How to Read and Understand the IRS Audit Package, Including Form 4549.

The IRS uses Form 4549 to reports its audit findings. They also can use Form 4549-A or Form 4549-E. The IRS might also use Form 5278. They also will include various cover letters: Letter 525, Letter 692, Letter 950, Letter 1912, or Letter 5262.

The IRS will usually request that you sign and agree to the balance due with Form 870 or you can sign the second page of the Form 4549.

Let’s Break the Package Down.

Notice Letter 525, 692, 1912 Cover Letter for Form 4549

The notice will provide the contact info for the Tax Examiner/Auditor. It will be listed in the upper right corner of Form 525, 692 or 1912

The letter will discuss the proposed changes to the return.
It will suggest that you review Form 4549 and tell you where to sign IF you agree. DO NOT sign this form unless you agree.
It will tell you what will happen if you are owed a refund. I will tell you soon how to tell if you owe.
It will tell you what will happen if you owe an additional amount. I will tell you soon how to tell if you owe.
It will tell you what to do if you owe a debt as a result of this audit and cannot pay. I will tell you soon how to tell if you owe.

Form 4549- Report of Income Tax Examination Changes

Section 1- Adjustments: In this section will be the adjustments made to the return. Positive numbers increase the taxable income, negative numbers decrease the taxable income.

Section 2- Total Adjustment: This section will indicate a net of the total adjustment(s) in Section 1

Section 3- Taxable Income Per Return: This is the taxable income from the return before audit.

Section 4- Corrected Taxable Income: This is the new Taxable Income post audit. It will also indicate how the tax was calculated (i.e. Tax Table) and the Filing Status Accepted (i.e. Single, Head of Household, Married Filing Joint, Married Filing Separate or Qualifying Widower).

NOTE: If this is not the same filing status as the one on the return, the service DID NOT accept that filing status.

Section 5: This is the new tax as a result of the audit

Section 6: This provided any additional or Alternative Minimum taxes as a result of the audit results.

Section 7: This is the new tax resulting from sections 5 and 6 combined.

Section 8: These (a through d) are any credits allowed.

Section 9: This is the new tax balance (Section 7 less 8a-d)

Section 10: These are other taxes (a through d) as a result of the audit

Section 11: This is the total corrected tax liability (Section 9 plus 10a-d)

Section 12: This is the tax that was shown as owing on the original, preaudit return. If this number is zero, that is because you were previously owed a refund.

Section 13: These are credit adjustments (a through c) which directly effect the tax liability.

Section 14: This is the increase (positive number) or decrease (negative number) in tax. It is Section 11, less Section 12, adjusted by Section 13 (a-c). This is the overall change in the outcome of your return (positive number is an increase in taxes, negative number is a decrease in taxes)

Section 15: This section is the adjustment to prepayment credits. A positive number is an increase and a negative number is a decrease.

Section 16: This is the new outcome of the return as if all adjustments are correct.

Example 1: If line 16 says a positive (balance due) $1,747 and you were expecting a $8,473 a refund, you lost $10,220 as a result of the audit and your new balance due is $1,747.

Example 2. If line 16 says a negative (overpayment) $2,123 and you were expecting a 6,235 a refund, you lost $4,122 as a result of the audit and your new refund is $2,123.

Example 3: If line 16 says a positive (balance due) $1,433 and you were expecting to owe $4,555, you gained $3,122 as a result of the audit and your new refund is $1,433.

Example 4. If line 16 says a negative (overpayment) $2,745 and you were expecting to owe $4,895, you gained $7,640 as a result of the audit and your new refund is $2,745.

Section 17: This is a calculation of any penalties (i.e. accuracy related penalties under IRC 6662).

Section 18: This is the total of all penalties calculated.

Section 19a: This is the new outcome of the return, assuming all the adjustment are correct.

Section 19b: This section is the total penalties from Section 18.

Section 19c: This is any interest calculated on the new debt.

Section 19d: This is the new outcome of the return after penalties and interest.

Signature Section. This is the signature section and we would highly suggest you read the section (below) of the ramifications regarding signature BEFORE signing.

Accuracy Related Penalties Under IRC 6662.

This will be a breakdown of the calculation of the Accuracy Related Penalties as of a specific date.

