Audit reconsideration: getting the IRS to reopen an assessed examination

What audit reconsideration is

IRM 4.13.1.2 defines it: “An audit reconsideration is the process the IRS uses to reevaluate the results of a prior audit where additional tax was assessed and remains unpaid, or a tax credit was reversed.” It is also how the IRS handles an original return filed after a substitute for return, and computational or processing errors in an exam assessment. Policy Statement 3-15, Reconsideration of an Unpaid Assessment, is the policy behind it. Pub 3598 (Rev. 11-2023) lists the usual reasons taxpayers ask: they did not appear for the audit, they moved and did not get IRS mail, they have information they did not provide in the audit, or they disagree with the assessment.

It is administrative grace, not a statutory right. There is no deadline in the Code for asking, but there is also no Tax Court review of the result. Its value is that it can reduce an assessment without paying it first, after the deadline to petition has passed.

The criteria

Under IRM 4.13.1.2.1, the taxpayer must have filed a return, the assessment must remain unpaid (or the IRS reversed credits the taxpayer disputes), the taxpayer must identify the adjustments in dispute, and the taxpayer must provide new information on the audited issues that was not considered in the exam, or show an IRS computational or processing error. IRM 4.10.11.4.1 adds that a request is not accepted if the taxpayer already had a reconsideration and brings nothing new, although a case can be reconsidered more than once with new information.

Payment changes the route. Pub 3598 says: “If you have paid the amount due in full, you must file a formal claim”. A fully paid exam assessment is a refund claim case under IRM 4.19.16, subject to the refund statute in IRC 6511 (three years from filing or two years from payment). See refund claims and suits.

Cases the IRS will not reopen

IRM 4.13.1.4.9.1 lists requests that are not worked as reconsiderations at all and requests that will not be considered:

Those not considered get Letter 916-C stating that tax assessed under a closing agreement, accepted offer or TEFRA proceeding cannot be reconsidered. For AUR assessments from a CP2000, the reconsideration request goes to the AUR function rather than the exam reconsideration unit.

Cases closed by Appeals or the Tax Court

If Appeals or the Tax Court already decided the liability, finality limits reconsideration. IRM 4.13.1.4.5 says the IRS will not reopen cases decided by the Tax Court (except dismissals for lack of jurisdiction), cases closed with a Form 906 or Form 866, cases closed with an “Appeals mutual concession settlement using a Form 870-AD” or another AD-type form, and cases barred by the statute. For other Appeals closures, the IRS looks at the Appeals closing code:

The typical reconsideration case is therefore a defaulted notice of deficiency: the taxpayer did not respond to the exam, the notice went unanswered, the tax was assessed, and now the taxpayer has the records.

Building the request

Pub 3598 describes the steps, and the IRM shows what the reconsideration unit looks for:

1. Get the examination report (Form 4549) and identify each adjustment you dispute. A copy of the report should go with the request.
2. Gather documentation for each disputed item that is new, not previously presented, and for the year in question.
3. Complete Form 12661, Disputed Issue Verification, explaining each issue you disagree with and why. Pub 3598 recommends it, and a request without documentation is answered with Letter 3338-C enclosing Pub 3598 and Form 12661.
4. Send photocopies, not originals; Pub 3598 says originals will not be returned. If faxing, put the TIN and tax year on every page.
5. Include daytime and evening phone numbers and the best time to call. Under IRM 4.13.1.4.13.2, if the phone number is in the file, one phone call attempt must be made in an effort to obtain missing documentation before a disallowance for lack of information.
6. If the client also wants a refund (part of the balance was paid), make sure the request meets the claim requirements and is within the refund statute; a reconsideration that asks for no refund is an abatement request and cannot later be converted into a claim (IRM 4.10.11.4.1).

Address the issue the examiner actually adjusted. A request that argues a different theory, or sends records for a different year, is the most common reason for denial.

How the IRS works it

In the campus, Compliance reconsideration units work requests under IRM 4.13.1.4. With no documentation, the unit sends Letter 3338-C. With partial documentation, the examiner can allow, partly allow or disallow based on the documents and IRS research, including prior or subsequent years closed no-change. If a decision cannot be made, the examiner tries one call; if the taxpayer says the documents can be sent, 10 days are allowed. If the call fails, Letter 3339-C asks for the missing items with a 45-day suspense. Full allowance abates the assessment; partial allowance abates part; full disallowance is sent on Letter 3340-C (or Letter 105-C if the account has a zero balance), which must state the reason and offers appeal rights.

