IRS Audits & Appeals in California
An IRS examination can put several years of financial decisions under review. A useful response starts with the actual notice, the tax periods involved and the information the IRS is requesting. A disagreement about an expense, payment or transaction should be supported by a clear record and a reasoned legal position.
RV Litigation Group PC assists California individuals and businesses with IRS audit responses and administrative tax disputes. We organize the issues, review proposed adjustments and address the steps needed to preserve available appeal rights.
Understand the Examination Before Responding
An audit does not itself establish that a taxpayer has done something wrong. The IRS may conduct an examination through correspondence or an in-person review. The response should be matched to the specific issues and records requested. The IRS audit overview explains these examination procedures.
We review the notice, relevant returns, supporting records and prior communications before preparing a response. For a business, that can require reconciling accounting records with the transaction documents and identifying who has reliable knowledge of the facts. Missing records should be identified honestly; assumptions should not be presented as established facts.
Evaluate Each Proposed Adjustment
Income and transaction treatment
A dispute may concern how a payment was characterized, when income was recognized or which taxpayer reported an item. The legal analysis should follow the underlying transaction and the available evidence.
Penalties and related exposure
A proposed tax adjustment and a penalty require separate attention. We review the stated basis for a penalty and whether the facts support a challenge or an available relief request, without promising that relief will be granted.
What Makes a Business Expense Deductible?
Under Internal Revenue Code section 162, an operating expense generally must be ordinary for the business and necessary to carrying it on. Necessary means helpful and appropriate; it does not require that the expense be indispensable. The expense must also belong to the proper taxpayer and tax year. The taxpayer’s accounting method and other timing rules determine when an amount is paid or incurred for deduction purposes.
A bank withdrawal proves that money moved, but may not establish what was purchased or why it qualified. A consulting contract describes the promised work; deliverables and correspondence show performance; invoices explain the charge; payment records help trace the transaction. Counsel connects those records to each disputed requirement rather than submitting an unexplained stack of documents.
Personal expenditures, amounts connected with acquiring an asset, and costs of starting a business may require different treatment. Some costs must be capitalized or recovered under separate rules instead of deducted immediately. This inquiry depends on the work performed and the applicable provision; it is not a rule that every expansion cost receives the same treatment. See 26 U.S.C. § 162 and IRS Publication 334.
Different IRS Notices Require Different Responses
An information request identifies what the examiner wants to review. An examination report proposes adjustments. A letter offering an administrative appeal and a statutory notice of deficiency serve different purposes. Counsel should identify the document before selecting a response; writing to the examiner is not a substitute for a required petition.
In a deficiency case, the usual Tax Court petition period runs from mailing of the notice, with a different period for qualifying notices involving persons outside the United States. Other matters have different jurisdictional rules. The precise notice, mailing information, applicable exceptions and court instructions must be checked before calculating a deadline. Payroll assessments and collection notices should not be placed automatically on the income-tax deficiency track.
Matters requiring a petition or judicial review are addressed through our Tax Litigation & Appeals practice.
Preparing a Request for IRS Appeals
The IRS Independent Office of Appeals reviews qualifying disputes separately from the examination function. Eligibility and submission requirements depend on the notice and procedural stage.
An eligible audit dispute ordinarily moves to Appeals after the originating office has completed its work, although specific early-resolution programs may apply. Follow the instructions in the letter offering review. The request ordinarily goes to the IRS office identified in that letter, rather than being sent directly to Appeals.
A formal protest identifies the taxpayer, periods, disputed changes, supporting facts, reasons and legal grounds, with the required signature and declaration. Some eligible cases use a simplified request. Those administrative procedures are different from the Tax Court’s small-tax-case procedure. New records or issues may require additional examination review before Appeals can resolve the dispute.
Review the complete notice and preserve the filing record. An inadequate explanation does not by itself invalidate a covered notice. If a statutory notice of deficiency arrives, evaluate its separate petition requirements even while administrative discussions continue. Read the IRS instructions for requesting Appeals.
Responding Accurately to an Information Request
Identify what each request asks for, who holds the records and which transactions they explain. Records outside a particular return year can still bear on an item under examination. Counsel can evaluate relevance, scope, privilege and whether clarification is needed; a taxpayer should not assume that a chosen description of the audit unilaterally limits the IRS’s lawful examination authority.
Records That Help Us Evaluate the Matter
- The complete notice and envelope, examination report, document requests and every prior response.
- Filed and amended returns, workpapers, relevant contracts, invoices and proof of payment.
- A transaction chronology identifying who prepared the return and what information was provided.
- Separate records of any penalty, collection notice, related state adjustment or disputed tax payment.
Start an inquiry with the notice or allegation, your role and any stated deadline. Preserve complete originals; arrange an appropriate transfer method before sending sensitive financial records.
Fictional California Examples
These fictional examples illustrate issues counsel may evaluate. They are not firm cases or results. Locations identify the setting; they do not establish venue, a local legal rule or a firm office.
A business claims a deduction for consulting fees. The IRS questions whether the work supported current operations, a new venture or acquisition of an asset. Contracts, deliverables, invoices and the accounting method help distinguish proof of an expense from the legal question of when and how it may be deducted.
An owner disputes an adjustment based on bank deposits and identifies transfers between accounts and asserted loans. Counsel traces both sides of transfers and reviews loan agreements, repayment history and business records. Calling a deposit a loan does not establish its treatment; the evidence must support the characterization.
An individual is supplying records to an examiner when a notice of deficiency arrives. Counsel separately checks the notice, mailing details and court filing requirements. Continuing the discussion does not substitute for the petition needed to preserve available Tax Court review.
How We Help
Assess the notice and the deadlines
We identify the agency contact, tax periods, requested response and current procedural stage.
Develop a documented response
We work with the client and appropriate accounting advisers to distinguish supported facts, missing information and legal disagreements.
Evaluate the next decision
We explain the available response, administrative appeal or litigation options and the implications of any proposed agreement.
Legal and Agency Resources
These statutes, decisions and agency resources explain the legal framework discussed above. The appropriate response depends on the actual notice, procedural stage and facts.
- IRS examinations
- IRS administrative appeals
- U.S. Tax Court: starting a case
- IRS Publication 556: examinations, appeals and refunds
- 26 U.S.C. § 162: trade or business expenses
- IRS: preparing an Appeals request
- 26 U.S.C. § 7522: explanation of covered notices
- 26 U.S.C. § 7602: examination authority
Frequently Asked Questions
No. An examination is a review of the return and supporting information; it is not itself a criminal charge. If questions about intentional conduct, altered records or criminal investigators arise, those issues require a separate assessment of criminal tax exposure.
Yes, where appropriate to the engagement. The accountant may have important records and knowledge of the return, while counsel evaluates the legal dispute and procedural options. Roles, authorizations and the handling of sensitive information should be established at the outset.
Discussions may continue, but they should not be treated as extending a petition deadline. Counsel needs to review the notice immediately and determine whether a separate filing is required to preserve court review. Keep the complete notice and evidence of when and how it was received.
No. A request for records is part of gathering information; a notice of deficiency carries separate statutory rights. Keep both documents and have the actual notice and mailing details reviewed before relying on a deadline.
Payment can change the available route. Counsel reviews the tax, amount paid, administrative refund claim and applicable limitations before evaluating a refund action. The requirements are different from filing a deficiency petition.
Some matters require a focused review of Tax Penalty Relief, Payroll Tax Disputes or Tax Liens, Levies & Collection Appeals, each with its own factual and procedural questions.
