Why timing matters

Negotiation during an IRS audit can change your financial outcome — but not every stage is equally advantageous. Negotiate early when you have documentation that supports a lower tax liability, or later if the IRS issues a proposed assessment and you’ll file an appeal. Don’t delay responding to notices; missed deadlines limit options and increase enforcement risk (IRS, Audits & Appeals: https://www.irs.gov/appeals).

Common settlement paths (what’s available)

  • Accept the examiner’s changes and pay (or arrange payment).
  • File an administrative appeal with the IRS Office of Appeals if you disagree (IRS Appeals: https://www.irs.gov/appeals).
  • Ask for an Installment Agreement if you can pay over time (see IRS Online Payment Agreement: https://www.irs.gov/payments/online-payment-agreement).
  • Propose an Offer in Compromise (OIC) to settle for less than the full amount when you lack ability to pay (IRS OIC: https://www.irs.gov/payments/offer-in-compromise).
  • Request penalty abatement if penalties are improper or due to reasonable cause.
  • Seek Currently Not Collectible (CNC) status when collection would cause financial hardship.

When to negotiate: practical triggers

  • You have clear documentation that reduces the IRS’s proposed adjustments (receipts, bank records, corrected forms).
  • The auditor’s position is based on assumptions rather than documents.
  • Collection is imminent and you can’t pay in full — a payment plan or OIC may be needed.
  • Penalties appear to be applied incorrectly or without consideration of reasonable cause.
  • The proposed assessment creates severe financial hardship — CNC or OIC discussions are appropriate.

In my practice as a CPA with 15+ years of audit and resolution work, the most successful negotiations share three traits: organized records, early engagement, and realistic settlement expectations. Start with a clean financial statement and a clear estimate of what you can realistically pay.

Step-by-step negotiation strategy

  1. Read the notice and calendar deadlines. Missing an appeals window or response deadline can forfeit negotiation rights.
  2. Gather supporting documents that directly rebut the proposed adjustments.
  3. Run a “worst-case” calculation: what you’d owe if you lost every issue plus penalties and interest.
  4. Consider informal discussion with the examiner to clarify facts — but take notes and confirm any agreements in writing.
  5. If the examiner won’t budge, file a timely appeal (Form and process details are on the IRS Appeals page).
  6. For collection issues, evaluate Installment Agreements, Partial Payment Installment Agreements (PPIA), Offers in Compromise, or CNC status. Use the IRS guidance and prepare the financial statement the IRS expects.

When to hire a professional

  • Complex adjustments (business audits, related entities, large proposed tax).
  • You need an Offer in Compromise — preparation and realistic valuation of assets matter (see our related guides on Offers in Compromise: “When an Offer in Compromise Might Be Better Than an Installment Agreement” and “Offer in Compromise: How Income Versus Equity Affects Eligibility”).
  • You want to appeal a proposed assessment to the IRS Office of Appeals.
  • You face lien, levy, or serious collection action.

Quick practical tips

  • Document everything and keep copies of what you send the IRS.
  • Respond by the deadline even if you need more time — request extensions in writing.
  • Get agreements in writing. Verbal comfort from an examiner is not the same as a signed agreement.
  • Avoid the most common mistake: accepting an assessment before you fully understand your appeal and collection options.

Common mistakes to avoid

  • Ignoring audit notices and deadlines.
  • Overvaluing negotiation leverage — realistic financials win more than aggressive posturing.
  • Failing to consider future effects (e.g., OIC limits refunds and requires compliance).

Useful next steps and resources

Professional disclaimer

This article provides general information about settlement options during an IRS audit and is not legal or tax advice. For advice tailored to your situation, consult a qualified tax professional or the IRS. The information above references IRS guidance as of 2025 (irs.gov) and is intended for educational purposes only.