There are three types of administrative remedies that a taxpayer may avail itself of in the event that the taxpayer believes that a tax, penalty, or interest has been improperly assessed. Reconsiderations deal with original determinations made during an audit/examination, and generally apply when the taxpayer has additional information that was not taken into account during the original examination. Reconsiderations are requests to reevaluate the results of an audit assessment when a taxpayer disagrees with the original audit determination and the additional tax has not been fully paid. If the tax has been full paid, then it is a claim. Adjustments deal with original returns. If a taxpayer seeks an adjustment, the taxpayer will generally file a 1040X (or another “X” series form, like a Form 941X) reporting the correct amount. Finally, an abatement is a claim through which the taxpayer asks the IRS to set aside a penalty (or interest in limited circumstances). The most common abatements relate to the First Time Abate program and reasonable cause.
Reconsiderations
An audit reconsideration is a process that 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 a taxpayer disagrees with the original determination the taxpayer must provide information that was not previously considered during the original examination.
When a reconsideration is pending, collection activity is suspended – but only on the amount being considered for an adjustment.[1] Failure for a taxpayer to respond or cooperate with the IRS will result in the case being returned to Collection to resume collection action. No further consideration will then be given to the reconsideration request until the tax is paid in full.
Taxpayers may request a reconsideration to provide correct or additional information to dispute assessments. If the taxpayer did not receive any notification of the assessment/adjustment prior to Collection contact, then the correct information must be provided to dispute the assessment for reconsideration. If the taxpayer has moved since filing the return in question and did not receive any correspondence from IRS such as the notice of the examination results, then the taxpayer will be provided an opportunity to produce the information necessary for a reconsideration request. If the taxpayer failed to appear for the audit, then the taxpayer will be provided an opportunity to produce the information necessary for a reconsideration request.
If the taxpayer never had an opportunity to submit required substantiation and now has the necessary documentation and/or submitted a document that was not considered, then the taxpayer will be provided an opportunity to produce the information necessary for a reconsideration request. If the taxpayer disagrees with an audit determination due to additional information not available at the time of the audit, then the taxpayer will be provided an opportunity to produce the information necessary for a reconsideration request.
If the taxpayer disagrees with a Notice of Deficiency assessment created by either Automated Substitute for Return (ASFR) or Substitute for Return (SFR) processing under the authority of IRC § 6020(b) and wants to submit an original return to correct the assessment, then the taxpayer will be provided an opportunity to produce the information necessary for a reconsideration request. If the taxpayer wants to claim tax credits (e.g., Earned Income Tax Credit (EITC)), which were denied during a prior audit and/or submitted a document that was not considered, then the taxpayer will be provided an opportunity to produce the information necessary for a reconsideration request
Exclusions from Reconsideration Processing
Reconsideration procedures do not apply if the taxpayer paid the liability in full and submitted a claim for refund. In such case, claims for refund are submitted by the taxpayer on Form 843 (Claim For Refund and Request for Abatement). Neither do they apply to requests for abatement of interest for ministerial or managerial delay under IRC § 6404(e)(1). Finally, reconsideration procedures do not apply to restitution based assessments (RBAs) (including penalties and interest), which may not be reduced or abated without a court order.
Rejecting a Request for Reconsideration
Revenue officers have discretionary authority to reject a taxpayer’s request for reconsideration. Rejection is appropriate when the request includes returns that are unsigned, frivolous, or filed after the assessment or refund statute expiration date. Further, the taxpayer’s request for reconsideration can be rejected if the taxpayer does not provide any new, pertinent information. The taxpayer must refute the rationale for a tax assessment based on an audit assessment by providing new information for the examiner to consider. The amended return (or other written statement requesting reconsideration) must address the audit determination.
The filing of a substitute for return by the IRS does not start the running of the period of limitations for assessment or collection. The assessment based on such a return, however, does start the running of the statute of limitations for collection purposes. Generally, to claim a refund, an amended return must be received within three years after the date the taxpayer filed the original return or within two years after the date the taxpayer paid the tax, whichever is later.[2]
If a reconsideration request is denied, the taxpayer has the right to raise an objection and provide additional documentation. If the taxpayer requested reconsideration orally, the IRS may reply orally but should follow up with a written communication. If the request was in writing, the IRS must reply in writing.
Audit Reconsiderations
Audit reconsiderations are requests to reevaluate the results of an audit assessment when a taxpayer disagrees with the original audit determination and the additional tax has not been fully paid. If the tax has been full paid, then it is a claim. If the assessment is a result of an audit of a previously filed return, the taxpayer may only request a reconsideration when new information is now available that was absent in the original audit. Audit reconsiderations generally take 60-90 days to process.[3]
If the assessment is the result of an automated under-reporter (AUR)[4] review of a previously filed return, the taxpayer must either submit a written request for reconsideration and/or file an amended return which identifies the specific income/deduction issues that resulted in the AUR adjustment and the reason for the change, i.e., what new information is available that was absent during the AUR process.
