IRS Publication 556: Examinations, Appeals, and Refund Claims

IRS Publication 556 is the official IRS guide that explains how an audit works, what rights you have while it’s happening, how to appeal the outcome, and how to file a claim for a refund when you’ve overpaid your tax. It walks a taxpayer through the full arc: from the letter announcing an examination, through the Independent Office of Appeals, and, if needed, into federal court. The sections below pull out the parts that most often matter in practice.

How the IRS Contacts You About an Examination

The IRS opens an audit by mail. Not by phone, not by email. The initial letter identifies the tax years under review and the specific items the examiner wants to see.¹

Returns get pulled for examination in a few different ways. Most are flagged by an internal scoring system that rates each return’s likelihood of containing errors, after which IRS staff decide which of the highest-scoring returns to actually look at.² Others are picked up through related examinations: if the IRS audits a partnership or S corporation, the individual partners or shareholders can be pulled in too.¹

Three Formats an Audit Can Take

The format depends on complexity.

A correspondence examination is handled entirely by mail. The IRS asks you to send documentation for one or two items, such as a charitable donation or a missing income document. You never meet an agent in person.
An office examination brings you or your representative to a local IRS office to discuss a small number of issues, like Schedule C expenses or capital gains.
A field examination sends a revenue agent to your home, business, or representative’s office. This one is reserved for larger businesses, multi-year reviews, and complex financial structures.

Your Rights During the Audit

The Taxpayer Bill of Rights sets out ten protections that apply through every stage of an IRS interaction.³ A few matter most while the examination is going on.

You can hire an attorney, CPA, or enrolled agent to deal with the examiner for you. Your representative needs a power of attorney on file, which you file using Form 2848.⁴ Once that’s processed, the agent deals with your representative and cannot force you to attend the interview yourself.⁵

You may audio-record any in-person interview, at your expense and with your equipment, as long as you tell the agent in advance.⁵ If you decide during questioning that you want to consult a representative, the agent has to pause the interview, even if you’ve already answered some questions.

Who Has to Prove What

In an examination, the burden of showing your return was correct sits with you. If the case reaches court, the burden can shift to the IRS on a factual issue, but only if you kept adequate records, substantiated the contested items, cooperated with reasonable IRS requests, and introduced credible evidence. One burden shift is automatic: the IRS always carries the burden of production for penalties in court proceedings.⁶

Getting Your Records in Order

After the notice arrives, contact the examiner, acknowledge receipt, and confirm exactly which items are under review. Asking for a reasonable extension to organize records is standard and usually granted.

Send only what the examiner asked for. Canceled checks, invoices, and bank statements should tie directly to the disputed items. Handing over unrelated paperwork can widen the audit into areas that weren’t originally in scope.

Travel, gift, and certain business deductions have heightened substantiation rules. You need records of the amount, the time and place, the business purpose, and the business relationship of anyone benefiting.⁷ Approximations get deductions disallowed, and this is where most audit adjustments happen.

How Long the IRS Has to Assess Additional Tax

The IRS generally has three years from when you filed a return to assess more tax.⁸ The clock runs from the filing date or the due date, whichever is later. A 2023 return filed on March 1, 2024, is treated as filed on April 15, 2024.

Two situations stretch or eliminate that window. If you omitted more than 25% of the gross income shown on the return, the IRS gets six years. If you filed a fraudulent return or never filed at all, there’s no time limit.⁸

During an audit, the IRS may ask you to sign Form 872, which extends the assessment deadline to an agreed date.⁹ You can refuse, or you can limit the extension to specific issues or a shorter period. Refusing has a practical downside. If the statute is about to run and the examiner isn’t finished, the IRS will typically rush a Notice of Deficiency out the door based on incomplete information. A limited, reasonable extension often gives you more room to present favorable evidence.

How the Examination Closes

An examination ends one of three ways. The IRS finds no changes and sends a letter closing the case. Or it proposes adjustments and you agree, in which case you sign Form 870 and the assessment goes through immediately, slowing further interest accrual.¹⁰ Signing that form waives your right to receive a Notice of Deficiency for those adjustments, which means you also waive your ticket to Tax Court on them.

