After the IRS Audit: A Deep Dive into IRS Form 4549 and Its Implications

Navigating the world of IRS forms can be a daunting task, especially when you receive one after a tax audit. One such form, Form 4549, "Income Tax Examination Changes," is particularly significant. This document is not just a summary of findings; it is a legally important instrument that outlines the IRS’ proposed adjustments to your tax return and can have a profound impact on your rights and financial obligations. This material will help you understand what this form means and how you should respond. 

The Road to Form 4549: The Audit Process 

Form 4549 is the culmination of an IRS tax examination, which can be conducted in one of three ways: by mail (correspondence audit), in an IRS office (office audit), or at the taxpayer’s home or business (field audit). The purpose of these examinations is to verify the accuracy of the information reported on your tax return. During the audit, an IRS examiner will review your books, records, and other supporting documents. At the conclusion of the examination, the examiner will discuss their findings with you. If the examiner proposes changes to your tax liability, these changes will be detailed on Form 4549. