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The Examination and Appeals Process

We examine returns for correctness of income, exemptions, credits, and
deductions.

Fairness if Your Return is Examined

Most taxpayers' returns are accepted as filed. But if your return is selected
for examination, it does not suggest that you are dishonest. The examination
may or may not result in more tax. Your case may be closed without change.
Or, you may receive a refund.

Courtesy and consideration. You are entitled to courteous and considerate
treatment from IRS employees at all times. If you ever feel that you are not
being treated with fairness, courtesy, and consideration by an IRS employee,
you should tell the employee's supervisor. Publication 1, Your Rights as a
Taxpayer, explains the many rights you have as a taxpayer. You can get free
publications by calling our toll-free number.

Pay only the required tax. You have the right to plan your business and
personal finances in such a way that you will pay the least tax that is
due under the law. You are liable only for the correct amount of tax.
Our purpose is to apply the law consistently and fairly to all taxpayers.

Privacy and confidentiality. You have the right to have your tax case kept
confidential. Under the law, the IRS must protect the privacy of your tax
information. However, if a lien or a lawsuit is filed, certain aspects of
your tax case will become public record. People who prepare your return
or represent you must also keep your information confidential.

You also have the right to know why we are asking you for the information,
exactly how we will use it, and what might happen if you do not give it.

Examination of Returns
An examination usually begins when we notify you that your return has been
selected. We will tell you which records you will need.

How returns are selected. We select returns for examination by several
methods. A computer program called the Discriminant Function System (DIF)
is used to select most returns. In this method, the computer uses historical
data to give parts of the return a score. IRS personnel then screen the return.

Some returns are selected at random. We also select returns by examining
claims for credit or refund and by matching information documents, such as
Forms W─2 and 1099, with returns.

Arranging the examination. Many examinations are handled by mail. For
information get the free Publication 1383, The Correspondence Process (Income
Tax Accounts). If we notify you that your examination is to be conducted
through a personal interview, or if you request such an interview, you have
the right to ask that the examination take place at a reasonable time and
place that is convenient for both you and the IRS. If the time or place we
suggest is not convenient, the examiner will try to work out something more
suitable. However, we will make the final determination on how, when, and
where an examination takes place.

Transfers to another district. Generally, your return is examined in the
IRS district where you live. But if it can be examined more quickly and
conveniently in another district, such as where your books and records
are located, you may ask to have the case transferred to that district.

Representation. Throughout the examination, you may represent yourself,
have someone else accompany you, or, with proper written authorization, have
someone represent you in your absence. If you want to consult an attorney, an
enrolled agent, or any other person permitted to represent a taxpayer during
an examination, we will stop and reschedule the interview. We cannot suspend
the interview if you are there because of an administrative summons.

Recordings. You can generally make an audio recording of an interview with an
IRS Examination officer. Your request to record the interview should be made
in writing. You must notify us 10 days before the meeting and bring your own
recording equipment. We also can record an interview. If we initiate the
recording, we will notify you 10 days before the meeting, and you can get
a copy of the recording at your expense.

Repeat examinations. We try to avoid repeat examinations of the same items,
but sometimes this happens. If we examined your tax return for the same
items in either of the 2 previous years and proposed no change to your tax
liability, please contact us as soon as possible so that we can see if we
should discontinue the examination.

Explanation of changes. If we propose any changes to your return, we will
explain the reasons for the changes. It is important that you understand
the reasons for any proposed change. You should not hesitate to ask about
anything that is unclear to you.

Agreement with changes. If you agree with the proposed changes, you may
sign an agreement form and pay any additional tax you may owe. You must pay
interest on any additional tax. If you pay when you sign the agreement, the
interest is generally figured from the due date of your return to the date
you paid.

If you do not pay the additional tax when you sign the agreement, you will
receive a bill. The interest on the additional tax is generally figured from
the due date of your return to the billing date. However, you will not be
billed for more than 30 days additional interest, even if the bill is delayed.

If you are due a refund, we can refund your money more quickly if you sign the
agreement form. You will be paid interest on the refund.

Appealing the Examination Findings

If you do not agree with the examiner's report, you may meet with the
examiner's supervisor to discuss your case further. If you still don't agree
with the examiner's findings, you have the right to appeal them. The examiner
will explain your appeal rights and give you a copy of Publication 5, Appeal
Rights and Preparation of Protests for Unagreed Cases. This free publication
explains your appeal rights in detail and tells you exactly what to do if you
want to appeal.

Appeals Office. You can appeal the findings of an examination within the IRS
through our Appeals Office. The Appeals Office is independent of your examiner
and IRS District Director or Service Center Director. Most differences can be
settled through this appeals system without expensive and time-consuming court
trials. If the matter cannot be settled to your satisfaction in Appeals, you
can take your case to court.

Appeals to the courts. Depending on whether you first pay the disputed tax,
you can take your case to the U.S. Tax Court, the U.S. Claims Court, or
your U.S. District Court. These courts are entirely independent of the IRS.
However, a U.S. Tax Court case is generally reviewed by our Appeals Office
before it is heard by the Tax Court. As always, you can represent yourself
or have someone admitted to practice before the court represent you.

If you did not yet pay the additional tax and you disagree about whether
you owe it, you generally have the right to take your case to the Tax Court.
Ordinarily you have 90 days from the time we mail you a formal notice (called
a "notice of deficiency") telling you that you owe additional tax to file a
petition with the Tax Court.

If you have already paid the disputed tax in full and filed a claim for
refund (discussed later) for it that we disallowed (or on which we did not
take action within 6 months), then you may take your case to the U.S. District
Court or U.S. Claims Court.

Court decisions. We follow Supreme Court decisions. However, we can lose cases
in other courts involving taxpayers with the same issue and still apply our
interpretation of the law to your situation. You have the right to appeal our
decision to do so.

Recovering litigation expenses. If the court agrees with you on most of the
issues in your case, and finds the IRS's position to be largely unjustified,
you may be able to recover some of your litigation expenses from us. But to do
this, you must have used up all the administrative remedies available to you
within the IRS, including going through our Appeals system. You may also be
able to recover administrative expenses from the IRS. Free Publication 556,
Examination of Returns, Appeal Rights, and Claims for Refund, explains your
appeal rights.

Other remedies. If you believe that tax, penalty, or interest was unjustly
charged, you have rights that can remedy the situation.

Claims for refund. Once you have paid your tax, you have the right to file a
claim for a credit or refund if you believe the tax is too much. The procedure
for filing a claim is explained in Chapter 1.

Cancellation of penalties. You have the right to ask that certain penalties
(but not interest, as discussed later) be canceled (abated) if you can show
reasonable cause for the failure that led to the penalty (or can show that you
exercised due diligence, if that is the applicable standard for the penalty).

If you relied on wrong advice given to you by IRS employees on the toll-free
telephone system, we will cancel certain penalties that may result. But you
have to show that your reliance on the advice was reasonable.

Reduction of interest. If our error caused a delay in your case, and this is
grossly unfair, you may be entitled to a reduction of the interest that would
otherwise be due. Only delays caused by procedural or mechanical acts that do
not involve exercising judgment or discretion qualify. If you think we caused
such a delay, please discuss it with the examiner and file a claim.