In recent conversation with an IRS employee, it was posited that the IRS did not provide audit reconsideration in employment tax cases. However, there is nothing in IRM 4.13.1, covering audit reconsiderations, which states that it only applies to income taxes (the word income only is mentioned once in the entire section, regarding the EITC). Rather, the only criteria for audit reconsideration per the IRS’s internal guidelines (the Internal Revenue Manual or “IRM”) as stated in IRM 126.96.36.199 are:
(1) The taxpayer must have filed a tax return.
(2) The assessment remains unpaid or the Service has reversed tax credits that the taxpayer is disputing.
(3) The taxpayer must identify which adjustments he/she is disputing.
(4) The taxpayer must provide new additional information for the audited issue(s) not considered during the original examination.
(5) There was an IRS computational or processing error in assessing the tax.
As to the last criterion, IRS Publication 3598 clarifies that this only requires that the taxpayer asserts disagreement with the tax. Audit reconsideration is not a statutory right and is discretionary on the part of the IRS. However, the IRS generally follows its internal procedures. If the IRS had intended for audit reconsideration to only apply to certain audits and returns, the IRM would have said so. It is this author’s opinion, based on the terms of the IRM procedures, a taxpayer with new information following an employment tax audit assessment may utilize the audit reconsideration procedures.
There is also some support for an employment tax audit reconsideration in a United States Tax Court Opinion. In Durda v. Commissioner, T.C. Memo. 2017-89 , the court noted the following facts:
At the hearing the SO explained to petitioner that his account had already been placed in “currently not collectible” (CNC) status because of his financial difficulties. The SO rejected his request that the NFTL be withdrawn, concluding that it should remain in place to protect the Government’s interest. Petitioner requested audit reconsideration of the employment tax liabilities; he asserted that he had issued Forms 1099-MISC to some contractors and asked for additional time to retrieve copies of these documents. The SO set a deadline of November 20 for petitioner to supply any documents that he believed relevant to a request for audit reconsideration.
In that case, the IRS allowed the taxpayer the opportunity for audit reconsideration of employment tax liabilities consistent with the clear terms of the IRM. In addition, because this was a collection due process case, the taxpayer was not required to pre-pay the liabilities and use refund procedures.
The existence of refund procedures does not mean the lack of audit reconsideration procedures as a taxpayer may file a refund claim in income tax cases as well. The IRM does not except employment tax returns or audits from the reconsideration procedures. Accordingly, an audit reconsideration request for employment taxes appears to be within the discretion of the IRS.
The author of this post is Daniel Layton, a former IRS trial attorney and former federal prosecutor who founded a tax law firm in Newport Beach, CA.
Posted 03/13/2020 by Daniel Layton.