1. What Evidence Can Disprove a Proposed Tax Adjustment?
A challenge should trace each contested entry from the agency's calculation to the underlying transaction and its legal treatment.
Distinguish Deposits from Business Revenue
A bank statement does not explain why money arrived. Account transfers, loans, and returned payments may be mistaken for sales. Loan documents, invoices, and contemporaneous transfer records can reveal double counting or a nontaxable source.
Test Expense Deductions against the Applicable Rule
IRC § 162 generally allows ordinary and necessary expenses of carrying on a trade or business, subject to other restrictions. A ledger entry alone is insufficient. Contracts, receipts, and payment records support the amount and business purpose. Travel and certain meals face additional limits or substantiation rules under IRC § 274.
| Disputed Amount | Useful Evidence | Question to Resolve |
|---|---|---|
| Deposits treated as sales | Bank transfers, loan agreements, invoices | Was the receipt taxable income or counted twice? |
| Rejected business costs | Contracts, receipts, payment records | Was the amount deductible and adequately supported? |
| Income assigned to a jurisdiction | Returns, activity records, location data | Did the agency apply the correct allocation rules? |
Deposits treated as sales
- Useful EvidenceBank transfers, loan agreements, invoices
- Question to ResolveWas the receipt taxable income or counted twice?
Rejected business costs
- Useful EvidenceContracts, receipts, payment records
- Question to ResolveWas the amount deductible and adequately supported?
Income assigned to a jurisdiction
- Useful EvidenceReturns, activity records, location data
- Question to ResolveDid the agency apply the correct allocation rules?
For an examination still underway, IRS audit defense may include a documented response before the agency issues a formal deficiency notice.
2. Which Tax Rules Apply to the Disputed Amount?
Tax treatment may differ under federal, state, and city law. The tax year and actual business activity matter more than the mailing address.
Federal Payment Reports and Business Income
Form 1099-K reports gross payment transactions, not taxable profit. Its total is not reduced for refunds or processing fees, and it does not account for the cost basis of property sold. Compare the form with transaction reports and the filed return before treating the difference as income.
New York State and NYC Business Taxes
The New York State Department of Taxation and Finance handles state income and sales taxes, including the city's sales-tax component. The NYC Department of Finance separately administers certain city business taxes. The NYC Unincorporated Business Tax covers qualifying activity, with exclusions for certain property held or managed for the taxpayer's own account. An LLC label alone is inconclusive. Income allocation may warrant state and local tax review.
3. How Does an Attorney Build and File the Challenge?
A valid challenge needs a contested figure, supporting records, and the procedure specified by law. Accounting records cannot replace a required petition.
Match Each Adjustment to Its Source
An initial case review should include:
- The full notice, tax period, proposed adjustments, and stated deadlines.
- Filed or amended returns, agency workpapers, and original transaction records.
- Prior correspondence, submissions, and evidence of timely delivery.
An attorney can distinguish calculation errors from legal disputes. For federal matters, a tax lawyer in the U.S. may prepare written objections, communicate with the IRS under proper authorization, and assess available administrative or judicial remedies.
Observe the Correct Protest Deadline
Under IRC § 6213(a), a statutory IRS Notice of Deficiency generally gives the taxpayer 90 days after mailing to petition the U.S. Tax Court. The period is 150 days if the notice is addressed to a person outside the United States. Subject to statutory exceptions, the IRS cannot assess the proposed deficiency during that period or while a timely Tax Court case remains pending before a final decision.
For protestable New York State notices, taxpayers may seek a BCMS conciliation conference or petition the Division of Tax Appeals. Many notices require action within 90 days, but the notice and tax law control.
Certain NYC business-tax determinations also carry a 90-day protest period, or 150 days for notices addressed abroad. For specified city business-tax refund disallowances, the period is two years. The filings are not interchangeable.
4. Practical Pitfalls in Assessment Disputes
The appropriate remedy depends on filing in time and distinguishing challenges to liability from requests for payment relief.
Do Not Rely on Continued Correspondence
Further correspondence with an examiner generally does not extend a filing deadline. A formal protest or petition may still be necessary. A dispute that reaches litigation may require separate tax controversy litigation analysis of jurisdiction and court rules.
Separate Liability, Penalties, and Collection
An assessed tax, a penalty, and collection of an existing balance present different issues. An installment agreement generally changes payment terms, not the underlying assessment. Penalty relief may require reasonable cause or another applicable legal standard. Preserve original records and document later corrections.
5. Frequently Asked Questions
Should I hire a tax attorney or a CPA for an IRS dispute?
Both attorneys and CPAs may represent taxpayers before the IRS when properly authorized. A CPA may focus on returns and accounting analysis, while an attorney can assess litigation and legal privilege issues. Some disputes require both kinds of work.
Are conversations with a tax attorney confidential during an IRS investigation?
Communications made in confidence for legal advice may qualify for attorney-client privilege. Tax return preparation and preexisting records are not automatically privileged. IRC § 7525 offers certain federally authorized tax practitioners limited confidentiality protection in qualifying noncriminal federal tax matters, not a general privilege for every conversation.
6. Review Your Disputed Tax Assessment
SJKP's attorneys can compare the notice and disputed figures with original records, assess the legal basis for each adjustment, and evaluate available filings before the applicable deadline.
11 Nov, 2026