If you don’t agree, the examiner writes a report and the IRS sends a 30-day letter. You have 30 days to accept the findings or request a conference with the IRS Independent Office of Appeals.¹¹ This is the last chance to resolve the case administratively. Miss the deadline and the IRS moves to a statutory Notice of Deficiency, the 90-day letter, and the administrative appeals door closes.

Appealing to the Independent Office of Appeals

The Independent Office of Appeals exists to resolve disputes without litigation, and it operates separately from the examination division. Appeals Officers are prohibited from discussing the merits of a case with the examiner who handled it.

The difference between an examiner and an Appeals Officer is settlement authority. An examiner applies the law to the facts. An Appeals Officer weighs the government’s litigation hazards and can settle accordingly. If the officer thinks the IRS has a 60% chance of winning a $100,000 issue in court, a settlement around $60,000 is defensible. That analysis is what gives both sides room to negotiate.

Small Case Request or Formal Protest

How you request the appeal depends on the amount. If the total proposed tax and penalties for each period is $25,000 or less, you can use a small case request, which is a short written statement of why you disagree.¹² You typically send it back on the response form included with the 30-day letter.

Above $25,000, you file a formal written protest.¹² The protest is a structured document that functions as your legal argument. It should include your name, address, and phone number; a statement that you want to appeal; the tax periods involved; a list of the specific adjustments you contest; a statement of facts, declared true under penalty of perjury; and a statement of law that ties your position to the code sections, regulations, or court decisions supporting it.

The legal argument is what does the work. “I disagree” moves nothing. Showing that your home office satisfies the exclusive-use test under Section 280A, backed by photographs, a floor plan, and a use log, gives the Appeals Officer something to weigh. This is often the point at which representation starts paying for itself.

The Conference and Its Result

After the protest is filed, an Appeals Officer schedules an informal conference. It’s a discussion, not a courtroom proceeding, aimed at identifying where the facts and law support each side and where they don’t.

If you reach agreement, you sign Form 870-AD. It generally binds both sides and prevents the case from being reopened absent fraud or misrepresentation, giving more finality than the Form 870 you might sign during the examination itself.¹³ If no agreement is reached, Appeals issues the 90-day letter, and your next move is court.

Taking the Case to Court

You have three forums. The right one depends on whether you can pay the tax first and what precedent favors your position.

The U.S. Tax Court is the only forum where you can litigate without paying the disputed tax up front. You must file your petition within 90 days of the date on the Notice of Deficiency, or 150 days if the notice is addressed outside the United States.¹⁴ That deadline is absolute. A judge decides the case; there is no jury.

If you’d rather sue in U.S. District Court or the U.S. Court of Federal Claims, you have to pay the assessed tax in full first and then sue for a refund. The Supreme Court set that full-payment rule in Flora v. United States, and it’s a firm jurisdictional prerequisite.¹⁵ District Court is the only forum offering a jury trial on factual issues. The Court of Federal Claims conducts bench trials in Washington, D.C. The choice among them often comes down to which court’s precedent best supports your position.

Filing a Claim for a Refund

A refund claim runs in the opposite direction. You approach the IRS to correct a return you already filed, usually to recover tax you overpaid because of a missed deduction, a miscalculated credit, or a corrected income document.

The Deadline Is Strict

You must file within three years from the date you filed the original return, or within two years from the date you paid the tax, whichever is later.¹⁶ File a 2022 return on April 15, 2023, and the three-year window closes April 15, 2026. Miss it and the money is gone. The IRS has no authority to extend this deadline.

