IRS audit reconsideration: how we think about a second look

An audit can end without the owner ever really taking part in it. The letters went to an old address, the bookkeeper left, a response date passed, and the IRS assessed tax on the file it had. IRS audit reconsideration is the federal administrative process for asking the agency to look again at that result while the assessment, meaning the tax formally recorded as owed, is still unpaid.

This article covers how we think about that request: who it fits, what closes the door, what goes in the package, and what happens to collection while the IRS reviews it. It doesn't cover the audit itself, formal appeals, Tax Court or penalty relief, each of which has its own rules. It's also federal only; the Oklahoma Tax Commission has its own, different process for disputing a state assessment.

What IRS audit reconsideration is, and what it isn't

IRS Publication 3598 describes audit reconsideration as the process the IRS uses when you disagree with the results of an audit of your return, or with a return the IRS created for you under section 6020(b) of the Internal Revenue Code because you didn't file one. The reasons it lists are ordinary ones. You didn't appear for the audit, you moved and never got the IRS's mail, you have information you didn't present, or you disagree with the assessment.

The limits matter as much as the definition. The Internal Revenue Manual, the IRS's written procedures for its own employees, ties the process to the agency's authority to abate an assessment, which means to reduce or remove tax already recorded as owed. Section 6404(a) of the Code is worded as an authorization: the IRS may abate the unpaid portion of an assessment that is excessive in amount, was assessed after the limitation period expired, or was erroneously or illegally assessed.

Authorized isn't required, and the manual itself describes the authority as discretionary. Section 6404(b) adds that a taxpayer may not file a claim for abatement of income, estate or gift tax. Our reading of the two provisions together is that reconsideration is a request the IRS has chosen to entertain under its own published procedures, not a right to a second audit.

There's a fair reason for that. By the time an audit assessment exists, the IRS has ordinarily sent its letters and given the taxpayer a chance to answer, and it has a legitimate interest in closing files. As we read the program, it exists because assessments made on an incomplete record are sometimes wrong, not to reargue points an examiner already weighed.

First question: is the tax still unpaid?

We ask this first because the answer decides which procedure applies. The IRS web page on reconsideration for correspondence examinations (audits conducted by mail) says you can request it only if the assessed liability remains unpaid. Publication 3598 says the same thing from the other side: if you've already paid the full amount, you must file a formal claim, and it names Form 1040X, the amended individual income tax return.

The manual tracks the same line. Its criteria require that the assessment remain unpaid, or that the IRS reversed tax credits the taxpayer is disputing. It also lists a fully paid prior audit among the requests that aren't worked as reconsiderations and are treated as formal claims for refund instead.

A refund claim runs on its own filing deadlines, which we cover in our article on refund claim deadlines and lookback rules. Someone who paid the balance in full is in a different procedure from someone who still owes, and the difference is easy to miss.

Second question: is there something the examiner never saw?

New information is the hinge. Publication 3598 lists the circumstances in which the IRS will accept a request: you submit information it hasn't considered before, you filed a return after the IRS completed one for you, you believe the IRS made a computational or processing error in assessing the tax, and the liability is unpaid or credits were denied.

The manual is more exact about how those pieces fit together. The taxpayer must have filed a return, the assessment must be unpaid (or credits reversed), and the taxpayer must identify which adjustments are in dispute. Then one of two things has to be true: there is new information on the audited issues that wasn't considered in the original examination, or the IRS made a computational or processing error in assessing the tax.

In our experience, the useful first step isn't gathering documents. It's finding out what the examiner actually had, because owners often recall sending everything when the file shows much less. Resending what was already reviewed doesn't meet the test as we read it, and the publication's own questions and answers say that under normal circumstances you don't need to resubmit information you already provided.

When the IRS prepared the return

A substitute for return is a return the IRS prepares from the information it has when a taxpayer doesn't file. Both the publication and the manual treat filing the actual return as a basis for reconsideration, and the manual describes it as contesting the substitute for return determination by filing an original delinquent return. We explain how those IRS-prepared returns come about in our article on substitutes for return.

Which returns the process covers

The publication names only the individual amended return, Form 1040X, when it discusses assessments already paid. The manual chapter we read lists an audit of any tax form other than Form 1040 among the requests that aren't considered reconsideration cases for that unit's purposes and are routed elsewhere. It doesn't say, in the portion we read, what happens after routing.

Our reading is narrow. An owner whose assessment came from a corporate, partnership or employment tax examination shouldn't assume the individual procedure maps onto that case.

Third question: is the door already closed?

Some assessments can't be reopened this way no matter what new documents exist. Publication 3598 says the IRS won't accept a request if you already agreed to pay the tax by signing a closing agreement (it names Form 906), a compromise agreement, or a Form 870-AD agreement with Appeals. A closing agreement is a written agreement with the IRS that is meant to settle a tax matter for good.

Two more bars appear in the publication. One is tax that results from final partnership item adjustments under TEFRA, a set of partnership-level audit procedures. The other is a liability on which the United States Tax Court or another court has issued a final determination.

