What is an Audit Reconsideration?
An audit reconsideration is defined by the Internal Revenue Manual (IRM) as the process the IRS uses to reevaluate the results of a prior audit where additional tax was assessed and remains unpaid, or a tax credit was reversed.
If the taxpayer disagrees with the original determination, they must provide information not previously considered during the original examination. IRS uses this process when the taxpayer contests a Substitute for Return (SFR) determination by filing an original delinquent return. [IRM §18.104.22.168(1)]
Audit Reconsideration Authorization
The Internal Revenue Code does not explicitly authorize the IRS to offer audit reconsideration as a relief provision to taxpayers. Nevertheless, the Code generally authorizes the IRS to abate the unpaid portion of the assessment of any tax or liability with respect to it that is one of the following:
(1) excessive in amount,
(2) assessed after expiration of the applicable period of limitation, or
(3) erroneously or illegally assessed (Sec. 6404(a)).
This means IRS has ‘discretionary authority’ to evaluate a prior audit conducted by an IRS auditor. This evaluation is a form of review of a previous audit where some issues remain unresolved. For a usual audit reconsideration situation, the taxpayer believes that the audit resulted in an inappropriate or unsupported increase in tax liability. As result, the taxpayer objects to pay the additional tax assessed. Many times, the taxpayer was not present at the audit, either because
(1)the taxpayer was unaware of it (did not receive the notice) or
(2)decided not to respond to the IRS notice.
Whatever the circumstances causing the disagreement with the tax assessment, need arises to have IRS take a second look at the prior audit findings.
Audit Reconsideration Effectiveness
Audit reconsideration can amount to a highly effective tool available to when the taxpayer
(1)is dissatisfied with the results of a prior audit,
(2)as well as when clients have not filed tax returns and the IRS has filed returns for them through the SFR process.
The SFR process allows the IRS to file tax returns on behalf of taxpayers in situations when taxpayers fail to make a return or file (willfully or otherwise) a false or fraudulent return. IRC section 6020(b) authorizes the IRS to use information gathered through the mandatory reporting processes (e.g., the Form 1099 series) and any other information available to it. IRC Sec. 6020(b)(2) states that any return prepared by the IRS “shall be prima facie good and sufficient for all legal purposes.” Once the IRS files a SFR on behalf of a non filing taxpayer, it can be an uphill battle to obtain relief. Usually, the taxpayer then needs to engage tax counsel.
There are several important concerns when choosing the audit reconsideration tool.
(1) audit reconsideration is not available during an original IRS examination.
(2) Audit Reconsideration is an administrative process, and is discretionary. As a result, the IRS has the power to decide which cases it will approve for audit reconsideration.
By comparison, the IRS Appeals Unit generally grants taxpayers the right to have their case mediated by an ‘independent representative’ of the IRS.
(3)The additional tax assessed by the IRS must remain unpaid; otherwise, the taxpayer will need to consider other options for seeking a refund such as a formal “Claim for Refund” which has it own labyrinthian rules.
(4)The taxpayer must have something “new” to offer the IRS for consideration, that usually is new evidence, e.g., supporting documentation that was not previously considered by the examining agent, for example.
Audit Reconsideration Goals
The stated goals of the audit reconsideration process are to ensure that:
- The amount of assessed tax is correct;
- The collection process is suspended while the reconsideration request is being considered;
- Procedures support the abatement of assessments in appropriate situations; and
- Cases are handled in a consistent manner.
What lessons can be derived from these goals?
(1)IRS is willing to work with taxpayers to help resolve tax disputes in a cost-efficient, timely manner.
(2)IRS is interested in ensuring that the amount of tax assessed is correct.
(3)Taxpayers benefit from having the tax collection process suspended while the IRS considers their requests.
(4)The goals support the notion of fairness and consistency on the part of the IRS when considering an audit reconsideration request.
Reasons for Seeking Audit Reconsideration
Frequent and common reasons for seeking relief through audit reconsideration include:
- The taxpayer did not receive some or all of the correspondence mailed by the IRS to the taxpayer. For example, the taxpayer moved and the IRS does not have the taxpayer’s current address;
- The taxpayer did not appear for an audit; Interestingly, even if the taxpayer decided to ignore the notice;
- The IRS did not consider some or all of the information submitted by the taxpayer in response to an IRS inquiry;
- The taxpayer disagrees with an assessment from an earlier audit and now has new information related to the dispute; or
- The taxpayer disagrees with an assessment based on a return filed by the IRS through the SFR process.
Married taxpayers’ jointly filed return was audited by the IRS. Subsequently, the IRS mailed a notice of deficiency (90-day letter) that stated that as a result of the audit, an additional tax was being assessed. Additionally, the notice stated that (1) the taxpayers had 90 days from the date of the notice to file a petition with the Tax Court; (2) the Tax Court cannot consider a late petition; (3) the time to file a petition with the Tax Court cannot be extended or suspended; and (4) the receipt of other information or correspondence from the IRS will not change the period for filing a petition.
