tax controversy

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.

Common Tax Traps for Entrepreneurs, Startups & Small Businesses

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

Federal tax audits or examinations don’t just happen to big corporations. Founders and small businesses are often hit the hardest. This is sometimes because growth outpaces compliance, and sometimes because the rules themselves are complex. Here are some key areas where trouble tends to strike, and what you can do to mitigate risk.

1. Worker Classification: Independent Contractors vs. Employees

Issue: Misclassifying workers can lead to payroll tax assessments, penalties, and even personal liability for owners.

Consider: The IRS applies a multi-factor test focused on control. If you dictate hours, tools, and how the work is done, odds are the worker is an employee.

Action: Use written contracts with contractors. Review relationships annually. Consider preparing and filing IRS Form SS-8 if classification is unclear.

2. Payroll Tax Compliance

Issue: The IRS treats unpaid payroll taxes as one of the most serious violations. Missed deposits, late filings (Form 940 and Form 941), or failure to remit tax withholdings can trigger the Trust Fund Recovery Penalty (TFRP). Under the TFRP, the IRS can collect directly from “responsible persons”—owners, officers, or even bookkeepers.

Consider: Red flags like:

  • Borrowing from payroll tax withholdings to cover operating expenses.
  • Repeated late deposits.
  • Incomplete or inaccurate Forms 940 or Forms 941.

Action: Use an outside payroll provider if you don’t have in-house talent. Always confirm deposits are made, even if a third-party processor is used.

3. Deductibility of Expenses

Issue: The IRS often challenges whether claimed deductions are truly “ordinary and necessary” under IRC § 162. Startups and entrepreneurs are particularly at risk because personal and business expenses sometimes blur together.

Consider:

  • Startup vs. operating expenses: Generally, pre-opening costs must be capitalized and amortized under IRC § 195. There is a limited first-year immediate deduction of $5,000 in startup costs and another $5,000 in organizational costs. But this deduction is subject to limitations and phase-out.
  • Meals, travel, and vehicles: Require strict substantiation with logs and receipts. Note applicable limitations like 50% of meals. Identify clear business purpose.
  • Home office deductions: Often challenged unless the space is used exclusively and regularly for business. Evaluate applicable safe harbor rules and remember deduction recapture rules on sale of your home.

Action: Keep meticulous records. A clean ledger with contemporaneous notes, mileage logs, and calendar entries are key in audit defense.

4. Entity Structure & Elections

Issue: The choice of entity—and whether elections are properly filed—drives tax mechanics and impact, reporting compliance, and controversy.

Consider:

  • Entity Classification Election (Form 8832): What is the default tax classification of the entity? Is the entity eligible to elect a different tax classification? Options are: association taxable as a corporation, partnership, or entity disregarded from its owner for federal income tax purposes. A late or erroneous election can have significant consequences. These mistakes can impact applicable tax mechanics and rate(s) and reporting obligations. Often, an election mistake leads to other incorrect or missed filings and more tax, interest and penalties.
  • S Corporation Election (Form 2553): If filed late or incorrectly, the IRS treats the company as a C corporation. This creates unintended double taxation. As above, impacts can also include other incorrect or missed filings, more tax, interest and penalties.
  • Reasonable Compensation: S Corp shareholders who underpay themselves and take most income as “distributions” risk IRS reclassification. This reclassification often triggers more payroll tax liabilities.
  • Conversions and Reorganizations: Changing from an LLC with partnership or disregarded entity tax classification to a corporation (or vice versa) can trigger unanticipated tax consequences. As before, this often leads to more tax, interest, and penalties if not carefully planned.

Action: Confirm your entity elections are on time, appropriate, and as intended. Keep written records of salary determinations and supporting research. Consult tax counsel before making any structural changes or elections.

5. Qualified Business Income (QBI) Deduction (IRC § 199A) Complexities

Issue: The 20% deduction can be huge—but the rules are highly technical. The IRS closely examines whether a business is a “specified service trade or business” (SSTB), how wages are calculated, and whether property is properly classified.

Consider:

  • Is your business type listed as a SSTB?
  • How are wages and property allocated?
  • Do income thresholds limit your deduction?

Action: Model the deduction annually to confirm eligibility, and document how wages and property are allocated. Careful planning around compensation, entity choice, and property ownership can preserve or improve the benefit.

6. Sale, Exit & Mixed-Character Transactions

Issue: When it’s time to sell, how you structure the deal often impacts whether proceeds are taxed as ordinary income or capital gain.

Consider: Impact to character (ordinary or capital gain) of gain, tax rate, and timing from:

  • Stock / equity sale (legal) treated the same for tax purposes,
  • Asset sale (legal) treated the same for tax purposes OR Stock / equity sale (legal) treated as an asset sale for tax purposes (available elections / requirements)
    • Allocation of purchase price to asset classifications (e.g., accounts receivable, inventory, goodwill, etc.)
  • Installment sale treatment
  • Foreign Investment in Real Property Tax Act (FIRPTA) for foreign investors selling an interest real property or a real-property rich entity.

Action: Get tax advice before signing the letter of intent. Once the framework structure is agreed upon, the tax impact of the final deal is often limited unless flexibility was built in.

7. Recordkeeping & Documentation – IRS Audit

Issue: The IRS doesn’t always take your books at face value. If records are thin, the IRS can use indirect methods to recreate your P&L. This can include bank deposit analysis, percentage markup analysis, or lifestyle audits (looking at cash and credit card expenditures and assets).

Consider / Action: Keep separate business and personal accounts and reconcile monthly. Save receipts and invoices. Prepare clear schedules for deductions. Save other relevant supporting documentation from third parties.

8. Penalties & Interest

Issue: The tax bill is only part of the pain. Late filing, late payment, and accuracy-related penalties can quickly snowball.

Consider:

  • IRC § 6651 penalties for failure to file/pay.
  • IRC § 6662 accuracy-related penalties for negligence or substantial understatement.
  • Other IRC provisions imposing penalties for failure to file related to certain informational returns.

Action: Keep a tax compliance calendar with entries and recurring reminders for all tax filing and payment due dates and amounts. Task a responsible employee (or a third-party consultant) with monitoring and managing all tax obligations to ensure timely reporting and payment.

Final Word

For entrepreneurs and small businesses, tax controversies often arise not from intent but from oversight, rapid growth, or technical missteps. Minding entity classification elections and payroll tax obligations, documenting deductions, and involving tax counsel early in transaction planning, can help small businesses avoid many of the most common IRS challenges.

Often a short consultation with a tax attorney can save you from years of penalties, interest, and costly disputes. If you’re facing an IRS notice of audit or examination, notice of proposed adjustment, or IRS collection action, don’t delay. Now is the time to contact tax counsel with experience in tax controversy matters. Prompt action with a tax attorney in your corner can improve results. Potential benefits can include avoiding or releasing tax liens and levies, reducing tax, interest and penalties, or settling tax debts for less than the amount owed.