1. If I am audited by a California taxing agency and disagree with the results, can I challenge them?     Yes.     Generally, the procedures for challenging audits by the state taxing agencies are much less satisfactory than for challenging IRS audits. In all cases, whether the taxes are income taxes before the Franchise Tax Board, employment taxes before the Employment Development Department, or sales taxes before the State Board of Equalization, you are entitled to a process of administrative appeal through at least two levels of agency review, ending up in a hearing, if the matter goes that far, before an administrative tribunal consisting of elected or appointed officials. You are entitled to no access to California courts before payment. Each agency has rudimentary settlement procedures for resolution of controversies before final board hearing. 2. Is the IRS truly a more friendly, taxpayer-oriented organization?     Yes, no, and it depends.     Changes made by Congress in 1998 have dramatically altered the practices of the IRS bill collectors working delinquent accounts. Consider the following: A. Seizures of taxpayer residences, formerly an area of great abuse, have dwindled to almost negligible. B. Seizures of operating business for nonpayment of employment taxes have declined as well, though may eventually be anticipated to resume something of their former level of activity. C. The law permits the IRS only ten years from the first billing to collect the taxpayer's liability.  This is not new, but formerly IRS revenue officers would bully taxpayers into extending the 10-year period, sometimes for abusively lengthy additional periods of time such as 30 or 40 years.  Extensions in excess of five years are now not permitted, and even five year extensions are permitted only in connection with a bona fide installment agreement that will pay off the tax liability in full. D. Before any of your assets can be seized, the IRS is now required to mail to you a notice permitting you to appeal the Revenue Officer's strategy  determinations to an unbiased individual in another branch of the agency called the Appeals Division.   Collection on the account must cease pending the Appeals Officer's review of the case    On the other hand, abusive, repetitive, and technically incompetent audits appear, on an anecdotal basis, to have increased.  Though absolute numbers of audits are way down from prior years (to a great extent because of diversion of personnel to taxpayer-service functions), the audits that are being conducted often, perhaps most of the time, are shamefully bad and need to be settled at higher levels than the auditor. 3.  If I am audited by the IRS and disagree with the results, can I challenge them?      Yes.   If the audit was for income, estate, or gift taxes, the IRS must mail you by certified or registered mail a document called a "Notice of Deficiency", in which the IRS details the proposed audit adjustments causing any increase in tax.  In response to this Notice of Deficiency, you are legally entitled to file a petition with the United States Tax Court (which has hearing rooms around the country) and get a full judicial review of the situation before the IRS may bill you.  In addition, before the IRS issues a notice of deficiency, the IRS will usually mail out a less formal report of the auditor's findings, which you may take to a negotiating staff called the "Appeals Division" in an attempt to resolve the case before having to go to court.  If you file suit before going to the Appeals Division, your case will be automatically routed to the Appeals Division before trial in an attempt to get a resolution of the case without necessity of a trial.      If the audit dealt with some other type of tax, such as employment taxes or one of various excise taxes, you will not be entitled to receive a Notice of Deficiency, but you will usually be accorded the opportunity, in response to the auditor's findings, to get to the Appeals Division and present your case before a negotiator.  You are always entitled to pay the tax in full and file a claim for refund of what you have paid, after which you may sue in federal court if you don't get satisfaction.  For certain taxes, such as employment taxes, you are permitted to file a law suit in federal court after payment of a token amount only, so that you can present the case to a federal judge without being forced to pay a potentially bankrupting liability. 4.  If you challenge an audit, will you end up being audited for the rest of your life?     No.    There is no evidence to support the widely-shared belief that you can get on the IRS's "bad-boy list" by resisting an erroneous audit.   There are no directives to agents urging them to take retribution out on taxpayers who legitimately and professionally dispute unwarranted audit adjustments, nor do tax professionals in general observe any such IRS behavior.  On the other hand, if the IRS writes you up for an issue, the auditor may open up other years to see if the same issue is to be found in those years as well.  It is better, therefore, to resist unwarranted audit adjustments rather than to acquiesce in them out of an unjustified fear that resistance will prompt further audits.    You may, by coincidence, find subsequent years selected for audit if your returns show a continuing reporting pattern that repeatedly attracts the attention of IRS officials classifying your returns for audit potential. 5.  How probable is it that the IRS may accept a "pennies on the dollar" offer to compromise outstanding tax liability?    That depends entirely on your financial circumstances.    The process of getting to closure on insurmountable tax liabilities by offering a lump-sum settlement lower than the liability is called an "offer in compromise".  This is the only procedure permitted by law to settle tax liabilities based on the taxpayer's inability to pay.    In some urban areas, advertisements in newspapers and on radio or television hawk services by vendors offering to represent taxpayers in an attempt to settle tax liabilities for pennies on the dollar.   The offers propounded by these vendors are often unrealistic and destined to be denied.    An offer in compromise is a formal proposal, set forth on an IRS form accompanied by detailed financial statements for the taxpayer's personal and business affairs.  An acceptable offer is determined completely by the facts revealed by the financial statement and follow-up verification requested by the IRS.  You must agree to offer a sum equivalent to the net value of all of your assets (with a few small statutory exemptions) plus a factor which takes into account the amount of discretionary monthly income you have after paying for the necessities of life. Most offers, if they fail, do so because of differing views between the IRS and the taxpayer regarding the "necessities of life".  Many of the amounts allowed by the government in this calculation are drawn from charts that the IRS publishes.  These amounts are set and not open to negotiation.    Generally speaking the following factors, if present, will tend to add up to an offer that will go through:    Funds available for borrowing from family, friends, or employer.  These funds then are used to pay the offer.    Low monthly income barely covering the necessities of life, thus negating any potential for "disposable income" which the IRS will want to take into account in the offer.    Few assets. (Ownership of a family home especially tends to complicate the offer process, since the taxpayer must either sell the property or borrow its full value in order to pay the offer.)    Offers in compromise are technically very difficult and can have serious negative consequences.  For example, they extend the ten-year period in which the government can collect taxes and thus should never be filed at or near the end of that ten-year period.  They can disrupt the availability of bankruptcy.  In general, they should never be considered without thorough consideration by a qualified tax attorney. 6.  Is the United States Tax Court much different from a normal courtroom?    Not particularly.    The Tax Court's administrative offices are based in Washington, D.C.  The judges travel to courtrooms around the country, some of which they borrow from other court systems, and some of which have been constructed for their own use.  The courtroom in Los Angeles is dedicated to the exclusive use of the Tax Court.    The Tax Court does not have jury trials, but the proceedings are otherwise very judicial in character.  There is a judge, clerk, and court-reporter, though usually not a bailiff.  Generally, in the absence of special notoriety about a case, outsiders have no interest in tax trials, so there are no strangers in the courtrooms during trials.    Most cases in the Tax Court are settled well before trial through contact between the taxpayer and the government's negotiating staff in the IRS Appeals Division.  Those cases that are not settled are scheduled into two week calendars for the next arrival of a Tax Court judge in town.  On the first Monday of the two week calendar, each unsettled calendared case is called by the judge and scheduled for trial in the ensuing two week calendar.  Because of the relative brevity of these two-week calendars, on which as many as a dozen or two cases may be set for trial, most trials are themselves short.  To make sure that this happens, the taxpayer is expected to work with the government to get the pertinent documents assembled and brought into court without the normal formalities many other court systems use to provide evidentiary foundations for documents.    Witnesses are sworn and give their testimony from a witness box, as in any other court proceeding.   Since the formal rules of evidence apply in Tax Court proceedings, taxpayers are generally well-advised to be represented by experienced counsel, preferably with a Tax Court background.