Summary. A federal tax dispute moves through a defined sequence of stages, and the options available to a taxpayer narrow at each one. Examination produces a proposed adjustment, an administrative appeal offers the only forum authorized to settle on litigation risk rather than the merits alone, and a statutory notice of deficiency opens a ninety-day window that is the last chance to litigate without first paying the tax. Collection is a parallel track with its own due process protections, its own deadlines, and its own set of resolution alternatives. This article maps the stages, explains what each forum can and cannot do, and covers the penalty defenses, relief provisions, and limitations rules that determine outcomes more often than the substantive tax law does.

Tax controversy is procedural practice. The substantive question — was the deduction allowable, was the income reportable — matters, but a great many cases are decided by whether a document was filed within a stated number of days, whether the right forum was chosen, and whether the record was built at the administrative stage where it could still be built.

The sequence is the thing to learn. Each stage has an exit, a deadline, and a set of options that closes when the deadline passes.

Selection and examination

How returns get selected

The Discriminant Function score, a statistical model comparing a return against norms for similar returns. High scores are reviewed by classifiers who decide whether to examine.

Document matching. The Automated Underreporter program matches Forms W-2, 1099, K-1, and now 1099-DA against the return and generates a CP2000 notice proposing changes. This is not technically an examination, which has consequences — it does not count as an audit for purposes of the prohibition on repeat examinations, and the response deadline is short.

Related examinations. A partnership audit reaching partners, an examination of a related entity, or a promoter investigation.

Referrals, including from whistleblowers under 26 U.S.C. § 7623, which pays fifteen to thirty percent of collected proceeds for qualifying information.

Campaigns and compliance initiatives targeting specific issues.

Types

Correspondence audits handle a narrow issue by mail. The majority of examinations.

Office audits are conducted at an IRS office by a tax compliance officer.

Field audits are conducted by a revenue agent at the taxpayer's place of business, and are the serious ones. Large corporate taxpayers may be in the Large Business & International division's continuous audit programs.

Managing an examination

Control the flow of information. The revenue agent issues Information Document Requests. Respond completely and on time to what is asked, and no more. An overbroad response invites new issues.

Do not let the agent interview employees informally. Designate a single point of contact.

Understand the agent's authority. A revenue agent determines liability. They cannot settle based on litigation risk — that authority belongs only to Appeals. An agent who says the case cannot be resolved is describing their own limits, not the taxpayer's options.

The summons. Section 7602 authorizes the IRS to summons testimony and records, from the taxpayer or from third parties. Enforcement is through a district court proceeding under §§ 7402(b) and 7604. The standard from United States v. Powell, 379 U.S. 48 (1964), requires that the investigation have a legitimate purpose, that the material be relevant, that the IRS not already possess it, and that administrative steps have been followed. Defenses are narrow: privilege, an institutional bad-faith purpose, or a criminal referral to the Justice Department under § 7602(d).

Third-party summonses generally require notice to the taxpayer under § 7609, and the taxpayer has twenty days to move to quash — but Polselli v. IRS, 598 U.S. 432 (2023), held that the notice exception for summonses issued to aid collection of an assessed liability applies even where the taxpayer has no legal interest in the accounts summoned.

Privileges. Attorney-client privilege applies. Section 7525 extends a limited privilege to communications with federally authorized tax practitioners, but it does not apply in criminal matters, does not cover tax return preparation, and does not protect communications regarding tax shelters. Work product protects material prepared in anticipation of litigation, and United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009) (en banc), took a restrictive view of tax accrual workpapers, though other circuits disagree.

Watch the statute of limitations. Section 6501 gives the IRS three years from filing to assess, extended to six years for a substantial omission of gross income exceeding twenty-five percent, and unlimited for a false or fraudulent return or a failure to file. Section 6501(c)(4) permits extension by agreement — Form 872 for a fixed date or Form 872-A for an open-ended extension terminable on notice.