Substitute for return (SFR) reconsiderations refer to reconsiderations of SFR assessments created by SFR (Exam) processing. A taxpayer must request reconsideration of an SFR assessment by filing an original return. If the Service has prepared SFRs for both spouses, the three-year time limit in IRC § 6013(b)(2) (Joint Returns of Income Tax by Husband and Wife) is not applicable and the taxpayers can file a joint return at any time. If, however, one of the spouses filed a married filing separate return, the joint return must be filed within three years from the due date of the return for that year (excluding extensions).[5]
Appeal Rights on Reconsiderations
The taxpayer will qualify for an appeal when the return is accepted for reconsideration and the result of the reconsideration disallowed the taxpayer’s request in full or in part. However, the taxpayer will not qualify for an appeal if the reconsideration request is denied, the taxpayer does not respond to the appointment letter, or the taxpayer does not appear for the appointment.
If the taxpayer wishes to dispute an audit reconsideration determination that the taxpayer chose not to appeal or for which the taxpayer did not qualify for an appeal, the taxpayer may file a refund claim with the Service after paying the full amount due. Claims are processed when the taxpayer submits Form 843 (Claim for Refund and Request for Abatement). Generally, to claim a refund, a Form 843 must be filed within three years from the time the original return was filed or within two years from the time the tax was paid, whichever is later.[6]
Adjustments
A Form 3870 (Request for Adjustment) is used for all requests of full or partial tax adjustments and/or penalty or restricted interest abatements. If the adjustment does not fully satisfy the balance due, the IRS will process the request for adjustment and continue to pursue collection.
There are two types of Form 1040X adjustments. The first amends an item on the original Form 1040. The second is filed as an original return for a substitute for return reconsideration. If Form 1040X pertains to a carry-back, the credit is available for debit interest purposes on the due date of the loss year return (determined without regard to any extension of time for filing). Computer generated penalties will be automatically recomputed based on the adjustment of tax.
An estimated tax penalty is computed on the original tax and is not increased or decreased with subsequent changes (after the due date including extensions) to the tax. There are four exceptions to this general rule: (1) an amended return received before the due date (called a superseding return); (2) an internal or processing error (such as misapplied credits); (3) withholding taxes allowable as a credit; and (4) separate filing status to joint filing status (the penalty must be recomputed on the joint liability). An estimated tax penalty cannot be adjusted because of the change in tax unless the amended return was filed before the due date of the original return or the original return was a result of a substitute for return assessment.
Employment Tax Adjustments
Employment tax adjustments may be made where the taxpayer had originally filed a valid employment tax return, but while working with Exam it is determined the return was inaccurate and a corrected return is necessary. Employment tax adjustments will not be made in situations where the taxpayer has been audited or Exam created the assessment under IRC § 6020(b).
A decrease to withheld income tax will only be allowed if the error is identified during the calendar year in which the error occurred and if the employer repays or reimburses the employee the amount of the over-withheld income tax before the end of the calendar year in which the wages were paid. Decreases identified after the end of the year may only be allowed to correct an administrative error or if section 3509 rates apply. The adjustment is made to each affected period.
If tax was understated on the original return, the taxpayer can file an “X” form to correct the amount of tax specifically applicable to the tax quarter being adjusted. For example, on August 12, 2014, an employer discovers an error with the Form 941 they filed for the 201403 tax period. The employer must file and pay Form 941-X reporting the correction by October 31, 2014 in order to qualify for an interest-free tax adjustment. The tax must be paid when the Form 941-X is timely filed. Otherwise, interest will accrue from the filing date of the Form 941-X.[7]
If the taxpayer does not file the “X” form by the due date of the return for the period in which the error was ascertained, the tax will be increased on the applicable period(s) and interest will be charged from the due dates of that period(s). The taxpayer must submit a new Record of Federal Tax Liability (ROFTL) to determine the increased FTD penalty on each period. If the taxpayer files the “X” form timely, but it does not pay when the “X” form is filed, the FTD penalty is 10% of the unpaid tax increase.[8]
The Federal Unemployment Tax Act (FUTA) Certification Program is the method IRS uses to verify with the states if the credit claimed on Form 940 and/or Schedule H (Form 1040) was actually paid into the states’ unemployment funds. Employers whose payments are received by the state after the due date are allowed 90% of the credit that would have been allowed had the payments been made on time. State FUTA certification must be attached to all 940 adjustment requests including IRC § 6020(b) adjustments. The taxpayer must provide the IRS with both the certification of state payments and a copy of their return. There are two exceptions to this rule: (1) full abatement of an IRC § 6020(b) assessment where it was determined the taxpayer was out of business the entire year and not liable for taxes reported on Form 940; (2) no credit is claimed for state contributions.
