How the Rich Beat IRS Audits (Even if They Are Wrong)

Added: 2026-05-11

[00:00:00]If you think the IRS always wins an audit because they know the law better than you, you would be wrong. Okay, because here's the reality. The IRS is not a judge. They're not the final authority and they don't always get the law right. They make assumptions, they take tax positions and sometimes those positions don't hold up. And when that happens, they can lose. Okay, sometimes it's because their tax position was weak and sometimes it's because you knew how to challenge it. So in this video, I'm going to show you how tax disputes actually work from audit to appeals to tax court. Why most people lose and how to give yourself a real chance to win.

[00:00:33]And I'm Jasmine Bilazarian. I'm a practicing tax attorney, CPA and enrolled agent. I represent clients in audits, appeals and in tax court and I see how the IRS works and know what you need to do to put yourself in the best position to get a great tax result even when the law is not perfectly on your side. We're going to break this down into three parts. Okay, first, the dispute. How you get into conflict with the IRS. Second is the strategy. How to approach your case with the IRS and finally, how it actually works when you're up against the IRS. And I'll go over a court case showing you how you can even win against the IRS when you don't have the law on your side. Because once you understand how these three pieces interact, you stop being afraid of your own shadow with the IRS and instead you know what to do to protect yourself and win. All right, let's start with the dispute because this is where most people misunderstand how the system actually works. Most taxpayers walk into an audit thinking the IRS is basically the judge. Okay, they think, if I just explain myself well enough, tell my whole story and show that I meant really, really well, the IRS will see that I'm right. There should be no penalties and it'll wrap up the audit nice and quick. Don't ever do that.

[00:01:38]Okay, that is not how this works. Not because IRS auditors are bad people.

[00:01:43]Most are professional and reasonable, but they are doing a job and that job is not to sit there like a neutral judge and weigh every possible legal angle in your favor. Their job is to ask you for 10,000 receipts and then deny every deduction that doesn't have a receipt.

[00:01:58]And that's, you know, like I'm joking except that's actually basically how it works. Which is why you cannot afford to misunderstand the auditor's role. Okay, the audit is just the beginning of a larger dispute process. The auditor is not on your side. They don't hate you.

[00:02:12]Okay, they're just usually not there to help you. And they do not specialize in tax law. They're focused on following a checklist that usually includes having you spend hundreds of hours producing hundreds of documents. And if you do not understand that structure, you can lose ground early by treating the auditor like a friend or a final decision maker when they are really just your first stop. So here's the real structure. The IRS auditor reviews your return and sends you document requests. Okay, their job is to examine what is in front of them, request documentation and disallow what they believe has not been substantiated. And at this stage, the focus is usually pretty black and white.

[00:02:47]Okay, they are not really there to resolve legal uncertainty or weigh litigation risk. Then, the audit ends and this is where a lot of people have an absolute heart attack. Okay, they read a six-figure or dare I say seven-figure adjustments and suddenly realize they probably need some help.

[00:03:04]Okay, and if that is you, do not panic.

[00:03:06]The next step is IRS appeals. Appeals gives you more time to gather documents if support was the issue, but more importantly, it is a different environment. Okay, appeals officers can consider what we call hazards of litigation and settle your case. And that just means they can take into account the risk that the IRS might lose in court and reduce the adjustment based on that risk. But then, if you still cannot get it resolved in appeals, you can petition to go to tax court and negotiate with IRS counsel. And at that point, you are dealing with attorneys.

[00:03:35]And I have to say, >> [laughter] >> these are by far my favorite people to deal with at the IRS. Every now and then you do run into an auditor or an appeals officer who is very confused or sometimes makes up rules. The IRS attorneys in my experience never do that. But the most significant thing about working with IRS attorneys is they understand my favorite statute, Treasury regulations and court cases and just really more advanced arguments along with truly weighing hazards of litigation because they are the ones who will actually have to take the case to court. So now that you understand the structure and understand that the IRS is not the final authority, the next question is, how should you actually approach a dispute? So, let's talk about the strategy. Okay, once you're in an IRS audit, you cannot create new facts.