Agents routinely request extensions near the deadline. Refusing is permissible and forces the agent to issue a notice of deficiency on the existing record, which is sometimes exactly what the taxpayer wants and sometimes produces a worse notice than a negotiated resolution. It is a judgment call, and it should be a deliberate one.

The thirty-day letter and Appeals

At the conclusion of an examination the agent issues a revenue agent's report and a thirty-day letter proposing adjustments and offering an administrative appeal.

The Independent Office of Appeals

Created in its current statutory form by the Taxpayer First Act at 26 U.S.C. § 7803(e), Appeals has a mission to resolve disputes "on a basis which is fair and impartial to both the Government and the taxpayer," and it is the only administrative body authorized to settle a case based on the hazards of litigation.

This is the central fact about Appeals. An Appeals officer may concede an issue the government would probably lose, or split an issue where the outcome is uncertain, in a way no examiner can. Most disputes resolve here, and a taxpayer who skips Appeals gives up the best settlement opportunity in the process.

Features:

  • Written protest required for larger cases; a small case request suffices below a threshold.
  • Ex parte restrictions limit communication between Appeals and the examination function on the substance of the case, under Rev. Proc. 2012-18.
  • New issues are generally not raised by Appeals, and new evidence may cause the case to be returned to examination.
  • Appeals officers weigh litigating hazards, so a protest should be written like a brief — the strongest legal authorities, the factual record, and a candid assessment of what a court would do.
  • Section 7803(e)(4) creates a general right of access to Appeals, subject to exceptions.

Fast Track Settlement and mediation are available for many cases and can compress the timeline substantially.

The notice of deficiency

If Appeals does not resolve the case, or if the taxpayer bypasses Appeals, the IRS issues a statutory notice of deficiency under § 6212 — the ninety-day letter, sometimes called the ticket to Tax Court.

This is the most important document in the process. From the date of mailing, the taxpayer has ninety days — 150 if addressed outside the United States — to file a petition in the Tax Court under § 6213(a). During that period, and while a timely petition is pending, the IRS may not assess or collect.

The deadline is strict. Boechler, P.C. v. Commissioner, 596 U.S. 199 (2022), held that the collection due process filing deadline in § 6330(d)(1) is not jurisdictional and is subject to equitable tolling — and the Tax Court and circuits have since divided on whether the same reasoning extends to the § 6213(a) deficiency deadline, with some courts finding it non-jurisdictional and others adhering to the traditional rule. Do not rely on tolling. File within ninety days.

Choosing a forum

Three courts can hear a federal tax dispute, and the choice is consequential and largely irreversible.

The United States Tax Court

Prepayment. The defining advantage: the taxpayer need not pay the deficiency before litigating.

Judges are tax specialists. There is no jury. Procedure follows the Tax Court Rules, with a distinctive requirement in Rule 91 that the parties stipulate to all facts and documents not genuinely in dispute — stipulation is mandatory, not optional, and it shapes the case substantially.

Small tax cases under § 7463 are available where the amount in dispute is fifty thousand dollars or less per year, with relaxed procedure — and no appeal.

Appeals go to the court of appeals for the circuit of the taxpayer's residence, and the Tax Court follows that circuit's law under the Golsen rule, from Golsen v. Commissioner, 54 T.C. 742 (1970). Circuit law therefore matters even in a national court.

The district court

Requires full payment of the assessed tax, filing an administrative refund claim under § 6511, waiting six months or receiving a denial, and then suing under 28 U.S.C. § 1346(a)(1).

The advantages: a jury is available, the judges are generalists which occasionally helps on an equitable or factual question, and the taxpayer is a plaintiff seeking money rather than a petitioner resisting a determination.

For divisible taxes — employment taxes and the trust fund recovery penalty — full payment means paying the tax for one employee for one quarter, then suing for refund. This makes district court realistic in trust fund cases where full payment of the entire assessment would be impossible.

The Court of Federal Claims

Also requires full payment. No jury. Appeals go to the Federal Circuit, which means unfavorable law in the taxpayer's home circuit can be avoided. This is the principal reason to choose it.

