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Audit Reconsideration – What Do You Do When the IRS Gets It Wrong?

Audit Reconsideration – What Do You Do When the IRS Gets It Wrong?

Key Points on Audit Reconsideration

  1. Can Result in “No Liability” for a Bad Exam Result;
  2. Requires an Amended Return with Correct Tax and Supporting Evidence;
  3. Usually Results In A Hold on Enforced Collection Activity While the Audit Reconsideration Is Under Review – Although the IRS Is Not Bound to Do So; and
  4. Depending on the Issue and Procedural History, Audit Reconsiderations Have a Very High Rate of Success.


A taxpayer has the right to challenge an incorrect IRS assessment, even after the audit is over and the assessment is final.  This right derives from the IRS's discretionary authority to "abate" the unpaid portion of the assessment of any tax or any liability in respect thereof, which (1) is excessive in amount, (2) is assessed after the expiration of the period of limitations, or (3) is erroneously or illegally assessed. IRC § 6404(a); Treas Reg. §301.6404-1.

The most common reason that a Request for Audit Reconsideration is filed is because the taxpayer was not present at the audit because they either were not aware of the audit (not having received the notice) or because the taxpayer did not respond to the audit due to missing documentation or a lack of understanding of the taxpayer's rights.

Fortunately, the assessment can be challenged even if the taxpayer did not present their supporting evidence of their position when the audit was being conducted, and even if all of their rights to contest the audit results through appeals or through the Tax Court have expired.  The IRS has a procedure called “Audit Reconsideration.”  The IRS discusses this procedure in a number of different places, but a good starting point is Publication 3598 – “The Audit Reconsideration Process” - https://www.irs.gov/pub/irs-pdf/p3598.pdf.

The “Audit Reconsideration” process falls under the IRS’s authority to abate all or part of any assessment.  The IRS will exercise this authority if three (3) conditions are met:

  1. The assessment is in excess of the correct tax liability;
  2. The assessment is made subsequent to the expiration of the applicable period of limitations; or
  3. The assessment was erroneous or illegally made.


The IRS will not exercise this authority if:

  1. The taxpayer has already signed an agreement (Form 906, Closing Agreement, Compromise agreement, of Form 870-AD) agreeing to pay the amount owed; or
  2. The U.S. Tax Court or another court has made a final determination on the tax liability.


Submitting a Request for Audit Reconsideration

Submitting a request for audit reconsideration involves a number of basic steps that can be accomplished with the help of a Tax Attorney or Enrolled Agent.

  1. First, you must file an Amended Return (Form 1040X, Amended U.S. Individual Income Tax Return – or relevant amended business tax return) for the tax year in question;
  2. Second, you must submit a copy of the audit report (Form 4549, Income Tax Examination Changes) and submit it with your return;  
  3. Third, you must set out in a letter the changes that should be considered and the points where the Amended Return differs from the Income Tax Examination Changes report; and
  4. Finally, you must prepare a detailed memorandum setting forth in full detail the relevant facts and applicable law.


Evidence, Documents, and Math – The Key To Success in Any Audit Reconsideration

Publication 3598 notes a few things about the Supporting Documentation you provide:

  • It should be evidence or information the IRS has not considered before;
  • It should point to a computational or processing error by the auditor; and
  • It should relate to an unpaid liability.


Since Audit Reconsideration is a discretionary matter for the IRS, one must not only convince the IRS of the correctness of the position taken, by providing all necessary back-up documentation, but must also address why the matter was not resolved during the original audit.  The IRS does not want to decide a matter twice.  The IRS also has a natural aversion to taxpayers failing to attend to important tax matters when they are first notified about them.  Common reasons why audits result in incorrect results are: (1) the taxpayer relied on an accountant or tax representative who did not properly address the issue the first time around and did not provide all the supporting evidence, information and documents; (2) the taxpayer did not have access to the key supporting evidence, information and documents that justified the tax position taken while the audit was in process; or (3) the audit process broke down and important information was not considered by the auditor for some reason.

The main point is that you must provide the IRS something that is new or different from what the auditor had when considering the matter the first time around.  From a practitioner perspective, it is critical to always try to submit something new for consideration even if the primary issue is the auditor’s methodology or their manner of computing the underreporting of tax.


Reasons for Seeking Audit Reconsideration

  • You did not receive some or all of the correspondence about the audit;
  • You did not appear for the audit, or appeared, but did not have all of your documentation together;
  • The IRS failed to consider some of the information you provided or made determinations on matters you provide information about, finding the information inadequate, without first asking for additional support;
  • You have new information that supports your position that you would like the IRS to consider;
  • You disagree with the assessment, primarily because it was based on a Substitute for Return ("SFR") which the IRS filed on your behalf, and which failed to take into account deductions that you are clearly entitled to; or
  • You have been denied tax credits (like the ETIC) that you are clearly entitled to.


Call Us Today - (201) 529-8024

If you have additional questions about the “Audit Reconsideration” process or would like our firm to submit an Audit Reconsideration relative to an IRS assessment made against you, please call us at (201) 529-8024 to set up a consultation.