Summary:
Previously a challenge of an auditors tax increase, short of going to court, was made by a conference at the IRS Appeals Division. Now a taxpayer can also request Mediation and Arbitration.

What will you do if you don't agree with the Internal Revenue Service's-proposed tax increase? Go to court? Maybe not. Instead, consider less expensive and less time-consuming alternatives.

The IRS says its Appeals Division gets agreements with taxpayers in 90 percent of the cases. To go to Appeals, you file a protest in a format prescribed by the agency, stating the facts and your arguments. You meet with an experienced IRS officer, independent of the agent and supervisor, to further explain your position.

Recently, the government added two more opportunities short of going to court: Mediation and Arbitration. Like the Appellate conference, both are confidential; court proceedings are not. These new programs, however, cannot be used for cases docketed in court or assigned to the Collection Division, or for disputes like frivolous issues.

Mediation: The mediator assists negotiations between you and the IRS. A neutral mediator works to resolve the issue by helping both sides recognize strengths and weaknesses and a likely outcome. The agency assigns a trained mediator from the Appeals Division, free of charge, or you can use a non-IRS employee as a co-mediator, at your expense. Even after starting the process, either party can pull out. You then go to arbitration or litigation or pay the IRS.

Arbitration: The arbitrator, like a judge, issues a ruling. You and the agency agree in advance to accept the arbitrator's decision. There is no appeal: You both give up the right to go to court. Appeals personnel serve as arbitrators, free of charge. Or you and the agency can agree on a non-IRS employee and share cost. Either side can request arbitration but only after trying negotiations.

Comments: Using the appeals process after an unfavorable audit seems logical. If you make no progress in appeals, mediation could be valuable. Then, if still no success, and if you don't want to go to court, strongly consider arbitration. This gives you another shot at a favorable ruling.

Even before beginning any negotiations, if the costs of the proposed adjustments are substantial or will adversely affect other years, get your tax CPA or tax attorney to handle the negotiations. Otherwise, do it yourself.

More at IRS Audits.