Choosing

Pay attention to: whether the taxpayer can afford to pay; whether circuit law is favorable; whether a jury would help; whether the issue is one where Tax Court expertise cuts for or against; and the relative speed of the forums.

Note that filing a Tax Court petition forecloses the refund forums for that year and that deficiency, under the res judicata effect of a Tax Court decision.

Burdens of proof

The Commissioner's determination is generally presumed correct, and the taxpayer bears the burden — Tax Court Rule 142(a), and Welch v. Helvering, 290 U.S. 111 (1933).

Exceptions:

  • Section 7491(a) shifts the burden to the Commissioner on a factual issue where the taxpayer introduces credible evidence, has complied with substantiation requirements, maintained records, and cooperated with reasonable requests. In practice it shifts less often than taxpayers hope, because the conditions are strictly applied.
  • Section 7491(b) places the burden on the Commissioner for income reconstructed solely from information returns.
  • Section 7491(c) places on the Commissioner the burden of production for penalties against individuals — including, under Graev v. Commissioner, 149 T.C. 485 (2017), and Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), the requirement to show written supervisory approval of the initial penalty determination under § 6751(b). This has become a significant and frequently successful penalty defense.
  • Fraud must be proved by the Commissioner by clear and convincing evidence, § 7454(a).
  • New matter raised by the Commissioner shifts the burden as to that matter.

The Cohan rule, from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), permits estimation of a deductible expense where the taxpayer proves an expense was incurred but cannot substantiate the amount. It does not apply to expenses subject to the strict substantiation rules of § 274(d) — travel, meals, entertainment, gifts, and listed property. For those, no records means no deduction.

Penalties and their defenses

Section 6651 — failure to file, five percent per month to twenty-five percent; failure to pay, one half percent per month. Section 6662 — the twenty percent accuracy-related penalty for negligence, substantial understatement, substantial valuation misstatement, and others, rising to forty percent for gross valuation misstatements and undisclosed foreign financial asset understatements. Section 6663 — the seventy-five percent civil fraud penalty. Section 6672 — the trust fund recovery penalty, one hundred percent of unpaid withheld taxes, against any responsible person who willfully fails to collect or pay over. Personal, and not dischargeable in bankruptcy under 11 U.S.C. § 523(a)(1)(A) and § 507(a)(8)(C). Information return penalties under §§ 6721 and 6722, and international information return penalties under §§ 6038, 6038A, 6038D, and 6677, which are substantial and increasingly litigated.

Defenses

Reasonable cause and good faith, § 6664(c), for most accuracy-related penalties. Reliance on a professional is the classic ground, and United States v. Boyle, 469 U.S. 241 (1985), draws the line: reliance on an adviser's substantive advice may be reasonable cause, but reliance on an agent to file on time is not, because the deadline requires no expertise.

Adequate disclosure on Form 8275 or 8275-R, which can defeat the substantial understatement penalty where there is a reasonable basis for the position.

Substantial authority for the position, § 6662(d)(2)(B).

Section 6751(b) supervisory approval, above — check it in every penalty case.

First-Time Abate, an administrative waiver in IRM 20.1.1.3.3.2.1 for failure to file, failure to pay, and failure to deposit penalties, available where the taxpayer has a clean compliance history for the prior three years. It is granted on request, often by phone, and is one of the highest-value five-minute tasks in practice.

Statutory exceptions and reliance on written IRS advice, § 6404(f).

Collection

A parallel track that begins once tax is assessed, and has its own procedural architecture.

The lien and the levy

The federal tax lien arises automatically under § 6321 on assessment, demand, and nonpayment, and attaches to all property and rights to property of the taxpayer. It relates back to the assessment date under § 6322. A Notice of Federal Tax Lien filed under § 6323 establishes priority against purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.

Recall the hyphenated trap of § 6323's super-priority provisions and the forty-five-day rule for after-acquired property securing a commercial financing agreement — the details matter greatly in a workout.

