By Robert E. McKenzie ©2011
Many times a taxpayer will fail to receive or ignore an IRS notice of deficiency and the IRS will assess additional taxes, If the assessment is wrong the taxpayer may be able to request an audit reconsideration form the collection division.
Definition of Audit Reconsideration
An Audit Reconsideration is 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.
Internal Revenue Manual Provisions
The IRM collection provisions provide the following rules for audit reconsideration.
1. These procedures provide instructions for processing taxpayer requests for audit reconsideration. These procedures only apply to cases that are not fully paid. Cases paid in full are claims and should follow regular claim procedures. These procedures do not apply to requests for abatement of interest for ministerial or managerial delay under IRC Section 6404(e)(1). The responsibilities and procedures are directed at ensuring the amount of assessed tax is correct.
2. Audit Reconsiderations are used:
A. To reevaluate the results of a prior audit when a taxpayer disagrees with the original determination by providing information that was not previously considered during the original examination, or
B. When the taxpayer contests an ASFR/SFR determination by filing an original delinquent return and the assessment remains unpaid or, as a result of the assessment, the tax credit is reversed.
3. There are several reasons why a taxpayer might request audit reconsideration. For example, the taxpayer:
A. Did not appear for the audit;
B. Moved and did not receive the IRS correspondence;
C. Disagrees with an assessment from an audit of their return and has additional information to be considered;
D. Disagrees with an assessment created under the authority of Internal Revenue Code 6020 (b) (ASFR/SFR);
E. Has been denied tax credits such as EITC claimed, during a prior examination.
4. When taxpayer states a deficiency has been incorrectly assessed,
A. Advise taxpayer that request must be in writing and
B. Provide taxpayer with Publication 3598, “What You Should Know About The Audit Reconsideration Process”.
5. Prepare Form 3870, Request for Adjustment and identify it as “Taxpayer’s Request for Audit Reconsideration”.
A. Attach a copy of the taxpayer’s request or original return and documentation to the form. Retain copies of Form 3870, a copy of the return or request, and all supporting documentation with the Collection case file. Request the input of TC 470cc90 to suspend collection on amounts reconsidered.
B. Address potential statute issues before requesting the TC 470 cc 90 input.
6. If the taxpayer filed a return for the period in question, advise the taxpayer to include the following in their request:
A. A written request or amended return which identifies the prior examination issue(s) and the reason for the abatement request;
B. The examination report Form 4549, Income Tax Examination Changes or Form 1902-B, Report of Individual Tax Examination Changes. If he does not have a copy, note your efforts on Form 3870 and forward your package without the original return.;
C. Documents supporting their position.
7. If the taxpayer never filed a return and Bal Due is the result of an SFR, request they file an original delinquent return. Review the taxpayer’s substantiation and determine if it is sufficient to allow the Service to consider abatement of the previous assessment.
8. For SFR assessments where an original return has now been secured:
A. Prepare Form 3870, Request for Adjustment, and identify it as “Taxpayer’s Request for Reconsideration of SFR Deficiency Assessment”. .
B. Attach a copy of the taxpayer’s request or attach the original date stamped return and documentation.
C. Retain copies of Form 3870, a copy of the return or request, and all supporting documentation with the Collection case file. [ IRM 220.127.116.11.1 ]
Reasons for a Request
The examination provisions of the IRM provide the following provisions to be considered by IRS audit personnel when collection forwards a case for reconsideration:
1. Some reasons for an audit reconsideration request:
A. The taxpayer did not appear for the audit.
B. The taxpayer moved and did not receive the correspondence from the IRS.
C. The document submitted was not considered.
D. The taxpayer has new documentation to present.
2. A taxpayer might request an audit reconsideration if:
A. The taxpayer disagrees with an audit assessment from an audit of their return.
B. The taxpayer disagrees with an assessment created under the authority of Internal Revenue Code Section 6020(b), Substitute for Return (SFR).
C. The taxpayer has been denied tax credits such as EITC claimed, during prior examination. [IRM 18.104.22.168 ]
Criteria for Reconsideration
In order to request an audit reconsideration:
1. The taxpayer must have filed a tax return.
2. The assessment remains unpaid or the Service has reversed tax credits that the taxpayer is disputing.
3. The taxpayer must know which adjustments they are disputing.
4. The Taxpayer must provide additional information not considered during the original examination [IRM 22.214.171.124 ]
Non-Acceptance of Request
A request for reconsideration will not be considered if:
1. The taxpayer has already been afforded a reconsideration request and did not provide any additional information with his current request that would change the audit results.
