One of the requirements of recovering attorney’s fees in a tax case is that the taxpayer must have exhausted its administrative remedies. To exhaust administrative remedies, the taxpayer must participate in an IRS Appeals conference before a Petition is filed with the Tax Court. This opportunity is often missed because an audited taxpayer is often unaware of the requirement or procedural right to an appeal.
At the end of an audit, the IRS auditor will issue an initial report that outlines the additional tax that the auditor believes is due. This letter gives the taxpayer a 30 day time frame in which to appeal a case. As an acknowledgement to the creativity of tax professionals, this letter is known as a “30 day letter.” Submitting additional information after the issuance of a 30 day letter may result in additional reductions in the asserted tax, but only a written protest requesting an appeals conference will have the case transferred to the IRS appeals division.
If the 30 day letter window to appeal expires, the auditor will issue a Statutory Notice of Deficiency giving the taxpayer 90 days to file a Petition to have the case heard in the Tax Court (the Statutory Notice of Deficiency is also known as a “90 day letter” – again, clever). Unless an appeal has already happened, filing a Petition with the Tax Court will also cause the case to be transferred to appeals.
Unfortunately, if the 30 day letter appeal option is missed, an audited taxpayer will not be considered to have exhausted its administrative remedies and, as a result, will be unable to recover attorneys fees regardless of the successful outcome of the case. Appealing the 90 day letter is not enough because (even though the case will go to appeals before actually going to the Tax Court), the rules on collecting attorney's fees require that the taxpayer goes to appeals before filing a Peition with the Tax Court.
The message? If you are audited and have a good case, the taxpayer should consider challenging the case in appeals following the 30 day letter rather than waiting for the 90 day letter. Note, there may be strategic reasons for ignoring the 30 day letter appeal period and waiting to file the case in the Tax Court after a 90 day letter. The point to remember, however, is that the 30 day letter vs. 90 day letter appeal right should be deliberately considered.