The Early Referral to Appeals program is a valuable IRS procedure designed to help taxpayers resolve audit disputes more rapidly by involving the IRS Appeals office before the agency formally proposes a deficiency. Traditionally, after an IRS audit, taxpayers would receive a notice of deficiency if the IRS found errors, which then could lead to litigation in Tax Court if disputed. Early Referral aims to streamline this process by encouraging earlier dispute resolution, reducing both taxpayer burden and IRS workload.
How Early Referral to Appeals Works
When a disagreement arises during an IRS examination over a specific tax issue — such as deductions, valuations, or other adjustments — and this matter is “substantially developed” (meaning the relevant facts and positions from both sides are clear), the taxpayer has the option to request an Early Referral to the Appeals office. This referral must be agreed upon by both the taxpayer and the IRS examiner’s management. If accepted, the Appeals office, which operates independently within the IRS, reviews the case impartially.
The Appeals officers examine the facts, the IRS’s and taxpayer’s arguments, plus the potential risks of litigation (often termed “hazards of litigation”). The goal is to reach a fair settlement without proceeding to formal deficiency notices or court proceedings.
Eligibility and Timing for Early Referral
Taxpayers eligible for Early Referral typically:
- Are under an IRS examination and face a substantial dispute on specific issues.
- Have completed fact gathering and presented their positions to the IRS examiner.
- Wish to avoid waiting for a formal notice of deficiency before appealing.
Not all cases qualify. Certain matters, such as fraud allegations or procedural issues, often are excluded from Early Referral. Moreover, the IRS must agree the case is ready — meaning the issue is substantially developed, and referral is appropriate.
Real-World Examples
Business Expense Dispute: Sarah, who owns a small business, encountered an IRS audit where the examiner disallowed some business expenses, claiming personal use. Confident in her documentation, Sarah requested an Early Referral. The Appeals officer reviewed the evidence and helped settle the dispute, reducing Sarah’s tax liability.
Asset Valuation Dispute: Mark, who sold inherited stock, faced an IRS disagreement over the valuation used for reported capital gains. By requesting Early Referral, the Appeals office reviewed both sides’ appraisals and facilitated a compromise, avoiding a lengthy court process.
Benefits and Strategies
- Faster Resolution: Early Referral can significantly shorten dispute resolution time compared to waiting for deficiency notices and potential litigation.
- Cost Savings: Avoiding Tax Court reduces legal and administrative expenses.
- Independent Review: Appeals officers provide a neutral, impartial examination.
For taxpayers considering Early Referral:
- Engage a tax professional familiar with IRS audit and appeals procedures to evaluate if your case qualifies.
- Ensure your issue is fully developed with all relevant documentation presented.
- Understand Appeals focuses on the merits and litigation risks, not just the initial examination stance.
Common Misconceptions
- Early Referral guarantees a win: Appeals decisions are based on evidence and litigation hazards, not taxpayer preference.
- It’s only for large corporations: Early Referral is available to individuals, businesses, and others undergoing IRS examinations with substantially developed disputes.
- It is automatic: The IRS must approve the referral request.
Further Resources
To deepen understanding, readers can review The Role of the IRS Appeals Office on FinHelp.io for an overview of appeals processes. Additionally, IRS Publication 5, “Your Appeal Rights and How To Prepare a Protest If You Don’t Agree,” available on IRS.gov, provides official guidance on the appeals process including alternative options like Early Referral.
For official IRS procedural details, the Internal Revenue Manual Part 8.2.3 offers authoritative insights on the Early Referral program (search “IRM Part 8.2.3” on IRS.gov).
Summary
Early Referral to Appeals offers taxpayers a proactive way to resolve IRS disputes before formal deficiency notices, fostering efficiency and fairness. By involving the independent Appeals office early, many audits avoid prolonged conflict, safeguarding taxpayer rights while easing IRS workloads.