Intake and screening

Send the request to the Central Reconsideration Unit of the campus exam operation that made the assessment; IRM 4.13.1.3.4 tells campus assistors to give the fax number or mailing address of the appropriate CRU, so a call to the number on the exam report gets the address. A request that reaches a phone assistor or another campus is identified by transaction codes (TC 420, 30X, 421 mark an exam assessment) and faxed to the right campus with Form 4442 (IRM 4.13.1.3.1 and 4.13.1.3.3). Once there, IRM 4.13.1.4.9 requires that “Reconsideration requests must be screened within 5 workdays of receipt to ensure they will be accepted and worked in CRU prior to opening in CEAS in Status Code 7100”, and IRM 4.13.1.4.6 that “Audit Reconsideration cases must be controlled on CEAS and/or IDRS (TXMOD) within 14 days of receipt in the CRU.” A request without documents is not held open for them: the unit sends Letter 3338-C and closes its control (status 7200), so a bare letter saying documents will follow buys nothing. Referrals from revenue officers on Form 3870 are started within 14 days.

Screening also sets the collection hold. For a complete request the contact employee checks the CSED and account status: no hold if less than a year remains on the CSED; a STAUP for 15 cycles in notice status; a TC 470 in ACS status 22 or 24; coordination with the revenue officer in status 26; and “If the account is in status 60 (Installment Agreement) instruct the taxpayer to continue payments as outlined in the agreement, do not input a collection hold.” If the taxpayer cannot say what issue is disputed: “Do not input a collection hold at this time. Advise the taxpayer that collection activity will continue until we receive the requested documentation.” The request with Form 12661 and documents is what stops collection; a letter announcing an intent to request does not.

What the examiner checks

IRM 4.13.1.4.13 has the examiner retrieve the original case from the CEAS archive, so the original workpapers, report and letters are in front of them (“If the original examination was worked on CEAS, do not order the administrative file.”). The examiner verifies that the assessment matches the report, then documents “the information requested on the original audit, subsequent documentation received with Reconsideration Request, documentation still needed, and conclusion reached.” That is the test the request has to pass: the documents must answer the specific request the original examiner made and the issue the report adjusted. A case the examiner suspends for more documents goes to status 7700, and “Cases in Suspense 7700 systemically closed on CEAS after 45 days if no reply received.” A full allowance needs no new report and restores the pre-audit liability; a partial allowance requires a new Form 4549.

The refund statute inside a reconsideration

Most reconsiderations are abatement requests on an unpaid balance, but the refund statute matters when part was paid or credits were reversed. IRM 4.13.1.4.17 says that “If a taxpayer submits a reconsideration request for reversal of an audit assessment or reversal of credits disallowed on the original return and we have not sent a formal disallowance letter, then the RSED is still open.” Where an adjustment produces an overpayment that cannot be refunded because the RSED has passed, the examiner must say so in Letter 105-C or 106-C with appeal rights and the right to sue, and the excess credit goes to the Excess Collections File. If the client paid any part of the assessment, say so in the request and ask for the refund expressly, so the request is treated as a claim and the RSED analysis is done.

Special circumstances change the result. Under IRM 4.13.1.4.3, if the taxpayer was in a combat zone during the original audit (plus 180 days after leaving), all exam assessments are reversed; disaster and identity theft cases follow their own procedures.

Field (area office) reconsiderations follow IRM 4.10.11.4 and can be requested with an amended return, a delinquent return or a written request.

Collection while it is pending

Pub 3598 says the IRS may delay collection when documentation arrives, but “we may resume collection activity if the documentation is not sufficient to support your position and you do not respond to any requests for additional information within 30 calendar days.” If the client has an installment agreement, payments must continue. If collection is already active, tell the revenue officer or ACS that a reconsideration has been filed; if levies continue and cause hardship, a Form 911 to the Taxpayer Advocate Service is an option. A request for a collection hold is separate from the merits, so do both.

If it is denied

IRM 4.13.1.4.18 says a reconsideration case is forwarded to Appeals if requested under Pub 5 when the request was accepted for reconsideration and then disallowed in full or part. It is not forwarded if the request was not accepted (for example, no new information), or if the taxpayer did not respond to an appointment letter or keep an appointment without an unavoidable reason. “The taxpayer's new information must be considered before the case is sent to Appeals.” New evidence first raised in Appeals can send the case back to the examiner.

When a case goes to Appeals, the IRS inputs a hold on collection (TC 470) and sends Letter 86-C. The letter's standard text says: “During the time your case is in appeals, collection activity will not be pursued on your account, however, interest and penalties will continue to accrue if there is a balance due.” Voluntary payments reduce that accrual. See the Independent Office of Appeals.

Other options after a denial: pay the full amount and file a refund claim within IRC 6511 (three years from filing or two years from payment), then sue if the claim is denied; or submit a doubt as to liability offer, which Pub 3498 describes as available where there is a genuine dispute about the existence or amount of the liability.

Substitute for return cases

When the IRS assessed tax on a substitute for return and the taxpayer later files an original return, IRM 4.13.1.5 treats it as an SFR reconsideration, with its own procedures for campus and area office cases, including recalculating the SFR penalties. File the return with a cover letter that identifies the SFR year and asks that it be processed as a reconsideration, and attach the support for the deductions and credits claimed. Keep the statute in view: an SFR does not start the assessment period, but the taxpayer's own return does (see the assessment statute).

Questions practitioners ask