card company will charge a fee to process the transaction.
  2. Convenience = ^ Sales – Second, those same customers who value the convenience of paying by credit card are likely to buy more, and/or more often from your company.
  3. Recurring/Automatic Payments – Related to the second reason, accepting credit cards enables setting customers up for recurring/automatic payments if they use your company’s goods or services regularly.
  4. Cash Flow – From a cash flow standpoint, a credit card payment is immediate like cash, but doesn’t carry the risk of a personal check that could bounce for insufficient funds. Also, as noted above, not all customers carry cash or want to use cash, and many will buy more if they can use credit.
  5. Accounting & Record-keeping – Credit card payments can be easily integrated and synchronized with your bookkeeping software, increasing accuracy and ease of accounting and documentation while minimizing costs for additional labor to do so.

In some instances, credit card processing fees can be strategically offset or recouped.

Often, despite the above reasons, small business owners and entrepreneurs remain hesitant to accept credit card payments because of their aversion to paying the transaction fee to the credit card network. This concern has led many start-up founders and small business owners to consider what they can do to offset the credit card processing fees that the network charges. To do so, numerous small businesses have creatively tried to pass the credit card processing fees along to the customer. But, are small businesses allowed to pass credit card fees along to the customer?

Currently, there is no federal prohibition, but 10 states have laws prohibiting a merchant from charging customers a surcharge to pay by credit card (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX). In California and New York, court orders have enjoined the state from enforcing the prohibition laws, but those cases remain on appeal. In Florida, an appeals court reversed a trial court order that upheld Florida’s law limiting surcharges, but that case remains subject to further litigation. So, what can a small business owner do to offset or recoup credit card surcharge fees?

Biz&TaxHax Tip:

If you are an entrepreneur or small business owner considering charging your customers a fee for paying by credit card, following is some guidance for minimizing the effect of credit card transaction fees to your business:

  1. Review Credit Card Network Agreements – Although there is no federal prohibition, and your state may not be one that prohibits imposing a surcharge for credit card users, companies should review their agreements with the various credit card networks to determine whether a contractual prohibition or limitation exists. Agreements with the credit card networks may prohibit or otherwise limit or restrict the merchant from charging the transaction processing fee to the customer. So it is important to review all agreements with credit card networks before imposing any surcharge on credit card users to avoid potentially breaching those agreements.
  2. Review Applicable Law for Specifics – Even if your business operates in a state where there is a prohibition on imposing a “surcharge” to credit card users, these laws may be drafted such that the company can avoid the prohibition by simply offering a discounted price to cash (non-credit card) payers. In other words, the company could simply set the price for its products or services at a particular amount that would cover the credit card processing fee cost, and then advertise to customers that if they pay by cash, they get a discount from the regularly stated price. Of course, if your company operates in a state with a surcharge prohibition, you should review the particular statutory/regulatory language before using this discounted price method, to ensure that this method would not also violate the law.
    • Read Credit Card Network Agreements Again & Clearly Post Discounted Prices for Cash Payments – Note, this practice may still violate some credit card network agreements, so it’s important to read the agreements carefully. Also, be careful to clearly and conspicuously post the discounted price for customers paying by cash to avoid any possible concerns with consumer protection/deceptive trade practices laws.

As always, it’s important to consult an attorney familiar with your company’s specific facts and circumstances and the applicable law before making any decision or taking any action that may affect contractual or regulatory compliance obligations of your company. An experienced lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your business compliance and planning needs.