2. The assessment was made as a result of a closing agreement entered into under IRC section 7121, using Form 906 and “Closing Agreements on Final Determination Covering Specific Matters” or Form 866 “Agreement as to Final Determination of Tax Liability” , or some combination of the two forms.
3. The assessment was made as a result of a compromise under IRC Section 7122. These agreements are final and conclusive. Identify a final compromise determination on IDRS by the posting of a TC 788.
4. The assessment was made as the result of final TEFRA administrative proceedings.
5. 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”.
6. The United States Tax Court has entered a decision that has become final, or a district court or the United States Court of Federal Claims has rendered a judgment on the merits that has become final.
Note: Once a case is docketed in Tax Court, Counsel has broad settlement authority. If a suit is filed in district court or the Court of Federal Claims, the Department of Justice represents the interests of the Commissioner and has settlement authority. In each of these cases, any request for reconsideration should be forwarded to the office of the Associate Area Counsel for forwarding to the docket attorney.
When the Tax Court dismisses a case for lack of jurisdiction, it does not enter a decision and the case is not dismissed on the merits. See IRC section 7459(d). Likewise, when a district court or the United States Court of Federal Claims dismisses a case for lack of jurisdiction, the case has not been dismissed on the merits IRM 126.96.36.199.
Combat Zone Case
A. If review of the taxpayers account indicates the taxpayer was in a combat zone during the original audit (plus 180 days after leaving the combat zone), reverse all assessments made by Exam. Review of the taxpayer’s account will show a TC 500 with closing codes 52, 54 & 56 that provides the entry and exit dates within the combat zone. The account will also have a -C freeze. Refer to IRM 188.8.131.52.4.1.1 for further information.
B. Normal combat zone procedures 184.108.40.206.20 do not apply to reconsideration cases, where the tax year(s) in question was not the same year(s) that the taxpayer was in a combat zone (plus 180 days after leaving the combat zone). For reconsideration requests other than the year(s) that combat zone procedures apply, continue to work and correspond with the taxpayer to resolve the reconsideration request.
Special procedures apply to disaster situations. Refer to IRM 25.16.5 for guidance and any additional guidance issued specific to the disaster. IRM 220.127.116.11.
CDP & Audit reconsideration
An audit reconsideration conducted prior to the CDP hearing will preclude a challenge to the underlying tax liability under section 6330(c)(2)(B) only if the taxpayer was offered the opportunity for a conference with Appeals to dispute the results of the reconsideration. Cf. Bailey v. Commissioner, T.C. Memo. 2005-241 (audit reconsideration with appeal rights one of several factors indicating taxpayer had a prior opportunity to challenge liability).
No opportunities to dispute liability
Receipt of a math or clerical error notice under section 6213(b)(1) If upon receipt of the notice, the taxpayer timely challenges an assessment resulting from a math or clerical error on the taxpayer’s return, the Service is required to immediately abate the assessment and any reassessment of the tax is subject to the deficiency procedures. The Service does not offer the taxpayer an opportunity for an Appeals hearing prior to issuance of the notice of deficiency under these circumstances.
Robert E. McKenzie
ARNSTEIN & LEHR LLP
120 SOUTH RIVERSIDE PLAZA • SUITE 1200
CHICAGO, ILLINOIS 60606-3910
FAX (312) 876-0288
BOCA RATON, FLORIDA
FORT LAUDERDALE, FLORIDA
WEST PALM BEACH, FLORIDA
HOFFMAN ESTATES, ILLINOIS
MEMBER OF INTERNATIONAL
April 27, 2008
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED
Internal Revenue Service
P.O. Box 480
Holtsville, New York 11742
Re: Request for Audit Reconsideration
Edward M. Taxpayer and Amber S. Spouse
Tax Year: 2005
Gentlemen and Ladies:
We are writing to request an audit reconsideration for the above referenced taxpayers for tax year 2005.
The following audit adjustment was an assessment made against the taxpayers:
Tax Year Ended Amount Due Per 90-Day Letter
Statement of Facts
The taxpayers contest the Service’s adjustment to tax for tax year 2005. This request of reconsideration is based on the information contained herein that supports the taxpayers’ claimed Schedule A deductions, for which the Service disallowed.
The Service disallowed the taxpayers’ itemized deductions for Job Expenses and Certain Miscellaneous Deductions and Other Miscellaneous Deductions. A copy of the Statement attached to the taxpayers’ original filed return itemizing the deductible expenses is enclosed herein. While the taxpayer maintains that all the deductions were legitimate, the most significant amount of post filing adjustment arose from the disallowance of the taxpayer’s Job Expense related to the commission he paid his talent agent.
