First of all, sorry about the repeat inquiries. But, there are steps you can take to fight back.
I would first engage a tax pro to handle your Appeal, since you report you have lost at audit. The insertion of a quality representative is often the best first step in tax defense.
Since you report no tax was due in those prior audits, you would be seen as complying with the tax law
. Since IRS waited to get to year 3, they appear to be trying to circumvent that standard in their own Internal Revenue Manual guidelines. Now, how to help you build your case:
I would then suggest requesting a copy of your previous audit files using the Freedom of Information Act (FOIA). The application will force IRS to produce its prior audit workpapers, which could produce the best evidence against their audit. Their workpapers will have excerpts of the appropriate case law, and perhaps references to the Internal Revenue Manual referring to the scheduling of these repeat audits.
I would then citate the law used in your favor in previous audit periods, to insure there were no changes in the law that might actually make some of your benefits taxable.
Once I had those items, I would think I could go to Appeals and win. IRS has to assess its risks at Appeals, and if they believe you would go to Tax Court, they may acquiesce at Appeals, abate the taxes, and note your file not to keep coming to you. The risk they run in court is not only a loss, but they could be found having to pay your legal fees, and having an adverse published opinion other taxpayers could use to fight similar pursuits.
I suggest a tax pro to handle this. make sure the pro you hire can represent you in Tax Court (CPAs and tax attorneys can, enrolled agents might). I hope this gives you some of the tools you will need in your fight. Thanks for asking at Just Answer.