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Four Possible Resolutions to an IRS Audit

There are four possible resolutions to an IRS audit: no change, agreed, unagreed, and partially agreed.

No Change

In this situation the agent accepts the return as filed and does not propose any deficiency adjustments to the return under audit. The taxpayer or the representative is notified of the “no change.” Most agents send written verification to the taxpayer and it is commonly referred to as a “no-change letter.” In some situations, the agent may make an adjustment, but there is no tax liability resulting from the change. This type of change could impact a carryover item or other adjustment in a subsequent year. Even after receipt of the no-change letter the taxpayer can subsequently determine that he or she is entitled to a refund. In this situation, there is nothing preventing the taxpayer from timely filing the appropriate refund claim.

Agreed Case

In this situation the revenue agent proposes an adjustment and the taxpayer decides not to contest the adjustment. The taxpayer will sign a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, and pay the deficiency agreed upon. By executing the Form 870 the taxpayer is agreeing to the assessment and waives the right to receive a statutory notice of deficiency. Similar to the no-change result, the taxpayer is not precluded from timely filing a claim for refund. In addition, the Form 870 does not prevent the IRS from reopening the examination and asserting additional deficiencies. However, in general the IRS will not reopen the examination except in limited circumstances.

Unagreed Case

If an agreement cannot be reached with the IRS agent practitioners may request an “informal closing conference.” The informal conference is held with the agent and the agent’s manager. Representatives have the opportunity to present the taxpayer’s positions to the manager just as to the IRS agent. If the manager determines that the agent’s report was incorrect, then the manager will instruct the agent to draw up a new report reflecting the corrected findings of fact and law. In our experience informal conferences generally do not result in any substantial deviation from the agent’s findings, but they are nevertheless worth considering. First of all, the conference itself does not take very much time, and it is sometimes possible to achieve the desired results at the informal level, or narrow the issues in an effort to avoid the expense and delay of taking a matter to Appeals. Second, failure to take advantage of an informal conference with the agent’s manager may bar the taxpayer from recovering reasonable attorney fees in the event that the taxpayer is otherwise a prevailing party against the Service. Third, it may preclude the burden of proof from shifting from the taxpayer to the Service in any court proceeding. Fourth, it may preclude the burden of proof from shifting from the taxpayer to the Service in any court proceeding.  Finally, it could be a factor in the Court imposing a penalty of up to $25,000 for unreasonably failing to pursue available administrative remedies.

Partially Agreed Case

In this situation the parties agree to some of the adjustments and agree to disagree with the remaining proposed adjustments. As discussed above with agreed issues, the parties execute a Form 870 with respect to the agreed-upon adjustments and the agent can prepare a thirty-day letter proposing the unagreed adjustments.  As with unagreed cases, the parties can participate in an “informal conference” with the agent and the manager. If the manager feels that the agent’s report was incorrect, then the manager will instruct the agent to draw up a new report reflecting the manager’s findings of fact and law. If the manager supports the adjustments, a thirty-day letter will be prepared.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.