The levy is administrative seizure under § 6331. Before levying, the IRS must issue a Notice and Demand, then a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least thirty days in advance, § 6331(d) and § 6330(a). Certain property is exempt under § 6334.

Collection Due Process

Sections 6320 and 6330 create the taxpayer's principal collection protection.

Section 6320 — a CDP hearing on the filing of a notice of federal tax lien, requested within thirty days after the five-business-day notice period. Section 6330 — a CDP hearing before levy, requested within thirty days of the final notice.

At the hearing, before an Appeals officer who has had no prior involvement, the taxpayer may raise:

  • Collection alternatives — installment agreement, offer in compromise, currently not collectible status.
  • Spousal defenses, including innocent spouse relief.
  • Challenges to the appropriateness of the collection action, including a balancing of the need for efficient collection against intrusiveness, § 6330(c)(3)(C).
  • The underlying liability, but only if the taxpayer did not receive a notice of deficiency and did not otherwise have an opportunity to dispute it, § 6330(c)(2)(B).

A timely CDP request suspends levy and tolls the collection statute. The determination is reviewable in the Tax Court within thirty days, § 6330(d)(1) — the deadline held subject to equitable tolling in Boechler.

A late request may still obtain an Equivalent Hearing, which provides the same substantive consideration but no judicial review and no suspension of levy.

Resolution alternatives

Installment agreements, § 6159. Guaranteed for small balances, streamlined up to a threshold with limited financial disclosure, and negotiated above it on Form 433-A or 433-B. A partial payment installment agreement pays less than the full liability over the remaining collection period.

Offer in compromise, § 7122. Three grounds: doubt as to collectibility, doubt as to liability, and effective tax administration. The collectibility offer is the common one, and the amount is driven by reasonable collection potential — net realizable equity in assets plus future income for a multiple of months, computed using the IRS's Collection Financial Standards. The offer is a formula exercise; understanding the formula is the whole skill.

Currently not collectible status, IRM 5.16.1, where collection would create economic hardship. Not forgiveness — the liability persists, the lien may be filed, and the account is reviewed periodically — but it stops enforced collection.

Bankruptcy. Income taxes may be dischargeable under 11 U.S.C. § 523(a)(1) if the return was due more than three years before filing, was actually filed more than two years before, the tax was assessed more than 240 days before, and there was no fraud or willful evasion. Trust fund taxes are never dischargeable.

The collection statute

Section 6502 gives the IRS ten years from assessment to collect. The period is suspended by a pending CDP hearing, a pending offer in compromise, bankruptcy, absence from the country, and certain other events. Computing the Collection Statute Expiration Date accurately, including all suspensions, is essential — and a strategy of running the clock is legitimate but requires precision.

Relief provisions worth knowing

Innocent spouse relief, § 6015. Three routes: § 6015(b) traditional relief for an understatement attributable to the other spouse where the requesting spouse did not know and had no reason to know; § 6015(c) separation of liability for a divorced, separated, or non-cohabiting spouse; and § 6015(f) equitable relief where the others are unavailable, governed by the factors in Rev. Proc. 2013-34. Section 6015(e) provides Tax Court review, and the § 6015(b) and (c) routes carry a two-year deadline from the first collection activity, while equitable relief under (f) does not.

Interest abatement, § 6404(e), for interest attributable to unreasonable IRS delay in performing a ministerial or managerial act.

The Taxpayer Advocate Service, § 7803(c), and the Taxpayer Assistance Order under § 7811, available where the taxpayer is suffering or about to suffer significant hardship. Genuinely effective in the right case and underused.

Administrative and litigation costs, § 7430, available to a prevailing taxpayer who exhausted administrative remedies where the government's position was not substantially justified — subject to net worth limits and a qualified offer provision that can shift costs from the date of the offer.

Whistleblower awards, § 7623, with Tax Court review of award determinations.

Practical counsel

Calendar every deadline the day the notice arrives. Ninety days for a deficiency notice. Thirty days for a CDP request. Thirty days for a thirty-day letter. Two years for a refund claim under § 6511(a) — three years from filing or two years from payment, whichever is later.