[00:04:17]Okay, you cannot invent documentation.

[00:04:20]So at that stage, the priority is simple. Pull together every single piece of substantiation that you have. Every receipt, every invoice, every bank statement, every mileage log, every email that helps you establish what actually happened. And if your records are a mess, that may mean spending dozens, hundreds or even thousands of hours organizing them. Okay, and that part is very painful. It is tedious and it's exactly why weak accounting systems turn into very expensive tax problems later. So once you make it past the IRS auditor stage, then the strategy is create risk for the IRS, right? I already mentioned a concept, hazards of litigation. This is one of the most important ideas in IRS disputes and almost no one talks about it publicly.

[00:04:58]Hazards of litigation means the risk that the IRS could lose if the case goes to court. And this matters. Okay, because the IRS is not just thinking about your case. They're thinking about what happens if they lose, how it affects future cases, whether it weakens their position across the board and let's be honest, they're also thinking about how much work it is for them to take the case to court when they could just settle. Because if they lose, especially on a legal issue, with that loss doesn't just stay isolated. It creates precedent for other people to cite to their disputes and precedent can be dangerous. And it is a reason that they'll settle your case more favorably than they otherwise would likely happen to do in tax court. And here's the part that frustrates people. Okay, IRS auditors do not consider hazards of litigation. So people argue reasonable common sense arguments with them and get nowhere. And they assume, the IRS isn't listening to me, right? Or the IRS isn't settling. The IRS auditor is not supposed to do either of those things.

[00:05:53]That is not their role. Hazards of litigation only shows up later in appeals with IRS counsel. So the real strategy is build a position strong enough that the facts are clean, the argument is clear and the IRS sees downside risk. Now, let's get into how it actually works. Okay, because this is where people finally understand what this looks like in real life. What people think is simple, right? If the IRS has the better legal position, they win, but that is not how litigation actually works. Because in court, it's not enough for the IRS to be directionally right, right? They have to make the right argument under the right framework and actually prove it. And if they do not, they can lose even when they had the better substantive position sitting right in front of them. A perfect example is Anikeev versus Commissioner. Okay, a 2021 tax court memorandum case that people constantly cite the idea that cashback rewards are not taxable. People read it and they say, look, the taxpayer won, right? The IRS was wrong. But that is not what really happened. In that case, the taxpayer ran millions and millions of dollars through a credit card rewards cycle, right? They bought these gift cards, debit cards and money orders on Amex, converted those instruments back deposited the money into their bank account and restarted the process. And they were not doing that incidentally.

[00:07:07]They were of course doing it because the rewards exceeded the fees. So there was a real profit in that loop. So, at a very basic level, this sounds really, really taxable, right? It is an undeniable accession to wealth, clearly realized over which the taxpayers had complete dominion. That is exactly why the IRS challenged it. And they probably thought they had a slam dunk case with no reason to settle. But then things went very wrong because the IRS attorney did not bring the right argument to court. And the court explains that the IRS had raised an alternative position on a basis adjustment theory. That theory would treat the reward dollars as reducing basis in the gift cards with tax arising later when the taxpayers converted the cards into money orders or cash equivalents. It was a winning argument. But the IRS attorney didn't bring that argument to court. And the court then says exactly that. They say, respondent, which is the IRS, declined to pursue an alternative position and we should not assume to do it for him. And that is the point. The IRS can have the better legal argument and still lose.

[00:08:14]And that is exactly why hazards of litigation matter. The IRS attorney put in all the time and expense to prepare for trial, lost anyways and now the tax court opinion lives on as one of the main cases that people cite to try and argue that cashback credit card rewards are not taxable even when you create a freaking business out of it. So, here's what I see over and over. Okay, people think the IRS wins because they know the law or they're the final authority. They are not. Okay, the IRS often wins because most taxpayers don't understand the system or how to present their case in a way that creates credibility, support and leverage. And if you take anything from this, it's this. Okay, the IRS is not unbeatable, the system is not one-sided and the outcomes are not random. If you understand where disputes are decided, what the IRS actually cares about and how to create risk in the right place, you can win against the IRS even when your accountant tells you it's game over.