Upon receipt of the 90-day letter, the taxpayers, through their accountant, submitted a request for audit reconsideration based on new information they had related to the audit. The IRS granted their request, stating in its letter that the taxpayers’ case would be returned to the examination group for evaluation. At the bottom of the letter, the following handwritten statement appeared: “Time to file a petition with the U.S. Tax Court has expired.” Nonetheless, the taxpayers filed a petition with the Tax Court. In response to the taxpayers’ petition, the IRS filed a motion to dismiss for lack of jurisdiction, on the grounds that the petition was not timely filed. The Tax Court found that the taxpayers did not file their petition for redetermination with the court within the time prescribed by Secs. 6213(a) and 7502. Accordingly, the court determined that it lacked jurisdiction to redetermine the tax liability and granted the IRS’s motion to dismiss for lack of jurisdiction.
Bad news if the taxpayers want to have their day in Tax Court and not have to pay the tax first. However, hope remains. The taxpayers were still able to have their case reconsidered by the IRS through the audit reconsideration process. The Court in Wong, T.C. Memo. 2000-88, “Petitioners did not even begin to discuss audit reconsideration with respondent until after the 90-day period had expired.” Takeaway: Given the discretionary nature of audit reconsideration, the taxpayer should view audit reconsideration as a possible remedy for resolving a dispute with the IRS, even when other strategies are unavailable, such as filing a petition with the Tax Court.
Factual Situations whee the IRS Views a Request for Audit Reconsideration Favorably
The IRM lists the following circumstances as examples of when it is likely to view a request favorably (IRM §22.214.171.124):
- The taxpayer requests the abatement of an assessment based on information that was not previously considered and that, if considered, would have resulted in a change to the assessment;
- An original delinquent return is filed by the taxpayer after an assessment was made as a result of a return executed by the IRS under Sec. 6020(b) or another SFR procedure; or
- There was an IRS computational or processing error in assessing the tax.
As a Tax Attorney, I have personally utilized situation one above to obtain a second look at a tax assessment that was several years old by the time the taxpayer came to see me.
Oppositely, the IRS has indicated it will not consider a request for audit reconsideration in the following situations (IRM §126.96.36.199):
- The taxpayer has already been afforded a reconsideration request and did not provide any additional information with the current request that would change the audit results;
- The assessment was made as a result of
- a closing agreement entered into under Sec. 7121 using Form 906, Closing Agreements on Final Determination Covering Specific Matters, and/or
- Form 866, Agreement as to Final Determination of Tax Liability;
- The assessment was made as a result of a compromise under Sec. 7122;
- The assessment was made as the result of final TEFRA administrative proceedings;
- The assessment was made as a result of the taxpayer entering into an agreement on Form 870-AD, Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax; or
- The Tax Court has entered a decision that has become final, or a district court or the Court of Federal Clams has rendered a judgment on the merits that has become final.
Requirements for Submitting an Audit Reconsideration
The taxpayer should send a written audit reconsideration request to the appropriate IRS office. Typically, the following documents should be submitted:
- A statement about the issues the taxpayer contends should be corrected;
- Information that supports the taxpayer’s position, including necessary documents such as Forms 1099, canceled checks, bank statements, and loan documents; and
- Copies of letters and reports the IRS sent the taxpayer (including, if available, a copy of the examination report, Form 4549, Income Tax Examination Changes).
Notice: The taxpayer should submit a request for audit reconsideration only if other options, such as filing a petition in Tax Court, have expired and are unavailable.
The audit reconsideration package should be prepared and presented in the same manner as an Appeals notebook. A cover letter is included with the audit reconsideration.
IRS Actions Following Audit Reconsideration Request
After it review of the taxpayer submission, the IRS normally advises the taxpayer whether it will change the assessed tax. Normally, IRS provides explanations for its conclusions. If a taxpayer does not agree with the IRS’s position, taxpayer may do the following:
- request a conference with the Appeals Office by filing a written protest.
- pay the tax in full and then file a formal claim for refund. If the IRS subsequently disallows the claim in full or in part, the taxpayer may request an Appeals conference or file a refund suit in U.S. district court or the Court of Federal Claims.
Usually, it takes several months prior to the time the IRS takes action on audit reconsideration requests.
Note: If a taxpayer is suffering an economic hardship or immediate threat of adverse action such as forced collection or has experienced a significant systematic delay in the IRS’s processing of a reconsideration request, the taxpayer can contact the Taxpayer Advocate’s Office and ask to expedite resolution of the request by filing Form 911, Request for Taxpayer Advocate Service Assistance.