Unit 10: The IRS Examination Process

Question 1

What is an IRS examination commonly referred to as?

Answer 1

An IRS audit

Question 2

How does the IRS notify taxpayers about an examination?

Answer 2

They are notified by mail.

The IRS never notifies taxpayers about an examination by email.

Question 3

What must taxpayers provide to support deductions on their tax returns?

Answer 3

Receipts or other documentation.

Question 4

What are the three types of IRS audits?

Answer 4

1. Correspondence audit - conducted entirely by mail;
2. Office audit - which takes place at a nearby IRS field office, and
3. Field examination - which typically take place at the taxpayer’s home or place of business.

Question 5

What is a CP-2000 notice?

Answer 5

A notice issued when the IRS finds discrepancies between its records and a taxpayer’s return.

Question 6

Where do field audits typically take place?

Answer 6

• Taxpayer’s home or place of business
• IRS office
• Office of the taxpayer’s representative

Field audits are the most detailed and thorough of IRS examinations.

Question 7

Under the Centralized Partnership Audit Regime (CPAR), who is responsible for tax underpayment?

Answer 7

The partnership itself is responsible for the tax underpayment, not the individual partners.

Unless the partnership elects to “push out” the liability to the reviewed-year partners.

Question 8

What criteria are used by the IRS to select returns for examination?

Answer 8

• Potentially abusive/tax avoidance transactions
• Information matching
• Computer scoring/DIF score
• Related examinations
• Third-party information

Question 9

What rights do taxpayers have during an IRS examination?

Answer 9

• Right to professional and courteous treatment
• Right to privacy and confidentiality
• Right to know why information is requested
• Right to representation
• Right to appeal disagreements

Question 10

How is a representative authorized to act on behalf of a taxpayer before the IRS?

Answer 10

The taxpayer must sign Form 2848, Power of Attorney and Declaration of Representative, authorizing the representative.

Question 11

Can a representative intentionally deceive the IRS or allow a client to do so?

Answer 11

No

Question 12

What must a representative provide to the IRS during an audit?

Answer 12

Requested documents if they possess them.

If the representative does not have the documents, they must disclose any information they have about them.

Question 13

True or False:

A representative can intentionally deceive the government during an audit.

Answer 13

False

A representative is not allowed to intentionally deceive the government or allow their client to do so.

Question 14

What can an IRS examiner do if a representative fails to submit records or respond to correspondence?

Answer 14

Communicate directly with the taxpayer.

The examiner has the authority to bypass the representative in such situations.

Question 15

What rights does the IRS have regarding audit locations and procedures?

Answer 15

• Make the final determination of when, where, and how the examination will take place.
• Visit the taxpayer’s place of business or home.

Visits can be made to establish facts that can only be accomplished by a direct visit.

Question 16

How much advance notice is required for recording an examination interview?

Answer 16

Ten days in writing.

The party initiating the recording must notify the other party.

Question 17

What happens if a taxpayer becomes uncomfortable during an audit interview?

Answer 17

The IRS must suspend the interview and reschedule it.

This allows the taxpayer to consult with a qualified representative.

Question 18

What notice must the IRS provide before contacting third parties?

Answer 18

Advance notice of the intent to contact third parties, including the designated time period for contact.

The notice must be sent at least 45 days before the first contact, and the period cannot exceed one year.

Question 19

Which act requires the IRS to provide advance notice before third-party contacts?

Answer 19

The Taxpayer First Act of 2019

(TFA)

IRC §7602(c)(1) was revised to include this requirement.

Question 20

When is the IRS exempt from providing notice before contacting third parties?

Answer 20

• Pending criminal investigations.
• When notice could harm tax collection efforts.
• If it may lead to retaliation against any person.

Contacts with other governmental agencies are not subject to TFA’s advance notice requirements.

Question 21

What document outlines an IRS examiner’s findings at the conclusion of an audit?

Answer 21

Revenue Agent’s Report

(RAR)

The RAR states the amount of deficiency or refund and explains how the tax liability was computed.

Question 22

What are the three ways an audit can be closed?

Answer 22

• No Change
• Agreed
• Unagreed (or “Disagreed”)

Each outcome involves different potential actions by the taxpayer and IRS.

Question 23

Under what circumstances can the IRS reopen a closed examination case?

Answer 23

• Fraud or misrepresentation.
• Substantial error based on an established IRS position.
• Serious administrative omission.

These are exceptions where a closed case may be revisited.

Question 24

What is the purpose of the IRS audit reconsideration process?

Answer 24

To dispute the results of a previous audit where additional tax was assessed and remains unpaid, or a tax credit was reversed.

New information, with documentation, must be provided that was not considered during the original examination.

Question 25

When will the IRS **not accept** an audit reconsideration request?

Answer 25

* If the taxpayer previously agreed to pay the amount by signing a closing agreement. * If a court has issued a final determination on the taxpayer’s tax liability. ## Footnote The IRS is under no obligation to approve a request to reopen an audit.

Question 26

What can a taxpayer do if their return has been audited for the same items in the previous two years with no change proposed?

Answer 26

Request the IRS to **discontinue** the examination. ## Footnote Approval of the request is subject to the IRS's discretion.

Question 27

How does a Partnership opt-out of the Centralized Partnership Audit Regime (CPAR)?

Answer 27

Partnership must make a valid election each year on **Schedule B-2 of Form 1065**. The election must be made on a timely filed return (including extensions). ## Footnote Partnerships have the option to elect-out of the CPAR, provided they meet the following requirements: * The partnership has 100 or fewer partners. * To be eligible to elect out, the partnership must have only “permitted” partners. Only individuals, C corporations, S corporations, or an estate of a deceased partner qualify.

Question 28

Why is a **CP-2000** notice issued?

Answer 28

They are typically issued to a taxpayer when information on the IRS computer systems on a taxpayer differs from that on a return filed by the taxpayer.

Question 29

When is a **CP-2000** notice issued?

Answer 29

Typically issued to a taxpayer when information on the IRS computer systems on a taxpayer differs from that on a return filed by the taxpayer.

Question 30

How does a Partnership opt-out of the **Centralized Partnership Audit Regime (CPAR)**?

Answer 30

Partnership must make a valid election each year on **Schedule B-2 of Form 1065**. The election must be made on a timely filed return (including extensions). ## Footnote Partnerships have the option to elect-out of the CPAR, provided they meet the following requirements: * The partnership has 100 or fewer partners. * To be eligible to elect out, the partnership must have only “permitted” partners. Only individuals, C corporations, S corporations, or an estate of a deceased partner qualify.

Question 31

# True or False During an IRS examination, **IRS submits Form 4564** to request information from the taxpayer.

Answer 31

True | Form 4564, Information Document Request (IDR) ## Footnote The taxpayer must make available any documents the IRS requests, including providing access to bookkeeping files such as QuickBooks.

Question 32

What is the purpose of Form 4549?

Answer 32

Issued by the IRS at the end of an audit to outline proposed adjustments to a taxpayer's return ## Footnote If the taxpayer agrees with the IRS’s proposed changes in the Revenue Agent Report (RAR), the taxpayer may immediately sign off on the RAR on **Form 4549 (Income Tax Examination Changes)**.