Do not ignore correspondence. Nearly every bad outcome in collection begins with unopened mail. A default assessment from a substitute for return under § 6020(b) uses no deductions and no favorable filing status, and unwinding it takes far longer than responding would have.

Build the record at Appeals. It is the last forum that will settle on hazards, and the protest is where the case is actually won.

Get compliance current first. No collection alternative — installment agreement, offer, or CNC — is available to a taxpayer with unfiled returns. Filing the missing returns is always step one.

Consider the criminal question early. Badges of fraud, a large unexplained understatement, or the appearance of a revenue agent from Criminal Investigation change the engagement entirely. Civil counsel should stop and bring in criminal tax counsel rather than continuing to produce documents.

Primary authority

Two worked matters

The examination that should have ended at Appeals

A construction contractor is examined for three years. The agent disallows roughly four hundred thousand dollars of subcontractor payments for lack of documentation, asserts a twenty percent accuracy-related penalty, and issues a thirty-day letter.

What the taxpayer did. Nothing, for thirty-five days. The thirty-day letter expired, Appeals was foreclosed at the administrative stage, and a notice of deficiency followed.

What that cost. Appeals could have weighed hazards: the payments were real, the recipients were identifiable from bank records, and the Cohan rule permits estimation where an expense is proved but the amount is not substantiated — subcontractor labor is not subject to § 274(d) strict substantiation. An Appeals officer confronting that would likely have allowed a substantial portion. The examiner could not, because examiners do not settle on hazards.

What was salvageable. A timely Tax Court petition preserved the case, and Appeals still got it — the IRS routinely refers docketed cases to Appeals before trial, which is the second bite. The § 6751(b) supervisory approval question was raised and the penalty was conceded when the approval form could not be produced timely. The case settled at roughly forty percent of the proposed deficiency.

The lesson. The thirty-day letter is not junk mail. And even after a default, the ninety-day petition preserves nearly everything — the one deadline that cannot be missed.

The collection case

A dental practice falls behind on payroll taxes over six quarters during a partner dispute. The assessment reaches three hundred and ten thousand dollars including trust fund amounts, and the IRS assesses the § 6672 penalty personally against both partners.

Step one: compliance. Two returns are unfiled. Nothing else is available until they are filed. This is always step one.

Step two: the CDP request. Filed within thirty days of the final notice of intent to levy. Levy is suspended, the collection statute tolls, and the taxpayers get a hearing before an Appeals officer with authority to consider alternatives.

Step three: the responsible person analysis. One partner handled all banking, signed checks, and decided which creditors to pay. The other treated patients and had no financial role. Section 6672 requires both responsibility and willfulness, and the clinical partner has a genuine defense. Because the trust fund penalty is a divisible tax, that partner can pay the tax for one employee for one quarter and sue for refund in district court — an affordable route to a real forum.

Step four: the entity resolution. Financial statements on Form 433-B establish reasonable collection potential. The practice has receivables and equipment but little equity and modest cash flow. A partial payment installment agreement is negotiated, with a lien filed to protect the government's position.

Step five: penalties. First-Time Abate is unavailable given the compliance history, but reasonable cause is asserted for two quarters based on documented embezzlement by a bookkeeper.

The case resolves over eighteen months. Nothing about it turned on substantive tax law.

Partnership audits under the centralized regime

The Bipartisan Budget Act of 2015 replaced the TEFRA partnership audit rules with a centralized partnership audit regime at 26 U.S.C. §§ 6221–6241, effective for tax years beginning after 2017. It changed partnership controversy practice fundamentally, and many partnership agreements have still not been updated for it.

The default is entity-level assessment. Under § 6225, adjustments are determined at the partnership level and the partnership pays an imputed underpayment, computed at the highest applicable rate, in the adjustment year — which means today's partners bear the cost of an adjustment to a return filed years earlier, when the partnership may have had entirely different owners.

