Crypto audits produce real disagreements. Basis reconstructions the examiner will not accept. Transfers treated as sales. Penalties stacked on top of a number you think is wrong. When the examination ends with a report you will not sign, the next stop is usually the IRS Independent Office of Appeals.

The rules for getting there are in Publication 5, “Your Appeal Rights and How to Prepare a Protest if You Disagree.” Everything below comes from the current revision, Rev. 4-2021, unless I say otherwise.

Before you appeal: exhaust the exam

Publication 5 says that before you request an appeal, make sure you have given the examiner any information, documents and explanations requested, or that you want considered. If you raise new information or new issues with Appeals that the IRS has not considered, it may need to go back to the examiner first, which “will likely delay the resolution of your case.”

It also says that if you disagree, you can discuss the issues with the examiner and then request a discussion with the examiner’s supervisor. Do it. A crypto exam often turns on records, and a supervisor may see a basis reconstruction differently than a busy examiner.

In some cases you can request Fast Track Settlement, where an Appeals employee mediates while the case stays with the examination function. The issue must be fully developed and the IRS must agree to participate.

The letter that starts the clock

At the end of an unagreed exam, you get a letter with the examination report and your appeal rights. Treasury’s penalty approval regulation gives one example, Letter 915, Examination Report Transmittal, which offers the options to agree, provide more information, discuss with the examiner or the examiner’s supervisor, or request an Appeals conference. See Treas. Reg. 301.6751(b)-1(e), Example 2.

Your letter states the deadline to request Appeals. Publication 5 says to send your protest to the address in the letter within the time limit in the letter.

Small case request or formal protest: the $25,000 line

Publication 5 sets the threshold.

  • Small case request. If the total amount of tax and penalties for each tax period involved is $25,000 or less, you may make a small case request instead of a formal protest: a brief written statement of the disputed issues and why you disagree, or the appeal request form included with your letter, or Form 12203, Request for Appeals Review.
  • Formal written protest. Required if the proposed change in tax and penalties for any tax period is more than $25,000. If more than one period is involved and any one exceeds $25,000, you must file a formal protest for all periods. Partnership and S corporation cases require a formal protest regardless of amount.

Crypto audits often span several years. One big year can force a formal protest for all of them.

What a formal protest must contain

Publication 5 lists the required elements:

  • A statement that you want to appeal the IRS’s proposed changes.
  • Your name, address and a daytime telephone number.
  • A list of all disputed issues, tax periods, proposed changes, and the reasons you disagree with each issue.
  • Facts supporting your position on each disputed issue.
  • Law or authority, if any, supporting your position on each issue.
  • A penalties of perjury statement, signed by you, or the representative version if your representative submits it.

For a crypto case, “facts supporting your position” means your reconciliation: transaction-level data, basis method, transfer matching, and the documents behind each. “Law or authority” means the Code, regulations and guidance on each issue, including the penalty defenses. If the examiner proposed penalties, address them separately, including reasonable cause under IRC 6664(c)(1) and the written supervisory approval requirement in IRC 6751(b). See supervisory approval of crypto penalties.

Statute time: Appeals needs a year

Publication 5 warns that before an examination case is received in Appeals, IRS policy for originating functions “may require greater than 365 days remain on the statute of limitations.” If more time is needed, the IRS will ask you to extend the assessment date. If you choose not to extend, “Appeals will not accept your case.”

Docketed Tax Court cases do not have that concern. Weigh the extension request carefully. See how far back the IRS can audit crypto.

Crypto issues that tend to move at Appeals

Appeals officers weigh the hazards of litigation. In crypto cases, these are the issues where a well-documented protest tends to matter most.

  • Basis reconstruction. An examiner who could not verify basis may have allowed none. Appeals can weigh how a court would likely treat a reasonable, documented reconstruction.
  • Transfers treated as sales or income. A transfer map tied to wallet addresses and exchange records often resolves these.
  • Double counting. The same disposition on two information returns, or a corrected form counted alongside the original.
  • Holding period. Transfer-in dates used as acquisition dates, converting long-term gain to short-term.
  • Penalties. Reasonable cause under IRC 6664(c)(1), and whether the IRS can show timely written supervisory approval under IRC 6751(b) for penalties that require it.

Each of those is a factual or legal argument Appeals can evaluate. Lead with the strongest, support it with documents, and keep the protest readable. Appeals officers are people with caseloads too.

Who should represent you at Appeals

Publication 5 says you may represent yourself at the Appeals conference, or appoint a person authorized to practice before Appeals, such as an attorney, certified public accountant or enrolled agent, under Circular 230. If you want your representative to participate without you, a properly completed power of attorney, usually Form 2848, must be on file before the representative can receive or inspect confidential information.

If a case may end up in Tax Court, consider who can follow it there. Practice before the Tax Court requires separate admission to that court. Choosing a representative who can handle both stages avoids a handoff in the middle of the dispute.

What Appeals will and will not consider

Publication 5 describes Appeals as independent of the division that proposed the changes and as the only level of administrative appeal within the IRS. Appeals applies tax law, including court decisions, to the facts, and most disputes settle there without litigation.

It also says Appeals “cannot consider your arguments if they are based only on moral, religious, political, constitutional, conscientious, or similar objections” to taxes. Arguments that crypto should not be taxed, or that the IRS should not have your exchange records, will not move Appeals. Arguments about basis evidence, holding periods, double counting and penalty defenses will.

If you skip Appeals or do not settle

If you do nothing after an income tax exam with a proposed deficiency, Publication 5 says the IRS will send a notice of deficiency giving you a limited time to petition the U.S. Tax Court, usually 90 days, or 150 days if the notice is addressed to a person outside the United States. The time to file is set by law, and neither the IRS nor the Tax Court can change it. See the crypto notice of deficiency.

If you petition the Tax Court without having gone to Appeals, Publication 5 says you will normally have an opportunity to attempt settlement with Appeals while the case waits for trial.

The bottom line

Appeals is where a lot of crypto audits get fixed, because it weighs litigation risk and evidence rather than just the examiner’s spreadsheet. Get there with a complete record, a clear protest, and enough statute time for Appeals to work. That is not a formality. It is the case.

If the deadline in your letter is close, do not let perfection cost you the appeal. A timely protest that states every disputed issue and the basis for each can be supported with more documentation later. A late protest may not be heard at all.