40 Percent Penalty Under IRC 6662); 6652(i); 6662(j)

This will be a breakdown of the calculation of the failure to file certain information returns, registration statements, etc. as of a specific date. This would only apply if one of the following applies;

Gross valuation misstatement (overstatement)
Non-disclosed transaction lacking economic substance
Undisclosed foreign financial interest

Tax Year Interest Computation

This will be a breakdown of the calculation of the interest as of a specific date.

Form 886-A Explanation of Items

This will be a detailed explanation of the items related to the audit

The legal implications of signing and agreeing to this are serious, so please DO NOT sign the second page if you do not agree.

This is NOT A BILL so don’t give up! If you can catch it before the case has been closed changes can still be forced. You also have the right to appeal or petition the Tax Court.

Your options are: 1) to pay the bill in full, 2) to gather more evidence or case law to support your case, 3) Appeal to the agent’s manager, 4) Appeal within the IRS, or 5) Wait for a Notice of Deficiency and petition Tax Court.

If you agree with the calculation at the bottom of the second page of Form 4549, sign & send it by certified mail to the agent at the IRS office address on the second page or on any Letter 692 or Letter 1912 you may receive.

If you do not respond to Form 4549, the IRS will send you a Notice of Deficiency. You will have 90 days to petition the Tax Court. If you do not file a petition, the IRS will bill you for the taxes.

If time is running out on the audit statute, they will likely ask you to sign an extension Form 872 so they can continue to examine you. Please do not sign this without legal advice. We generally do not grant extensions to the IRS unless there is a specific reason to do so.

Income Issues: The IRS will determine your income by reviewing the Wage & Income Transcripts, your bank records and your lifestyle. You should a copy of your Wage & Income Transcripts from the IRS Agent, via website at www.irs.gov/transcripts or by calling 1-800-829-1040 so you can compare them with your records.

The IRS will declare all deposits into the bank or other accounts to be income unless you can prove otherwise.

By reviewing your assets and purchases the IRS will estimate if the income you reported compares to your lifestyle.

Deduction Issues: The IRS Agents will often deny deductions because the evidence is insufficient, is poorly organized or lacks substantiation. Each item being questioned on your return has its own unique legal evidence requirements – more than just a few receipts or cancelled checks or even an accounting software program. You must produce titles, insurance policies, purchase and transaction records, license information, employment records, etc. to prove your case. Each issue requires its own unique approach.

Lost Documents: If you didn’t keep your records or the records are lost or unavailable we can still re-create your case. Unless you dealt solely in cash, bank records and credit card records can be obtained. Even if you used a lot of cash, we could obtain affidavits or use industry standards to arrive at a reasonable figure.

What is my first step?

If you received a letter or notice, a decision must to be made. Do you feel confident to handle this situation on your own? If it is a simple issue and you already know the answer, call, or write them. If the issue is more complicated, you need to hire a Certified Tax Resolution Specialist. The IRS or State will take full advantage of your lack of knowledge and experience.

What is Your Next Step?

The next step is to determine if the notice was sent in error. Do you have an outstanding tax liability? Do you have unfiled or incomplete returns?

Is There a Time Limit?

Yes, each letter or notice from the IRS or State will indicate a date that you MUST contact them by. If you need more time, call the number on the notice or letter, and request an extension. DO NOT ALLOW the time to expire without contacting them or hiring a representative to contact them for you.

What You Don’t Want to Do!

What you don’t want to do is nothing. Your tax problems will only get worse if you ignore them. If you cannot pay, there are a number of potential solutions available to those who are otherwise in compliance. In compliance means having all tax returns filed and any balances paid or on a payment plan. If you have outstanding debts or unfiled returns, you need to get hire a Certified Tax Resolution Specialist.

Get Some Help

If you don’t know how to address the issue(s), have unfiled return/unpaid balances or just done feel confident, let the experts at Legacy Tax & Resolution Services represent you. Work with our team of Certified Tax Resolution Specialists to resolve your issue(s) quickly. Best of all, you don’t have to talk to the IRS or State; we can speak on your behalf.

Stop the stress and resolve your problems Call 800-829-7483 TODAY

For more information, see Frequently Asked Questions- Top 10 Audit Mistakes