Modification under § 6225(c) can reduce the imputed underpayment: by having reviewed-year partners file amended returns, by demonstrating that some partners are tax-exempt or corporate and entitled to different rates, or by taking account of the character of the income.

The push-out election under § 6226 shifts the liability to the reviewed-year partners, who take the adjustments into account on their current returns with an interest rate two percentage points higher. This is frequently the better answer, and it must be elected within forty-five days of the final partnership adjustment.

The opt-out election under § 6221(b) is available to partnerships with one hundred or fewer partners, all of whom are individuals, C corporations, foreign entities that would be C corporations, S corporations, or estates of deceased partners. A partnership with any partner that is itself a partnership or a trust cannot opt out — which excludes most fund and tiered structures. The election is made annually on the return.

The partnership representative under § 6223 replaced the TEFRA tax matters partner and has far greater power: the representative's actions bind the partnership and all partners, and partners have no statutory right to notice or participation. There is no requirement that the representative be a partner.

What partnership agreements must address. Whether to opt out where eligible, and a covenant restricting transfers that would destroy eligibility. Who serves as partnership representative, how they are removed, and what they must obtain partner consent for. Whether push-out is elected. Indemnification among current and former partners for an imputed underpayment. Notice and information rights that the statute does not supply. Obligations of departing partners, and survival of those obligations in the purchase agreement.

An agreement drafted before 2018 that still refers to a "tax matters partner" is a warning sign, and the fix is straightforward and worth doing before an examination rather than after.

The criminal boundary

Civil tax practitioners need to recognize the point at which a matter changes character, because continuing to act as though it has not is the most damaging thing counsel can do.

Signals. A revenue agent who stops asking questions and starts collecting documents. A referral to Criminal Investigation, whose special agents carry badges and give a modified Miranda warning at first contact. Repeated large understatements. Two sets of books. Destroyed or altered records. Cash transactions structured below reporting thresholds. A taxpayer whose explanations shift.

The badges of fraud the IRS applies are catalogued in the Internal Revenue Manual: understatement of income, inadequate records, failure to file, implausible explanations, concealment of assets, failure to cooperate, illegal activity, attempts to conceal illegal activity, dealing in cash, and failure to make estimated payments.

What changes. Section 7525's practitioner privilege does not apply in criminal matters. An accountant's work becomes discoverable, and the accountant becomes a witness. A Kovel arrangement — engaging the accountant through counsel so the work is covered by attorney-client privilege, from United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) — must be established before the work is done, in writing, and with the accountant genuinely working at counsel's direction.

What counsel should not do. Continue producing documents. Prepare amended returns without analyzing whether they constitute admissions. Permit the client to be interviewed. Allow the client to speak with the return preparer about the substance of the matter.

Voluntary disclosure. The IRS maintains a voluntary disclosure practice for taxpayers with criminal exposure who come forward before an investigation begins, cooperate, and arrange to pay. It does not guarantee immunity, but a timely, truthful, complete disclosure is considered in the decision whether to recommend prosecution. The window closes the moment the IRS initiates an examination or receives information from a third party — which is why the analysis has to happen early.

The statutes. Section 7201 (attempt to evade, five years), § 7206(1) (false return under penalties of perjury, three years), § 7206(2) (aiding preparation of a false return), § 7202 (failure to collect or pay over trust fund taxes, five years), and § 7203 (willful failure to file, a misdemeanor). Willfulness in the tax context means the voluntary, intentional violation of a known legal duty — Cheek v. United States, 498 U.S. 192 (1991) — which is why a genuine, even unreasonable, misunderstanding of the law can negate the element.

The right move at the boundary is simple and uncomfortable: stop, tell the client plainly, and bring in counsel who does this work.

Related articles

This article is provided for general informational purposes and does not constitute legal or tax advice. Deadlines in federal tax procedure are short and consequences of missing them are frequently permanent. Dollar thresholds, penalty amounts, streamlined agreement limits, and administrative procedures change regularly; verify current figures before relying on them. If there is any indication of a criminal referral, consult criminal tax counsel before producing anything further.