Podcast Summary: "How Tax Works"

Episode 40 — What You Should Do If Your Audit Goes Poorly and You Need to Litigate?

Host: Matthew Foreman, Co-Chair of Falcon Rappaport & Berkman’s Taxation Practice Group
Date: November 24, 2025

Episode Overview

In this episode, Matthew Foreman breaks down what happens when a tax audit does not go your way and you must consider appeals or litigation. Continuing from the previous episode on the audit process, Matt discusses the steps involved after an adverse audit outcome, options at each stage, real-world advice for dealing with both the IRS and state agencies, and the significant practical and emotional toll of tax disputes.

Key Discussion Points and Insights

1. Outcomes of an IRS Audit

• Not all audits result in additional tax; some end with a “no change” letter, meaning the IRS agrees with the taxpayer’s return.
  • “I've gotten [no change letters]. I actually got a decent number recently. Had some really tough audits that turned out well.” (03:10)
• Sometimes there are agreed changes, usually small or obvious ones (math errors, missed 1099s).
• In harder cases, negotiations or “horse trading” occur—trading on certain issues to settle others.
• If disagreement persists, options include agreeing to the findings and moving on, or pursuing appeal/litigation.

2. The Preliminary Notice of Deficiency (30-Day Letter)

• This is an administrative step, not required by statute, giving the taxpayer a chance to resolve disputes before a formal assessment.
• “It's an administrative device used by the IRS to give the taxpayer a chance to resolve in an informal manner any differences of opinion prior to the formal assessment procedure.” (08:30)
• Strategies:
  • Submit additional info if possible.
  • Appeal the agent’s position.
  • Request the formal notice if litigation is the goal.

3. Independent Office of IRS Appeals

• Matt strongly supports utilizing this office, which offers real negotiation opportunities with knowledgeable officers as opposed to IRS auditors.
  • “I’m a big fan of the IRS Independent Office of Appeals… much better at understanding and applying the law to the facts.” (14:30)
• Confidentiality advantage: appeals are not public, unlike tax litigation.
• “Tax court filings are public... you have another bite at the apple before you go public.” (16:10)
• Note: This type of independent appeals does not exist in many states (e.g., New York’s BCMS, which Matt calls "useless").

4. State Appeals: A Frustration

• New York's BCMS (Bureau of Conciliation and Mediation Services) is not effective for substantial legal disputes.
  • “BCMS is useless. I said it to [the Commissioner’s] face.” (19:20)
• May only be good for minor corrections or penalty abatements.
• Process and effectiveness differ greatly from state to state.

5. Dealing with Auditors & IDRs (Information Document Requests)

• Building a respectful, human relationship with auditors can help resolve audits more smoothly.
  • “Being human really helps... a lot of people really underestimate how much it helps to just talk to a person and treat them like a person.” (28:45)
• IDRs (IRS Form 4564) are the primary means auditors ask for information; always respond directly and narrowly.
  • “You answer the questions directly but narrowly. It’s a lot like dealing with a small child... they keep asking for more if you give too much leeway.” (36:15)
• Do not provide unnecessary documentation; redact or limit as needed.

6. Substantiation & Documentation

• Cites Cohen v. Commissioner: taxpayer testimony and affidavits are admissible, though the IRS often distrusts them.
• Key: provide contemporaneous documentation and reasonable methods for calculations (not necessarily the only method).

7. Notice of Deficiency (90-Day Letter) & Filing in Tax Court

• If issues are unresolved after appeals, the IRS will issue a statutory Notice of Deficiency (the “90-Day Letter”), triggering the real countdown for litigation.
• Taxpayers have 90 days to file in Tax Court (or district court if paid in advance).
• “The IRS can't assess until after 90 days. Plus 60 days. Never understood why the plus 60...” (43:34)
• If you sign IRS Form 870 (consent), you waive your right to Tax Court.

8. Litigation Options

• Tax Court: Most common and preferred for many since payment isn’t required upfront.
  • Judges are typically experienced in tax matters.
  • “Tax court’s probably the most common place to litigate for a couple of reasons... you don’t have to pay before you go to tax court. Interest…still accruing, but penalties are not.” (54:30)
• District Court/Court of Federal Claims: Must pay tax first and sue for refund. Judges may lack specialized tax expertise; can have a jury trial.
• Each court has its own rules and appellate path. If unsatisfied with outcomes, appeals rise to Circuit Courts and rarely the US Supreme Court.