Tax Assessed on Incorrect Entity or Tax Period
If a return is processed to an incorrect tax period or TIN and needs to be corrected, the return will need to be reprocessed to the correct tax period or TIN. The Service cannot assess additional tax on a return if the statute of limitations on assessment with respect to that return has already expired. An adjustment can still be made, but it requires a manual process by the IRS.
There are two options for adjustments when a tax is assessed on an incorrect entity or tax period. First, the taxpayer may request an abatement of all assessments under the incorrect entity or tax period and request that CCP reprocess the return to the correct entity or tax period. This will assure the correct received date on the return, so the correct amount of penalty and interest is assessed. Second, the taxpayer may submit a correct, signed return under the correct entity. The IRS will then abate all assessments under the incorrect assessment. Under this option the failure to file penalty will be assessed if the return is a balance due even though the incorrect return may have been assessed timely and no failure to file penalty was assessed.
Penalty and Interest Abatements
Computer generated penalties will automatically recompute. The IRS must use the “Reasonable Cause Assistant” when the taxpayer requests relief of certain penalties due to reasonable cause. If the taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty) have been assessed in the prior 3 years, RCA provides an option for “first time abate.”[9] A penalty assessed and subsequently reversed in full will generally be considered to show compliance for that tax period. The Reasonable Cause Assistant considers fully reversed penalties in its first time abate analysis.
The reasonable cause explanation provided by the taxpayer will be considered after Reasonable Cause Assistant performs the First-time Abate/Clean Compliance History analysis. If first time abate criteria does not apply, then the taxpayer’s explanation will be used to determine if reasonable cause penalty relief criteria is met. The taxpayer is required to provide documentation to support their claim before a penalty relief determination can be reached.
Reasonable cause penalty abatements must be approved by the group manager. A determination to override the Reasonable Cause Assistant’s conclusion must be justified. The reason the assistant’s conclusion is being overridden is required and must clearly state why the assistant’s conclusion is incorrect and why, or why not, the facts and circumstances of the case support the action being taken. Managerial approval is required.
Penalties asserted by Exam may not be abated by Collection and require a request for reconsideration. Likewise, penalties or interest sustained by Appeals may only be abated by Appeals. If Appeals partially abates a penalty, that generally indicates they sustained the rest of the penalty. The taxpayer should have received a letter from Appeals advising the next steps in the Appeals process.
Interest Abatement
The IRS does not (generally) abate interest for reasonable cause. However, IRC § 6404(e)(1) (Abatement of interest attributable to unreasonable errors and delays by Internal Revenue Service) provides that the IRS may in its discretion abate interest on certain tax deficiencies[10] assessed as a result of unreasonable errors or delays in the performance of a ministerial or managerial act by the IRS. If abatement of interest is sought, the taxpayer must attach a detailed description as to when, how and to what length of time the IRS caused a delay or how an unreasonable error caused increase interest, as well as supporting documentation letters, payoff letters and date specific information.
An extension of time to file does not extend the time to pay. Therefore, interest is due from the due date of the return without regard to any extension of time to file. However, the IRS in its discretion may abate the interest on any payment of tax to the extent that an officer’s or an employee’s erroneous or dilatory actions in performing a ministerial or managerial act in his/her official capacity caused an unreasonable error or delay in the payment of the tax.[11]
Penalty Relief Denial and Appeals
Exam will inform the taxpayer of the determination to not abate a penalty for reasonable cause. Exam must provide written notification to the taxpayer of the denial and of the taxpayer’s appeal rights, regardless of whether the request was received in person, over the phone, or in writing. If the taxpayer submits a written appeal, the revenue officer who rejected the abatement request will review the appeal to determine if the taxpayer has raised new information. New information is information that was not previously discussed with or raised by the taxpayer, or not previously investigated and documented by the revenue officer. No separate memorandum may be prepared by Exam for Appeals discussing the basis for the original penalty abatement denial. This is so, because ex parte communications are prohibited.[12]
If the appeal contains new information that requires additional investigation or ICS documentation, the revenue officer must conduct any additional consideration or investigation of the new information as appropriate, secure managerial concurrence of decision to sustain penalty abatement denial, and attempt to make telephone contact with the taxpayer to explain the results of the additional investigation.