The Form and the Filing

Individuals file Form 1040-X. It requires the original figures, the changes, the corrected amounts, and a written explanation.¹⁷ Corporations use Form 1120-X.¹⁸

You can file Form 1040-X electronically through tax software for the current year and the two prior tax years.¹⁷ For older years or paper filers, use certified mail with return receipt when the deadline is close. Processing usually runs 8 to 12 weeks, sometimes 16.¹⁹

If the IRS Denies the Claim

If the IRS disallows the claim, it sends a formal notice of disallowance. You then have two years from that notice to sue in U.S. District Court or the U.S. Court of Federal Claims. If six months pass with no IRS action on your claim, you can file suit without waiting for a denial.²⁰ A denied refund claim doesn’t follow the same Appeals track as an audit dispute, though you can request Appeals review informally.

Penalties, Interest, and Payment

If an audit ends with more tax owed, interest accrues from the original due date of the return, not from the date the audit wraps up. The rate is set quarterly at the federal short-term rate plus three percentage points for individual taxpayers, and it compounds daily. On a multi-year audit, that compounding matters, which is one reason signing Form 870 promptly, when you agree with the findings, has real dollar value.

The penalty you’re most likely to see is the accuracy-related penalty: 20% of the underpayment attributable to negligence, disregard of the rules, or a substantial understatement of income tax. For individuals, “substantial understatement” means the understatement exceeds the greater of 10% of the tax that should have been shown on the return or $5,000.²¹

Fraud is different. The penalty is 75% of the underpayment attributable to fraudulent conduct. The IRS bears the burden of proving fraud, but once it establishes that any portion of the underpayment was fraudulent, the entire underpayment is presumed fraudulent unless you can prove otherwise for specific portions.²²

If you can’t pay the full balance, the IRS offers payment plans. Individuals who owe $50,000 or less in combined tax, penalties, and interest can qualify for a streamlined payment plan without submitting detailed financial statements, with up to 10 years to pay.²³ Interest and the late-payment penalty continue to run on the unpaid balance. Ignoring the assessment is the worst option: the IRS has liens and levies available, and its collection statute runs ten years.

When to Bring in the Taxpayer Advocate Service

If IRS action is causing financial hardship, or you’ve hit a wall trying to resolve something through normal channels, the Taxpayer Advocate Service is an independent organization within the IRS that can step in.²⁴ TAS can help when you face an immediate threat of adverse action, when you can’t get a response through regular channels, or when IRS procedures aren’t working as they should. Contacting TAS doesn’t replace the formal appeals process. It’s a separate pressure point for when the standard system isn’t functioning. You can reach TAS through the toll-free number on IRS notices or through its website.

1
Internal Revenue Service. Publication 556 – Examination of Returns, Appeal Rights, and Claims for Refund
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Internal Revenue Service. The Examination (Audit) Process
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Internal Revenue Service. Taxpayer Bill of Rights
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Internal Revenue Service. About Form 2848, Power of Attorney and Declaration of Representative
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Office of the Law Revision Counsel. 26 USC 7521 – Procedures Involving Taxpayer Interviews
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GovInfo. 26 USC 7491 – Burden of Proof
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Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
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Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
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Internal Revenue Service. Form 872, Consent to Extend the Time to Assess Tax
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Internal Revenue Service. Form 870 – Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment
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Taxpayer Advocate Service. Letter 525 Audit Report/Letter Giving Taxpayer 30 Days to Respond
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Internal Revenue Service. Preparing a Request for Appeals
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Internal Revenue Service. Office of Chief Counsel Memorandum POSTN-143425-07
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Office of the Law Revision Counsel. 26 USC 6213 – Restrictions Applicable to Deficiencies; Petition to Tax Court
15
Justia. Flora v. United States, 357 U.S. 63 (1958)
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Office of the Law Revision Counsel. 26 USC 6511 – Limitations on Credit or Refund
17
Internal Revenue Service. About Form 1040-X, Amended U.S. Individual Income Tax Return
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Internal Revenue Service. About Form 1120-X, Amended U.S. Corporation Income Tax Return
19
Internal Revenue Service. Amended Return Frequently Asked Questions
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eCFR. 26 CFR 301.6532-1 – Periods of Limitation on Suits by Taxpayers
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
23
Internal Revenue Service. Simple Payment Plans for Individuals and Businesses
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Taxpayer Advocate Service. Taxpayer Advocate Service