How to ANALYZE an IRS Revenue Agent Report
Every IRS audit concludes with a Revenue Agent Report which includes all the findings the IRS made based upon the documents and information collected, and the determination IRS has made.
An IRS audit starts with a initial audit letter sent to the taxpaye (in the case of our clients, the business owner). Then the IRS will send an IDR, also called an Information Document Request with a list of documents and information the IRS needs.In some cases a business owner might receive more than one IDR.
The next step is to provide documents and negotiate, communicate with your revenue agent and comply with additional requests for information. At the end of the audit, you will receive a Revenue Agent Report.
Sections of the Revenue Agent Report
Let’s review the sections of the Revenue Agent Report, so you understand where the information is and how to read it.
Section 1 Adjustments to Income
The first section of the RAR is adjustments to income. Now this includes anything from income, additional income the IRS found, or even a reduction of income. Usua,lly IRS finds additional income. And then secondly, the section will include any other adjustments to expenses and potentially even net operating losses. So for instance, if you deducted $100,000 for business rent, and IRS was only able to substantiate $30,000 of rent expense, you will have an adjustment of $70,000. Now, the way these numbers are appearing in the section is that if it’s an an adjustment to an expense, it’ll be a positive number, now an adjustment down. So in our example of $100,000 that was reported on your tax return, IRS only substantiated $30,000, the adjustment is 70,000, you’ll have 70,000 as a positive number, not a negative number because expenses on your return are always a negative. They offset income. So think of it in terms of what is on the return and what adjustments have to be made to have the corrected tax liability.
Other items that appear again on the net operating loss, if you have any depreciation, could be schedule expenses. Every item on your return that IRS is going to make an adjustment to will be in this top section.
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Section 2 Corrected Tax Liability
Then you’ll have the next section, will be corrected tax liability, and this is the correct amount of tax that you’ll owe, and then at the very bottom is the balance. Now this balance does not include penalties and interest.
The 4549 form has two pages. On page two at the top, you will see the penalties, and the penalty is really broken down by, late return that you filed, you’ve filed a return late, or you made a payment that was late, you’ll have a late filing penalty, late payment penalty, not always, but typically, you will have the negligence penalty. And IRS typically does assess a penalty, the negligence penalty, which is 20% of the additional tax that you owe. So negligence is because you might not have had kept good books and records, or you didn’t have substantiation for some of the expenses or the income, IRS typically will assess that. If IRS believes that you were willful, they will assess a fraud penalty. And the fraud penalty is significantly more. It could be basically 75% of the tax, the additional tax that you owe. Now to assess fraud, IRS has to make a determination based on findings, a separate finding altogether that you were willful. And a definition of willfulness, is a voluntary and intentional disregard of a known legal duty. It’s a lot of words, but it basically means that you disregarded a duty that you knew or should have known. So if you have a fraud assessment, a fraud penalty assessment, you’re going to want to ask the revenue agent for their findings and they should provide you with a report that summarizes all the facts, and all the documents they obtained, and how they got to the conclusion that the return was fraudulent in some way.
Section 3 – Interest and total Balance
Below the penalty amount, at the very bottom, you’ll have interest and then you’ll have the total balance out. And every column is a separate year. So for instance, if we’re dealing with 2020 and 2021, 2020 will be in one column and then the next year will be over to the right and proceeding forward.
So that’s how you read a Revenue Agent Report. Some of the things to look for are, you know, you need to go through the different sections in the very back of the report.
The two pages that we just discussed is the 4549 form, but it includes a lot of other things in this report and it will go line on by line on with a brief explanation.
So in other words, if your company had inventory, and there was an adjustment to inventory, there’ll be a section just as there’s a line item on the 4549 on page one, the adjustments to income for Costs Of Goods Sold. You will have a separate section in the back that will indicate the amount reported on the return, the amount per exam, the amount the IRS was able to substantiate or not substantiate per exam, and then the variance. And there should be an explanation.
Generally, IRS puts a very broad description of why you didn’t satisfy or why the full expense was not allowed. Sometimes the revenue agents will put a little bit more detail. If you want more detail, there is a work paper the IRIS provides or actually prepares, and you’ll need to request the revenue agent provide that to you. And that will be really more like a factual summary of the dialogue and the information that was exchanged between you and the service. Hopefully you can get that information, it’s very valuable to you.
Very important. If you get the Revenue Agent Report, it’s generally called a 30-day letter.
The IRS may give you less time, but you have to know what the deadline is to respond to that. And if you disagree with the report, you’ll have a limited number of days which you’ll have to confirm with the revenue agent to respond. If you respond, you’ll have to provide either additional documents if the IRS allows you to do that or sometimes they demand that you provide a protest letter with additional documents.
And if you disagree and you can’t come to an agreement with a protest letter which has to be signed under penalty of perjury, the matter then can go to IRS appeals, that’s the next step. If you don’t provide a protest letter or don’t respond to IRS at all and you have a disagreement, you will get a Notice of Deficiency. And the Notice of Deficiency then requires you, if you still want to legally challenge the assessment or the proposed assessment, you have to file a tax court petition with the United States Tax Court, within 90 days of the date that’s listed on the Notice of Deficiency.
Be careful, there have been cases where IRS has miscalculated the 90th day and they put the wrong date. It says date to respond by and it might not be the correct date. So calculate 90 days from the date of the letter and that’s the last day that you have to file a petition with the US Tax Court. And the mailbox rule applies, typically. If you send something through US Postal Service you have to send it certified mail. And the date that you put it in, as long as it gets processed that day, should count.
If you have any questions definitely you can contact our office or contact a qualified tax attorney and make sure you understand what the deadline is. If you do file a timely tax court petition, then you will have your your opportunity to go to tax court. But before you have your trial, IRS will push the case to appeals. So if you haven’t gone to IRS appeals yet, IRS will attempt to resolve it through appeals, and you and appeals officer will be able to review the issues and hopefully come to an agreement.
The IRS Appeals process
So there’s two ways you can get to appeals. You either file a protest letter after you get the Revenue Agent Report, and then you go to appeals. And if you disagree with appeals or you can’t come to an agreement, you’ll get your Notice of Deficiency. Or if during the audit, you get your Revenue Agent Report and you don’t respond or you don’t file a protest letter, then you’ll get your Notice of Deficiency. In either situation, once you get the NOD, the Notice of Deficiency, you need to file a tax court petition within 90 days to go to tax court. If you don’t do that, you waive your legal right to challenge the assessment, the proposed assessment and the proposed assessment becomes a final assessment. And therefore, IRS will be able to collect, take collection action such as levies, liens, do a lot of other things. So it’s important to respond to an IRS Revenue Agent’s Finings in a timely manner.
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