A few years ago, a Denver woman suffered nerve damage in one of her fingers after an operation to remove a cancerous growth. Her doctors told her the finger might have to be amputated.
The woman sought help at a clinic in Kansas City, Mo., that specialized in treating her disorder. She stayed at a nearby motel during her treatment and spent $377 on her room and meals, deducting the amount later on her tax return as medical-related expenses.
Internal Revenue Service officials told her that had she flown the 600 miles from her home in Colorado to Kansas City each day for treatment, she could have deducted the travel costs. But she could not deduct what she spent on the motel room and meals. Pay another $180.92 in taxes, she was told.
The woman appealed and won her case when Murray Falk, then a tax court judge, ruled in her favor. “I found that her motel room was a substitute for a hospital room,” recalled Falk, now a Los Angeles tax lawyer.
Every year, thousands of taxpayers believe that they are wronged by federal or state tax authorities. Often they gripe about disallowed deductions for medical-related costs, fire and storm damage, child-care costs, business-related expenses such as travel and car expenses. Often they complain that they are penalized an excessive amount for filing late.
How people react varies. Many conclude that the time and effort required to fight isn’t worth the amount of money in dispute. Still others pay the penalty, intimidated by what they perceive as all-powerful agencies in the IRS or state Franchise Tax Board.
But some taxpayers, like the Denver woman, fight. And sometimes they win.
The appeal process is one of the least understood parts of the tax system--and for good reason. Few taxpayers take advantage of it.
Last year, 57,364 cases went through the IRS’ formal appeals procedure, a tiny amount relative to the 107 million federal tax returns filed annually by individuals. Likewise, state tax officials said only a few thousand people go through its appeals process each year, a small fraction of the 13 million people who file returns.
Yet tax experts say those who feel wronged need not be scared by the process. The tax appeal system can work if you are wronged.
Disputes can stem from several sources. One is the familiar audit procedure in which the tax agency takes a closer look at your return and may ask you to make a better case for a claimed deduction or produce more documents, such as receipts for charitable gifts. Keep in mind that should your return be selected for examination, it doesn’t necessarily mean you will pay more.
“Just because you are selected for an audit, it doesn’t mean you are loser. You may have no change, and you can get a refund,” said Newport Beach tax lawyer Paul W. Raymond.
In some cases, agency officials disagree with the way you computed your taxes and may recompute them for you. If you don’t like what they did, you can fight.
Here are some of the questions you should ponder if you believe that you have been wronged by a tax agency:
- To fight or not to fight?
The most basic reason to fight a tax decision is that a state or federal agency wants money you feel is rightfully yours. And just because the amount is small, you have as much right to fight to get it back as the tycoon whose tax shelter is being questioned.
Falk, the former tax court judge, recalled one case he heard in which a welder successfully fought the IRS over $92.30 in taxes. The agency said he owed it after telling him he could not deduct the cost of buying some special work clothes.
Another reason to appeal is that you don’t necessarily have to spend anything. To file an appeal costs nothing. If you eventually choose to sue in court after striking out in your appeals, however, you will pay court fees.
Finally, appealing your case may make you feel better. Some tax experts say it can serve as a catharsis for people who feel wronged. Even those who ultimately lose often feel better just knowing their case has been heard by a third party.
“A person has a good feeling knowing he or she has had an independent review of an IRS action. It acts as a safety valve for people to vent frustration,” Falk said.
The best reason not to appeal may be that your time is so valuable or your blood pressure so high that an appeal isn’t worth it.
Appealing takes time for meetings and hearings, patience waiting months to be heard. Ultimately, it may not be worth the trouble. And interest on what you owe will accumulate during the appeal.
Another consideration is that you risk having your whole return opened up. So if there are other questionable deductions on your return, you may want to forget fighting. “It depends on how clean your tax return is,” said Century City tax attorney Mortimer L. Laski, a former IRS official, when asked whether people should appeal.
One myth that tax experts say keeps people from appealing is a belief that tax officials will try to get even with those who successfully appeal. Even tax attorneys who regularly battle the agency say the IRS is more interested in determining the correct amount of tax than in scoring victories.
“It’s important not to think of the IRS as a confiscatory agency. All of the training we did with the service always hinged on the fact that the Internal Revenue Service person tries to determine the correct liability,” Laski said.
- Should you handle the case yourself?
The main reason to hire someone to represent you is that you probably will increase your chances of winning. The biggest reason not to is cost.
You can spend a lot hiring a professional to represent you. A certified public accountant may be $150 an hour and more. So can a tax lawyer. For as much as $100 an hour you can hire an enrolled agent, who is authorized to represent people before the IRS.
A new federal law allows taxpayers to recoup legal and accounting fees if they show the IRS acted unreasonably. Compensation not only includes court expenses, but money spent earlier for lawyers and accountants while the case was being appealed to IRS administrators.
Don’t assume that the $150 or so you paid your tax preparer last spring to do your taxes will cover your appeal. They often charge extra. Before hiring a preparer, ask whether the fee includes representing you if you have a problem.
So if the amount in dispute is small, say $500 or so, it usually isn’t worth hiring someone. If you have a big complex case and are in danger of having severe penalties assessed against you, then you probably need a lawyer and/or a certified public accountant.
Another reason to handle the case yourself is that it may not be difficult, especially in a small matter. Both the Denver woman whose meals and room were disallowed and the welder handled their case themselves.
- Will you win?
Reality is that the odds are stacked against you. Tax agencies don’t keep score, but it’s clear they win most of the time. Falk said that when he was a judge handling small tax cases, about 70% of the taxpayers lost. The rest succeeded in either getting the money in dispute or at least getting some reduction in what the IRS said they owed.
Some tax lawyers believe that fighting a tax dispute is a good idea because it puts agents under pressure to settle and keep the case out of tax court.
“One rule of thumb is that whoever stands up for their rights and stomps around a little gets more attention than somebody who is fully cooperative and rolls over,” tax lawyer Laski said.
- How do you fight it?
The first thing to do is not ignore the tax agencies. That will lead to bigger penalties that may be irreversible.
Your first contact at the IRS will be with a revenue agent, basically an accountant who works for the agency. If the agent disallows something, then you can take your case to his or her supervisor. Most cases are settled with either the revenue agent or supervisors.
If you are still unhappy, you can request an appeals conference. Your case will be heard by IRS employees, but they are different from the ones you dealt with initially and theoretically are independent.
If you you lose at the appeals level, you have 90 days to file a petition with the U.S. Tax Court. Otherwise, the total amount of the tax, interest and penalties will be assessed against you.
The IRS has forms available describing the appeal process in more detail. For more information, call (800) 424-FORM.
If you receive a notice from the state Franchise Tax Board telling you that you owe more taxes, the first thing to do is to try to resolve it informally with a local tax office or by calling the number on any form or letter you receive.
If you can’t resolve the problem there, you have 60 days to file a protest that allows you to document and justify your case. If that doesn’t work, you can appeal to the California State Board of Equalization. Beyond that, you can sue in civil court.
For information on the state appeals process, call the toll-free Franchise Tax Board information number at 1-800-852-5711.