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An IRS audit is an examination of a tax return; an appeal is an administrative review within the IRS; a lawsuit is a case filed in court; and a settlement is an agreement that can resolve some or all disputed issues at different points in the process. They are not interchangeable terms, and the notice you receive—not the label you use—determines what step may be available and when it is due.
This guide covers U.S. federal tax procedure. State tax audits and state court procedures are separate.
How the four terms differ
| Term | What it means | Where it happens | What may happen |
|---|---|---|---|
| Audit (examination) | The IRS reviews return items for accuracy. | IRS examination function | The return may be accepted without change, adjusted, or result in a refund. IRS Publication 556 |
| Appeal | Administrative review of a disputed IRS decision. | IRS Independent Office of Appeals | Appeals may resolve eligible issues without litigation. IRS Appeals at a Glance |
| Lawsuit | A judicial challenge filed in a court with authority over the matter. | Often the U.S. Tax Court for an eligible notice; other federal court routes may apply to other matters. | A Tax Court case begins with a timely petition in response to a qualifying notice. Deadlines vary by notice and case type. U.S. Tax Court petitioner guidance |
| Settlement | An agreement resolving some or all disputed liability or issues. | IRS Appeals, a pending Tax Court case, or a collection program, depending on the matter | An agreement may resolve issues administratively or lead to a stipulated decision entered by the Tax Court. Tax Court guidance on events before trial |
The practical distinction is who is deciding the matter, what stage it is in, and which document controls the next step. An examiner conducts the examination, Appeals reviews eligible disputes administratively, and a court handles a properly filed case. A settlement describes a possible resolution, not a separate stage that automatically stops every deadline.
What happens in an IRS audit?
An audit, which the IRS also calls an examination, is a review of whether income, deductions, credits, or other return items were reported accurately. The IRS says it accepts most returns as filed and selects some for examination through methods that can include computerized screening, random samples, or information matching. Being selected does not by itself mean the taxpayer made an error or acted dishonestly. Examinations can end with no change, a refund, or proposed adjustments. IRS Publication 556
If the examination proposes changes
- Read the IRS letter and examination report carefully, including any explanation of appeal rights and dates.
- Identify the specific items you disagree with and gather records that support your position.
- Follow the response instructions in the correspondence. The available path depends on the letter and the kind of determination; not every IRS bill or notice carries the same appeal rights. See the IRS guidance on considering an appeal.
What an IRS administrative appeal is—and is not
The IRS Independent Office of Appeals is separate from the office that conducted the examination. It reviews eligible disputes and seeks to resolve tax controversies without litigation. Appeals can handle matters before a court petition and cases after a Tax Court petition has been filed. An Appeals officer considers the facts, law, and positions of both sides; in some cases, litigation risk may be relevant to considering a compromise. IRS Appeals at a Glance and IRS explanation of what to expect after requesting an appeal
An appeal is not a lawsuit: it is still an IRS process, not a court case. Nor is every disagreement eligible for Appeals. The IRS says an appeal may be appropriate when the correspondence explains appeal rights, you disagree with the decision, and you have not signed an agreement. A bill that does not mention appeal rights, or a concern only about inability to pay, generally does not fit that route. Check the specific letter and the IRS page on considering an appeal.
Fast Track mediation
For many unresolved examination or collection issues, Fast Track is a voluntary IRS mediation option after the examiner or collection officer has completed work. The mediator cannot force either side to participate or accept a resolution. If the issue is not resolved, the taxpayer may still have access to traditional Appeals. Details are on the IRS Fast Track page.
When a tax dispute becomes a lawsuit
A lawsuit involves a court filing. In an eligible Tax Court matter, the taxpayer starts the case by filing a petition in response to a qualifying IRS notice. A notice of deficiency generally allows 90 days from the mailing date to petition, or 150 days if the notice is addressed to a person outside the United States. These are general periods for a deficiency notice, not a universal deadline: other notice types and case types have different filing periods. The Tax Court says the deficiency petition deadline is strict and generally cannot be extended. Read the notice and the court’s current petition guidance to identify the deadline that applies.
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If you thought an agreement had been reached but then receive a notice that grants petition rights, do not assume the notice can be ignored. Tax Court guidance says to protect your rights by filing within the period stated in the notice; the IRS may be proceeding as though there is no settlement. U.S. Tax Court, Starting a Case
How a settlement can happen
Settlement is a resolution method, not a synonym for appeal or lawsuit. An eligible dispute may be resolved through an agreement with Appeals before litigation. A case that has already been petitioned to the Tax Court may also settle. In the court process described for self-represented petitioners, the IRS prepares a stipulated decision, both sides sign it, and the IRS submits it to the Court for entry; once entered, the case closes without a trial appearance in that situation. See the Court’s guide to things that occur before trial.
Offer in Compromise is a specific collection option
An Offer in Compromise (OIC) is an agreement to settle a tax liability for less than the full amount owed. It is a collection arrangement handled through the IRS’s collection process, including collection Appeals work where applicable—not a generic name for negotiating an audit result or settling a lawsuit. See the IRS pages on preparing an Appeals request and what to expect after requesting an appeal.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to check before choosing a next step
- The exact notice: Find the notice type, date, stated response or petition deadline, and any appeal-right language.
- The stage: Determine whether the matter is still an examination, an administrative dispute, a filed court case, or a collection issue.
- The disagreement: List the specific items at issue and the documents or legal grounds supporting your position.
- Any active deadline: Do not rely on a presumed agreement or a general deadline where the notice states a different one.
Eligibility, deadlines, and procedures depend on the specific notice and case. If a filing deadline is active or the dispute is complex, consider qualified tax controversy counsel or a Low-Income Taxpayer Clinic; the Tax Court petitioner guidance describes help options.
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