1. What Happens during a Tax Audit and What Are Your Rights?
A tax audit is an examination by the IRS or state tax authority of your tax return to verify that income, deductions, and credits are accurate and compliant with law. You have the right to representation, access to the auditor's workpapers, and a formal appeals process if you disagree with the examination findings.
The audit process typically begins with a notice of examination, which specifies the years under review and the issues the tax authority intends to examine. During the examination phase, the IRS or state agency may request books, records, bank statements, and other supporting documentation. You are not required to produce documents beyond what the tax authority has authority to summon, and any summons must follow statutory procedures that protect taxpayer rights.
If the examiner proposes adjustments, you receive a notice of proposed adjustment, which outlines the changes and the tax, interest, and penalties the authority believes are due. At this stage, you may request a conference with the examiner's supervisor or request a formal appeals hearing before any assessment becomes final. Many disputes are resolved at the administrative level without escalation to court, making early documentation and clear communication with the tax authority critical.
How Does the IRS Notice and Demand Process Work?
After an examination concludes, the IRS issues a statutory notice of deficiency (also called a 90-day letter) if it determines additional tax is owed. This notice informs you that you have 90 days to file a petition in the United States Tax Court if you wish to contest the determination before the IRS assesses and collects the tax.
If you do not file a Tax Court petition within the 90-day window, the IRS proceeds to assessment and collection. Once assessed, the IRS may issue a notice and demand for payment, and if payment is not received, the agency may pursue collection remedies, including wage garnishment, bank levies, and liens on property. The 90-day period is jurisdictional, meaning that if you miss this deadline, the Tax Court loses jurisdiction to hear your case, and your only avenue for dispute becomes a refund claim filed after payment.
2. What Are the Main Stages of Tax Controversy and Litigation?
Tax disputes follow a defined progression from administrative examination through appeals and, if unresolved, to litigation in one of three forums: Tax Court, federal district court, or the United States Court of Federal Claims.
The administrative stage includes the audit, the examination report, and the appeals process. During appeals, you may present new arguments and evidence that were not considered by the examining agent. The appeals officer is independent and may sustain, modify, or reverse the examiner's position. Many cases settle at the appeals level because both parties have an opportunity to assess the strength of their respective positions.
If the administrative process does not resolve the dispute, litigation becomes necessary. Tax Court proceedings are conducted under the Tax Court Rules of Practice and Procedure and do not require payment of the disputed tax before filing suit. In contrast, if you choose federal district court or the Court of Federal Claims, you must first pay the full amount of tax, interest, and penalties assessed, then file a refund claim with the IRS, and finally file suit if the IRS denies the claim or does not respond within the statutory period.
How Does Tax Court Differ from Other Forums?
Tax Court is a specialized tribunal with judges experienced in tax law, and it offers several procedural advantages for taxpayers. You do not need to pay the disputed tax before filing suit, which preserves cash flow and reduces the financial burden of litigation. Tax Court also operates under more relaxed rules of evidence than district court, and the court may consider hazards of litigation when settling cases on appeal.
Federal district court and the Court of Federal Claims require full payment before suit, but these forums may be preferable if you have a sympathetic factual record, seek a jury trial (available only in district court), or want to pursue counterclaims beyond the scope of the tax dispute. The choice of forum depends on the nature of the dispute, the strength of your evidence, and your ability to fund litigation.
3. What Penalties and Interest Can the IRS Impose, and How Are They Challenged?
The IRS may assess penalties in addition to the underlying tax liability. Common penalties include accuracy-related penalties (typically 20 percent of the underpayment), fraud penalties (75 percent), failure-to-file penalties, and failure-to-pay penalties.
Accuracy-related penalties require a showing that you did not have substantial authority for your tax position. If you can demonstrate reasonable cause for the underpayment and that you acted in good faith, you may be entitled to penalty relief. Fraud penalties are more severe and require clear and convincing evidence of intent to evade tax; the burden shifts to the IRS to prove fraud, but once the IRS establishes fraud, the penalty applies to the entire underpayment, not just a portion.
Interest accrues daily on unpaid tax from the due date until payment is made. The interest rate is adjusted quarterly and is compounded daily. Interest cannot be waived, but it may be reduced if the IRS made an error in its calculation or if you paid a portion of the tax on time. In litigation, you may challenge the statutory basis for a penalty or argue that the IRS failed to follow procedural requirements, such as adequately explaining the factual basis for the penalty or providing notice of the right to appeal.
4. How Can a Taxpayer Navigate the Appeals Process and Resolve Disputes?
The IRS appeals process is a critical stage where many tax disputes are resolved without litigation. After receiving an examination report proposing adjustments, you may request an appeals conference within a specified timeframe, typically 30 days from the date of the examination report.
The appeals process is designed to provide an independent review of the examination findings. You may present new legal arguments, economic analyses, or factual evidence that supports your position. The appeals officer has settlement authority and may consider hazards of litigation, which means the officer can recommend settling the case for a percentage of the disputed amount even if the law or facts do not clearly favor either party.
Documentation is essential during appeals. A clear, organized presentation of your tax position, supported by contemporaneous records and expert analysis where appropriate, strengthens your posture. If you are pursuing tax controversy and litigation strategies, consider engaging counsel early to develop a coherent narrative and ensure all relevant evidence is presented to the appeals officer.
What Role Does the New York Department of Taxation and Finance Play in State Tax Disputes?
New York State maintains a separate tax administration and dispute resolution process. Taxpayers subject to New York income tax, sales tax, or other state taxes may face audits by the Department of Taxation and Finance. The state offers an administrative appeals process similar to the federal system, though the procedures and forums differ.
New York disputes may be heard in the Division of Tax Appeals, which functions as an independent administrative tribunal. If you disagree with the Division's determination, you may seek judicial review in the New York Appellate Division. The state process typically moves faster than federal litigation, but the legal standards and burden of proof are comparable. Taxpayers facing both federal and state disputes should coordinate their positions and ensure that arguments and evidence are consistent across both proceedings.
5. What Should You Do If You Receive a Notice of Audit or Assessment?
Your immediate priority is to preserve your rights by understanding the notice and the deadline for response. Read the notice carefully to identify the tax years under examination,
19 May, 2026
