If you’ve been through an IRS audit, you know that one of the most important documents you receive at the end is the Revenue Agent Report (RAR).
However, many taxpayers may not know where to start when it comes to reading their Revenue Agent Report.
John Milikowsky, the founder of Milikowsky Tax Law, explains how to read your Revenue Agent Report in detail. Check out the video below for more information:
In this article, we walk you through the elements that make up an IRS Revenue Agent Report.
First, What is an IRS Revenue Agent Report?
The Revenue Agent’s Report is a detailed document describing an IRS examiner’s audit findings. Additionally, the Revenue Agent Report states “the amount of deficiency or refund the agent finds the taxpayer to owe or be owed, respectively.”
Taxpayers have the right to disagree with a revenue agent’s report. If taxpayers disagree, they can challenge the agent’s findings through:
- A formal protest to the IRS Office of Appeals division by appealing to the U.S. Tax Court, or
- Paying the new assessment but then suing for a refund.
If the Revenue Agent Report is unchallenged or upheld, delinquent taxpayers may be subject to increased fines or jail time if they fail to reconcile their tax situation.
Now that we have covered what a Revenue Agent Report is, let’s break down how to read it, section by section.
How to Read a Revenue Agent Report
The first section of the Revenue Agent Report is called the “Audit Information.” This includes basic information about the audit, such as the type of audit (field or correspondence), the date the audit began, and the taxpayer’s name and address.
Learn more about the four types of IRS audits and how to navigate them.
In this section, the revenue agent lists their findings. Each finding will include:
- A description of the issue
- The amount of money in question
- The proposed changes to the tax return
Adjustments to Income
At the top of page one, you’ll find the adjustments to income. Adjustments typically start with income, whether income has increased or decreased, which could go either way. Typically, IRS will increase your income if they identify additional income that was not reported on your tax return.
After the adjustments to income, you’ll find expenses. The expenses on your return are negative, they offset income. If IRS disagrees as to an item of an expense, it will be listed as a positive number to offset the negative number.
Corrected Tax Liability
Beneath these figures, the Revenue Agent Report will list the corrected tax liability and any credits, such as prepayments you have made or withholdings of income tax.
Below the corrected tax liability and credits, the Revenue Agent Report will list the balance at the bottom of the first page.
The top of page two of the Revenue Agent Report will list the penalties.
For example, if you filed a late return or made payments late, typically IRS will also include a negligence penalty. Negligence occurs if you kept poor records and you didn’t have any substantiation, or you didn’t have enough substantiation where IRS could tell you made some typical errors. In this event, they may file a negligence penalty.
IRS can also assess a fraud penalty if they can establish willfulness and there is fraud for failure to file a return on time. Additionally, IRS may determine fraud in overestimating or overstating expenses or understating income where they believed it was more willful rather than negligent.
In addition, on page two, IRS will assess interest from the date the return payment was due.
If the Revenue Agent Report is reviewing an individual, this date is typically April 15th. If the agent is reviewing a corporation, the return payment due date is usually in March.
The final section of the Revenue Agent Report is called “Recommendations.” In this section, the revenue agent will list their recommendations for how to resolve the findings. These recommendations are non-binding, but they can be helpful in negotiating with IRS.
What to Do After Reading Your IRS Revenue Agent Report
At the end of this process, IRS can give you a set period of time in which to dispute these findings. This is typically 30 days but can occasionally be only 10 days.
You have 30 days to provide a protest letter. If you do not, IRS will conclude the audit with a notice of deficiency. At this point, you’re required to file a tax court petition going to the United States tax court in order to dispute the findings.
What We Recommend
If you believe that the revenue agent overlooked some facts and you have some substantiation that’s not being considered by the revenue agent, you should consider communicating with the supervisor and try to get the supervisor involved. File a protest letter within the deadline.
Consider enlisting the help of an experienced tax attorney to navigate the complex situation and efficiently resolve any issues with IRS.
At Milikowsky Tax Law, we have over a decade of experience working with IRS audits and are experts in defending business owners in the face of IRS or other government agency audits.
Read on to learn how to respond to an IRS audit in 2022.