The taxpayer, Mr. Taxpayer, is a local radio personality. In 2005, his agent, Steven T. Agent, negotiated a lucrative contract for the taxpayer. As a result, he was paid a commission of $77,000.00 for his work performed. A signed letter from Mr. Agent indicating that he received this compensation is enclosed herein. In addition, Mr. Taxpayer used a professional image hairstyling service for certain events the taxpayers attended. A signed letter from Patti Witness of Salon Chic is also enclosed herein substantiating the $1,200.00 claimed expense.
Law and Discussion
Internal Revenue Section 6404 allows the Service to abate assessments which may have been made incorrectly despite a taxpayer’s failure to contest the assessment in a timely manner. Specifically, Treas. Reg. § 301.6404 1 Abatements states:
“(a) the District Director or the Director of the Regional Service Center may abate any assessment or unpaid portion thereof, if the assessment is in excess of the correct tax liability, if the assessment is made subsequent to the expiration of the period of limitations applicable thereto, or if the assessment has been erroneously or illegally made.”
The Internal Revenue Manual provides the following bases for a request:
“(1) Some reasons for an audit reconsideration request:
(a) the taxpayer did not appear for the audit,
(b) the taxpayer moved and did not receive the correspondence from the IRS,
(c) the taxpayer has new documentation to present;
(2) A taxpayer might request an audit reconsideration if:
(a) taxpayer disagrees with an assessment from an audit of their return and has additional information to be considered,
(b) taxpayer disagrees with an assessment created under the authority of Internal Revenue Code Section 6020,
(c) taxpayer has been denied tax credit such as EITC claimed, during prior examination.”
The Manual provides the following criteria for consideration (Section 18.104.22.168):
“1. In order to request an audit consideration:
(a) The taxpayer must have filed a tax return,
(b) The assessment remains unpaid or the Service has reversed tax credits that the taxpayer is disputing. If the taxpayer has paid the tax, they should file a formal claim to contest the tax deficiency (Form 1040X),
(c) The taxpayer must know which adjustments they are disputing,
(d) The taxpayer must provide additional information not considered during the original examination.”
The taxpayers meet several of the above criteria for audit reconsideration. The taxpayers’ case falls under the provision of Treas. Reg. § 301.6404 1 since the assessment “in excess of the correct tax liability” are erroneous.
Trade or business expenses are one of the major categories of deductions allowed by the tax law in computing the income subject to tax. Generally speaking, a deduction is allowed for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” In this respect, a taxpayer can be engaged in carrying on a number of trades or businesses. Five characteristics are recognized as essential in establishing any item as a trade or business expense: an item must (1) be paid or incurred during the taxable year, (2) be for “carrying on any trade or business,” (3) be an expense, (4) be a “necessary” expense, and (5) be an “ordinary” expense.
Examples of ordinary and necessary expenditures directly related to the taxpayer’s trade or business are given in the federal tax regulations. See Treas. Reg. § 1.162-1. They include: management expenses, commissions, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in pursuit of a trade or business, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.
Based on the above, the taxpayers clearly should be allowed their claimed deduction on Schedule A for Job Expenses and Certain Miscellaneous Deductions. Mr. Taxpayer is a radio personality and having a talent agent negotiate his contracts is essential to his business and it is customary in the industry. The taxpayers have included a copy of a signed acknowledgement from the taxpayer’s agent, Steve Agent, indicating that he was compensated $77,000.00 in 2005 for work performed on behalf of the taxpayer. This expense was clearly incurred during the taxable year to carry on the taxpayer’s trade. Further, it was a necessary and ordinary expense. The five characteristics to establish a trade or business expense are well established. Further, the Treasury Regulations explicitly state that commissions paid are a deductible business expense. A copy of Treasury Regulation Section 1.162-1 is enclosed herein.
Similarly, the taxpayers are required to attend certain functions and maintain an appearance in line with their celebrity status. To this effect, the taxpayers hired Patti Witness of Salon Chic to be the taxpayer’s professional image hairstylist and incurred an expense during 2005 in the amount of $1,200.00.
The taxpayers meet the conditions for reconsideration by the Service for their 2005 Form 1040 return. We hereby request that this year be re opened for this purpose.
Thank you for your consideration.
Very truly yours,
Robert E. McKenzie
cc: Edward Taxpayer
*The above statement of facts is made on information and belief and is true and correct to the best of my knowledge.
Edward M. Taxpayer
Amber S. Spouse-Taxpayer
1030 N. Lake Shore Drive
Chicago, Illinois 60611
Portions Reprinted from
“REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS”
REPRESENTATION BEFORE THE COLLECTION DIVISION OF
Robert E. McKenzie
WITH PERMISSION FROM
All Rights Reserved