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, he/she must provide information that was not previously considered during the original examination. It is also the process the IRS uses when the taxpayer contests a Substitute for Return (SFR) determination by filing an original delinquent return. [IRM §126.96.36.199(1)]
Although the Internal Revenue Code does not explicitly authorize the IRS to offer audit reconsideration as a relief provision to taxpayers, it nonetheless in general terms authorizes the IRS to abate the unpaid portion of the assessment of any tax or liability with respect to it that is (1) excessive in amount, (2) assessed after expiration of the applicable period of limitation, or (3) erroneously or illegally assessed (Sec. 6404(a)).
In practical terms, this means the IRS has discretionary authority to evaluate a prior audit conducted by its employees. This evaluation represents a form of "rework" of a previous audit where some issues remain unresolved. In a typical audit reconsideration situation, the taxpayer believes that the audit resulted in an inappropriate increase in tax liability and thus refuses to pay the additional tax. Often, the taxpayer was not present at the audit, either because the taxpayer was unaware of it (did not receive the notice) or simply decided not to respond to the notice. Regardless of the circumstances causing the dispute, there may be a need to have the IRS evaluate the prior audit findings.
Audit reconsideration is a highly effective tool available to practitioners when a client is not satisfied with the results of a prior audit, 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. In these situations, Sec. 6020(b) authorizes the IRS to use information gathered through the mandatory reporting processes (e.g., the Form 1099 series) as well as any other information available to it. Significantly, Sec. 6020(b)(2) states that any return prepared by the IRS "shall be prima faciegood and sufficient for all legal purposes."
Practitioners should note several important elements when pursuing audit reconsideration. First, audit reconsideration is not available during an original IRS examination. Second, as an administrative process, audit reconsideration is discretionary. Thus, the IRS has the power to decide which cases it will approve for audit reconsideration. By comparison, the Appeals function within the IRS generally grants taxpayers the right to have their case heard by an independent representative of the IRS. Third, the additional tax assessed by the IRS must remain unpaid; otherwise, the taxpayer will need to consider other options for seeking a refund. Finally, the taxpayer must have something "new" to offer the IRS for consideration, which typically comes in the form of new evidence, e.g., supporting documentation that was not previously considered by the examining agent.
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? First, the IRS is willing to work with taxpayers to help resolve tax disputes in a cost-efficient, timely manner. Second, the IRS is interested in ensuring that the amount of tax assessed is correct. Third, taxpayers benefit from having the tax collection process suspended while the IRS considers their requests. Finally, 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
Some of the more 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, perhaps because the taxpayer moved and the IRS does not have the taxpayer's current address;
- The taxpayer did not appear for an audit, 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.
For example, suppose two 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.
Even with this outcome, all hope was not lost. The taxpayers were still able to have their case reconsidered by the IRS through the audit reconsideration process. As the court noted 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." There is a powerful message here for practitioners: Given the discretionary nature of audit reconsideration, the practitioner should always view audit reconsideration as a possible remedy for resolving a dispute with the IRS, even when more traditional vehicles are unavailable, such as filing a petition with the Tax Court.
Circumstances Under Which 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 §188.8.131.52):
- 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.
On the other hand, the IRS has indicated it will not consider a request for audit reconsideration in the following situations (IRM §184.108.40.206):
- 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).
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.
Action by the IRS
After it reviews the documents that are submitted, the IRS should advise the taxpayer whether it will change the assessed tax and should provide explanations for its conclusions. If a taxpayer does not agree with the IRS's position, it may request a conference with the Appeals Office by filing a written protest. A taxpayer may also 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.
It is not unusual for several months to pass before the IRS initiates action on audit reconsideration requests. The national taxpayer advocate's 2008 Annual Report to Congress showed that reconsideration requests ranked sixth out of the top 15 issues received in the advocate's office. If a taxpayer is suffering an economic hardship or immediate threat of adverse action 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.
Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. David Hove is a senior partner and shareholder with LWBJ LLP in West Des Moines, Iowa. Mr. Hove is a member of the AICPA Tax Practice & Procedures Committee. For more information about this column, contact Prof. Chambers at firstname.lastname@example.org.