An IRS Examination Report is a detailed document the Internal Revenue Service issues after completing an audit of your tax return. It summarizes the results of the IRS review, highlights any adjustments they propose to your reported income, deductions, or credits, and explains why these changes are necessary. This report is essentially the IRS’s formal communication of their audit findings, but it is not a final tax bill. Instead, it offers a chance for taxpayers to understand the IRS’s position and respond accordingly.
Why Does the IRS Conduct Audits and Issue Examination Reports?
The IRS audits tax returns to ensure compliance with tax laws and verify that taxpayers have reported their income and deductions accurately. Some returns are selected randomly, while others are flagged because certain items trigger system alerts—like unusually high deductions or inconsistencies between reported income and third-party data. The audit process is a routine enforcement step and does not imply wrongdoing.
The Audit Process and Where the Examination Report Fits In
Understanding where the Examination Report fits can reduce anxiety about the audit:
- Initial Notification: The IRS first contacts taxpayers via a letter—often a CP2000 or similar notice—informing them that their return is under review.
- Information Submission: Taxpayers respond by providing documents or explanations, either by mail, phone, or in-person meeting, depending on the audit type.
- IRS Evaluation: An IRS examiner reviews all submitted information against the original return.
- Examination Report Issued: If the IRS identifies discrepancies that warrant changes, they issue the Examination Report, outlining proposed adjustments to your tax liability and explaining the basis for each.
For more insight into IRS audits, see Examination (Audit).
What Does an Examination Report Include?
The report contains several key components:
- Explanation of Adjustments: Detailed descriptions of each proposed change, such as disallowed deductions or additional taxable income, with references to tax codes.
- Recalculated Tax Liability: Shows how adjustments alter the amount of tax owed or refunded.
- Summary of Changes: A summary showing total increases or decreases in tax.
- Form 886-A, Explanation of Items: Often included for thorough explanations supporting adjustments.
- Your Rights and Options: Information on how to accept the changes, dispute them, or appeal.
Responding to an Examination Report
Receiving an Examination Report gives you options:
- Agree: If you accept the findings, sign and return the agreement form (commonly Form 4549). This finalizes the audit and requires payment of any additional tax plus interest.
- Disagree: Provide additional evidence or explanations if you dispute some or all proposed changes. You may request a meeting with the examiner’s manager to discuss the case further.
- Appeal: If disagreements persist, you can appeal to the IRS Office of Appeals, an independent department that reviews audit disputes. The Examination Report includes instructions on initiating an appeal, often referencing IRS Publication 5.
Real-Life Example
Consider Sarah, a freelance graphic designer who claimed a home office deduction. The IRS audited her return and issued an Examination Report stating the reported office space size was overstated. After reviewing the report, Sarah agreed with the correction, signed the agreement, and resolved the audit efficiently.
Who Receives Examination Reports?
Examination Reports can be issued to individuals, small businesses (sole proprietorships, partnerships, S corporations), larger corporations, and tax-exempt organizations. Essentially, any taxpayer selected for an IRS audit may receive this document.
Tips When You Receive an Examination Report
- Stay Calm: It’s a step in the audit, not a final penalty.
- Review Thoroughly: Read the report carefully, focusing on the explanation of adjustments.
- Compare Your Records: Match IRS findings with your documents to see if you agree.
- Get Professional Help: If unsure, consult a CPA or Enrolled Agent who specializes in tax audits. Learn more about Certified Public Accountants (CPAs).
- Respond on Time: The report will specify a deadline, usually about 30 days, which is critical to maintain your rights.
- Keep Records: Retain copies of correspondence and your responses.
Common Misconceptions
- The Examination Report is not a final tax bill.
- Ignoring it can lead to a Notice of Deficiency and enforced collection.
- Audits are not only for dishonest taxpayers; many audits are random.
Key Sections in an Examination Report
| Section/Form | Description |
|---|---|
| Form 4549 (Income Tax Examination Changes) | Summary of proposed tax changes and new tax amount. |
| Explanation of Adjustments | Detailed reasoning for each proposed change. |
| Form 886-A (Explanation of Items) | In-depth explanations supporting adjustments. |
| Waiver of Restrictions on Assessment (Part of Form 4549) | Your agreement to allow IRS to assess additional tax. |
| Audit Report Summary | Narrative overview of the auditor’s findings. |
| Appeal Rights and Information | Instructions on how to contest the findings or appeal. |
Frequently Asked Questions
Is an Examination Report the same as a tax bill?
No, it proposes changes; a tax bill or Notice of Deficiency follows if changes are accepted or not contested.
How long do I have to reply?
Usually 30 days, with possible extensions on request.
What if I disagree?
You can provide more information, request a manager review, or appeal.
Where can I get help?
Consult tax professionals like CPAs or Enrolled Agents.
For official IRS guidance on appeals, consult IRS.gov.
Understanding your Examination Report is crucial for navigating an IRS audit successfully. Taking timely, informed action can protect your taxpayer rights and potentially reduce your tax burden.