The manual adds a wrinkle on the court bar. It tells employees not to reopen cases decided by the Tax Court but carves out dismissals for lack of jurisdiction, which means the court concluded it had no power to hear the case. Its table directs that some of those dismissed cases be worked as reconsiderations when the request rests on new information, while cases that were tried, settled by IRS counsel, or dismissed for lack of prosecution are denied.

We're cautious about leaning on that. It's an instruction to IRS staff, and we treat it as guidance for employees, not a promise to taxpayers. What it does tell us is that a prior trip to court isn't automatically the end of the question, and that how the case closed matters.

Fourth question: is a different route the better fit?

Reconsideration is one tool among several, and often not the first one we'd reach for. If the audit is still open, or the time to respond to it or appeal it hasn't run, those routes come with defined rights that a discretionary request doesn't replace. We describe that stage in our article on what happens in IRS Appeals after the audit.

Other situations point elsewhere too. If the tax has been paid in full, the path is the refund claim described above. If the assessment is correct but can't be paid, the problem is collection, and the publication itself points to installment agreements and offers in compromise as payment options.

And if the disagreement is an argument the examiner already heard and rejected, with no new facts and no IRS error, the criteria above aren't met. That's the government's position, and it's a reasonable one: an audit has to end at some point.

What we send, and how we organize it

Publication 3598 is specific about the package. Send copies and not originals, because originals won't be returned. Include a letter stating clearly which changes you want considered, a copy of the examination report (Form 4549) if you have it, and a daytime and evening telephone number.

No special form is required, but the publication recommends Form 12661, Disputed Issue Verification. It also says documentation must accompany the request, and that the request goes to the IRS campus address shown on the examination report. The IRS web page adds an online option, the Document Upload Tool, alongside mailing to the office listed on the audit letter.

Form 12661 is worth reading even if you write a letter instead. It gives each disputed issue or adjustment its own block, asking for the reason you disagree, the amount claimed on the original return and the amount allowed on the audit report. Its instructions say to number the supporting information with the same number as the disputed issue.

In our experience, that numbering instruction is the most useful sentence in the whole process. The publication says the IRS considers each issue separately, so we build the request adjustment by adjustment against the Form 4549, with every document tied to a line. A box of receipts asks the reviewer to redo the audit; an indexed package asks the reviewer to confirm a conclusion.

Consider a hypothetical with round numbers. An Oklahoma City contractor's mail audit closed without a response and disallowed $40,000 of deductions: $25,000 of vehicle expenses and $15,000 of subcontractor payments. She has canceled checks and Forms 1099 for all $15,000 of the subcontractor payments but only a partial mileage log for the vehicle.

A request could document the first issue completely and the second only in part. Because each issue stands on its own, one realistic result is acceptance on the subcontractor payments and little or no movement on the vehicle expenses, which is the partial acceptance the publication describes. That's an illustration, not a prediction.

What happens to collection while the IRS looks

The publication's wording here is careful. It says the IRS may delay collection activity when it receives your documentation, and may resume it if the documentation isn't sufficient and you don't respond to a request for more within 30 calendar days. If you already have an installment agreement, a payment plan with the IRS, the publication says you must continue to make the payments.

Staff instructions in the manual show why the word is may. Employees are generally told to input a collection hold when a reconsideration case is set up, but not when the account is in certain statuses (an installment agreement is one) or when less than one year remains before the collection statute expiration date, the date the IRS's time to collect runs out. When a request arrives and the disputed issue can't be identified, the instruction is not to input a hold, and collection continues until the documents come in.

Two cautions follow. The publication doesn't promise a hold, and we didn't find in it any statement that a request pauses or extends another deadline on the account, so we don't assume it does. A request sent without documents is in the weakest position: the manual says such a case isn't held open to wait for them.

Timing is the other unknown. The publication says to expect to hear from the IRS within 30 days after submission, and the web page gives the same estimate while adding that it may take longer, possibly several months. Internally, the manual treats a response as timely when it's initiated within 30 calendar days of receipt and calls for an interim letter when that can't be done.

If the answer is no

The publication describes three results.

• The IRS accepts the information and abates the tax.
• It accepts the information in part and reduces the tax in part.
• It finds the information doesn't support the claim and leaves the tax in place.

Its questions and answers add that the examiner's explanation lists the documentation you submitted and says whether each item was acceptable. That list is where we start when a request is denied in whole or in part, since it shows what was actually weighed.

If you disagree with the result, the publication gives these choices.

• Request an Appeals conference.
• Pay the amount due in full and file a formal claim.
• Do nothing, in which case the IRS will bill you for the amount due.

Appeals isn't open in every case. The manual tells staff that a denial letter must not include appeal language when the case closed with finality, such as by a court decision. The mechanics of Appeals review after a denial are outside this article.

A denial also isn't necessarily a mistake. Records reconstructed after the fact, or documents that don't tie to the specific adjustment, give a reviewer little to work with, and it isn't the reviewer's job to fill the gaps.

If an audit assessment was made on a record you never had the chance to complete, the order of these questions tends to matter more than the volume of paper. We're glad to talk through where a situation like that sits; you can reach us through the contact page or at our Oklahoma City office. A conversation before the request goes in is usually easier than repairing one afterward.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.