The taxpayer may wish to full pay the liability prior to submitting an appeal to avoid further interest and penalties on the tax amount and interest on the penalty amount. If the taxpayer has submitted an appeal, the IRS will continue collection activity on the unpaid tax and interest. Collection activity will be suspended only on the unpaid penalty portion of the assessment during the 15-day period granted to the taxpayer to file an appeal. Collection activity on the unpaid penalty portion will continue to be suspended during the period the penalty abatement is under consideration by Appeals unless collection of the tax liability is in jeopardy or the taxpayer is attempting to delay collection.[13] If Exam determines that collection of the tax liability is in jeopardy or that the taxpayer has submitted an appeal solely to delay collection, secure group manager approval to pursue collection of the penalty while the penalty abatement is under consideration by Appeals.[14]
Reasonable Cause
The taxpayer may claim that penalty should not have been assessed in the first place, or the taxpayer disagrees with the amount of the penalty. The taxpayer may claim that return or payment was late due to a problem with the mail.[15] The taxpayer may claim that the taxpayer was unable to obtain or reconstruct records.[16] The taxpayer relied on someone else to file or pay, or the taxpayer relied on the advice of someone else.[17] The taxpayer may claim that an IRS error caused the non-compliance.[18] The taxpayer may claim that the taxpayer’s failure to comply was directly related to a change in the tax law; however, an abatement in the Tax Law Change category requires the concurrence of a manager. The taxpayer may claim that it is in bankruptcy. The taxpayer may claim ignorance, that is the taxpayer did not know about, or was unfamiliar with filing requirements, withholding, etc.; the taxpayer was unaware of income or did not know it was taxable.[19]
The taxpayer may claim that it was unable to comply because of absence, either the taxpayer’s or the absence of another person.[20] The taxpayer may claim that it was unable to comply because of a casualty.[21] The taxpayer may claim that the taxpayer, a relative, or someone affecting the taxpayer’s business died.[22] The taxpayer may claim that a divorce prevented the taxpayer from complying. The taxpayer may claim that the taxpayer did not comply because he or she is elderly or incapacitated. The taxpayer may claim that an illness of the taxpayer or an illness of someone else caused the failure to comply,[23] or that the taxpayer is physically or mentally impaired. In such case, the IRS will inquire as to whether someone else has taken responsibility for the affairs of the taxpayer.
The taxpayer may claim that a move or relocation resulted in the taxpayer’s inability to comply; however, the IRS does not accept this ground as providing reasonable cause. The taxpayer may claim that one or more required signatures were missing from the taxpayer’s return, but the IRS will want to know the exact nature of the signature problem. Finally, the taxpayer may claim that the taxpayer lacked the funds to pay or payment would have been a hardship.[24] The IRS notes, however, that an undue hardship must be more than an inconvenience to the taxpayer. The mere inability to pay does not ordinarily provide the basis for granting penalty relief. The taxpayer must show that they exercised ordinary business care and prudence in providing for the payment of the tax liability.
The taxpayer may claim that “mitigating circumstances” prevented filing or depositing. A mitigating circumstance does not refer to an event beyond the control of the taxpayer, but it is an issue mentioned by the taxpayer. The IRS will look at mitigating circumstances to determine whether the taxpayer had a lack of willful intent. Mitigating circumstances include when filing or deposit requirements are too complex; the taxpayer called, but IRS phones were busy; the taxpayer made some kind of data entry or phone entry error; the taxpayer received unanticipated income, self-employment income, etc., for the first time; the taxpayer changed jobs, moved, is having marital difficulties, etc. Finally, the IRS will look to whether the taxpayer detected error in first place, took corrective action, or actually corrected the error.
Footnotes:
[1] IRM 5.1..15.3.1(1)(c).
[2] See IRC § 6511.
[3] IRM 5.1.15.4.6.3.
[4] The “automated under-reporter” system is an automated analysis and processing of potential underreported and/or over-reported discrepancies identified through information return matching.
[5] See IRM 5.1.15.3.4(5)(b); IRM 25.6.1.9.4.4.
[6] See IRC 6511.
[7] IRM 5.1.15.5.6; see also IRM 20.2.10.
[8] See IRM 20.1.4.21.5.
[9] See IRM 20.1.1.3.6.1 (First Time Abate)
[10] Such as income, estate, gift, certain excise taxes (employment taxes are specifically excluded).
[11] See IRC 6404(e)(1)(B).
[12] See IRM 5.1.9.5 (Communications with Appeals).
[13] See IRM 5.11.3 (Jeopardy Levy without a Jeopardy Assessment).
[14] See IRC § 6330(f).
[15] See IRM 20.1.1.3.2.2.
[16] See IRM 20.1.1.3.2.2.3.
[17] See IRM 20.1.1.3.2.2.5.
[18] See IRM 20.1.1.3.4.
[19] See IRM 20.1.1.3.2.2.6.
[20] See IRM 20.1.1.3.2.2.1.
[21] See IRM 20.1.1.3.2.2.2.
[22] See IRM 20.1.1.3.2.2.1.
[23] See IRM 20.1.1.3.2.2.1.
[24] See IRM 20.1.1.3.3.3.
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