How to Analyze an IRS Revenue Agent Report
An IRS Revenue Agent Report (RAR) is a document prepared by a revenue agent, which is a type of IRS employee who is trained to audit tax returns and determine the accuracy of the information provided.
If you are the subject of an IRS audit and receive an RAR, it is important to carefully analyze the report in order to understand the issues being raised and determine the best course of action.
In this article, we will provide an overview of the process for analyzing an RAR, including reviewing the findings and determining any potential implications for your tax liability. Understanding the content of the RAR and the audit process can help you to effectively respond to the audit and minimize any potential tax liability.
Let’s dive in.
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.
Every IRS audit concludes with a Revenue Agent Report which includes all the findings the IRS made based upon the documents and information collected, and the determination IRS has made.
An IRS audit starts with an initial audit letter sent to the taxpayer (in the case of our clients, the business owner). Then the IRS will send an IDR, also called an Information Document Request with a list of documents and information the IRS needs.In some cases a business owner might receive more than one IDR.
The next step is to provide documents and negotiate, communicate with your revenue agent and comply with additional requests for information. At the end of the audit, you will receive a Revenue Agent Report.
Sections of the Revenue Agent Report
Let’s review the sections of the Revenue Agent Report, so you understand where the information is and how to read it.
Adjustments to Income
The first section of the RAR is adjustments to income. This includes anything from income, additional income the IRS found, or even a reduction of income.
Usually, IRS finds additional income. Additionally, the section will include any other adjustments to expenses and potentially even net operating losses.
Corrected Tax Liability
The next section of the RAR is the corrected tax liability. shows the correct amount of tax that the IRS believes you owe, based on the audit findings. This may be different from the amount of tax that you originally reported on your tax return. The corrected tax liability is calculated by adding any additional tax that the revenue agent determined you owe, subtracting any overpayments that the agent found, and making any necessary adjustments to your tax return.
The balance at the bottom of the RAR reflects the total amount of tax that you owe, including any interest and penalties that may have been assessed. It is important to carefully review the corrected tax liability and balance sections of the RAR, as they will provide important information about the tax implications of the audit and any action you may need to take.
If you disagree with the corrected tax liability or the balance, you can contest the findings and seek to resolve the matter through the IRS appeals process.
Expenses
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.
Balance
Below the corrected tax liability and credits, the Revenue Agent Report will list the balance at the bottom of the first page.
This balance does not include penalties and interest.
Penalties
The top of page two of the Revenue Agent Report lists the penalties that the IRS has assessed based on the audit findings. Penalties may be assessed for a variety of reasons, such as filing a tax return late, making payments late, or failing to keep adequate records.
One type of penalty that may be assessed is the negligence penalty, which occurs if the IRS determines that you kept poor records and did not have sufficient substantiation for your claims. This penalty may be assessed if the IRS determines that you made errors on your tax return due to a lack of attention or care, rather than an intentional effort to evade taxes.
The IRS may also assess a fraud penalty if they believe that you deliberately and willfully failed to file a tax return on time or deliberately understated your income or overstated your expenses in order to evade taxes. Fraud is considered a more serious offense than negligence and may result in more severe penalties.
It is important to carefully review any penalties listed in the RAR and understand the reasons for their assessment in order to respond appropriately and contest any penalties that you believe are incorrect.
Section 3: Interest and Total Balance
The section on page two of the Revenue Agent Report that lists interest and the total balance is an important part of understanding the tax implications of the audit. Interest is typically assessed from the date that the tax payment was due, which is usually April 15th for individuals and March for corporations.
The RAR may include a broad description of why the full expense was not allowed or why the tax payment was not satisfied. In some cases, the revenue agent may provide more detailed information about the audit findings in the work papers that were used to prepare the RAR. If you want more detail about the audit findings, you can request that the revenue agent provide the work papers to you. These papers may include a factual summary of the information that was exchanged between you and the IRS during the audit process. Having access to this information can be valuable in helping you to understand the audit findings and respond appropriately.
Recommendations
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.
Final Thoughts
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.
