Audit reconsideration: an effective way of resolving disputes with the IRS.

• Author: Hove, David J.

An audit reconsideration is defined by the Internal Revenue Manual (IRM) as:

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 fifing an original delinquent return. [IRM [section] 4.13.1.2(1)]

Although the Internal Revenue Code does not explicitly authorize the IRS to offer audit reconsideration as a relief provision to taxpayers, it nonetheless in general terms authorizes the IRS to abate the unpaid portion of the assessment of any tax or liability with respect to it that is (1) excessive in amount, (2) assessed after expiration of the applicable period of limitation, or (3) erroneously or illegally assessed (Sec. 6404(a)).

In practical terms, this means the IRS has discretionary authority to evaluate a prior audit conducted by its employees. This evaluation represents a form of "rework" of a previous audit where some issues remain unresolved. In a typical audit reconsideration situation, the taxpayer believes that the audit resulted in an inappropriate increase in tax liability and thus refuses to pay the additional tax. Often, the taxpayer was not present at the audit, either because the taxpayer was unaware of it (did not receive the notice) or simply decided not to respond to the notice. Regardless of the circumstances causing the dispute, there may be a need to have the IRS evaluate the prior audit findings.

Audit reconsideration is a highly effective tool available to practitioners when a client is not satisfied with the results of a prior audit, as well as when clients have not filed tax returns and the IRS has filed returns for them through the SFR process.

The SFR process allows the IRS to file tax returns on behalf of taxpayers in situations when taxpayers fail to make a return or file (willfully or otherwise) a false or fraudulent return. In these situations, Sec. 6020(b) authorizes the IRS to use information gathered through the mandatory reporting processes (e.g., the Form 1099 series) as well as any other information available to it. Significantly, Sec. 6020(b)(2) states that any return prepared by the IRS "shall be prima facie good and sufficient for all legal...