9. State Litigation Process (New York Example)

• After failed BCMS, goes to Division of Tax Appeals (administrative law judge), then Tax Appeals Tribunal.
• If still unresolved, Article 78 proceeding in the Appellate Division (bypassing NY Supreme Court trial level).
• Highest level: NY Court of Appeals, but certiorari is rarely granted.

10. Strategic Considerations & Emotional Toll

• Tax disputes can drag on for years—even a decade isn’t unheard of.
• Cost-benefit analysis: sometimes it’s smarter to settle than litigate.
  • “It's expensive, it's time consuming. You're going to lose sleep, you're going to lose time. It's stressful.” (01:18:28)
• The emotional and financial cost must be considered at every stage.

Notable Quotes & Memorable Moments

• On negotiations in audits:
  “Sometimes there's a little bit of so-called horse trading... 'you give up the 469 issue for these businesses, we won’t accelerate depreciation here.'” (05:00)

• On settling audits instead of litigating:
  “I could fight you on the $30,000 or...pay my attorney $65,000 for the appeal. But I don’t really think it’s worth it.” (07:20)

• On IRS Appeals Office vs. state equivalents:
  “I've had really good experiences [with IRS Appeals]... as opposed to my thoughts on auditors.” (13:48)
  “BCMS is useless. I said it to [the NY Tax Commissioner]’s face.” (19:20)

• On the documentation process:
  “People are like, 'Oh, I have to send a 200-page operating room.' I’m like, why? They asked for who owns it and the allocations... Just send them the cover page and the 4 or 5 relevant pages.” (37:20)

• On strategy and the wear of litigation:
  “Years from the audit through appeals—a decade is not an unheard of period of time. It’s expensive, it’s time consuming. You’re going to lose sleep, you’re going to lose time. It’s stressful.” (01:18:28)

• On the unpredictability of state processes:
  “Each state has its own rules. I gave you New York because I know New York best... It’s where I sit.” (01:16:10)

Important Timestamps

• 03:10 — "No change" audit outcomes and simple agreed changes.
• 08:30 — Explanation of the 30-day letter (preliminary notice of deficiency).
• 13:48 — Experience with the IRS Independent Office of Appeals.
• 19:20 — Rant on New York’s BCMS being “useless.”
• 28:45 — The value of treating auditors as human beings.
• 36:15 — Answering IDRs: "directly but narrowly."
• 43:34 — Explaining the 90-day letter; timeline and procedures for filing in Tax Court.
• 54:30 — Tax Court/Judicial options and distinctions.
• 01:09:50 — Litigation and appeal process in state courts (NY example).
• 01:18:28 — Emotional and financial toll of long-running tax disputes.

Summary Table: Post-Audit Decision Path

| Stage | Key Document / Step | Options/Notes | |---------------------|-------------------------------------|-------------------------------------------------| | Audit | IRS Form 870 / No Change Letter | Settle or agree; negotiation possible | | 30-Day Letter | Preliminary Notice of Deficiency | Respond, appeal, or request 90-Day Letter | | Appeals | Protest to Independent Appeals | Confidential; often effective | | Notice of Deficiency| Statutory 90-Day Letter | File Tax Court petition in 90 days | | Litigation | Tax Court / District Court / Claims | Pay & sue for refund (except Tax Court) | | Appeals | Circuit Court (Federal/State) | Decisions binding within jurisdiction | | Supreme Court | Petition for Certiorari | Rare; constitutional issues |

Tone and Style

The episode is conversational, direct, practical, and occasionally candid or irreverent (especially toward state systems and bureaucracies). Matt’s approach is to demystify, offer relatable analogies, and prepare listeners for real-world challenges.

Takeaways

• Consider settling if the cost of litigation outweighs potential benefit.
• Use the IRS Independent Office of Appeals—it’s often more effective than fighting in court.
• When providing documents, be precise, not overbroad; only give what’s requested.
• Treat auditors as humans; building rapport can make a big difference.
• Understand the long, stressful road of litigation before diving in—it's not for everyone.

Next Up:
Episode 41 will cover what to do if you owe taxes and cannot pay—or want to have penalties reduced or payment plans established.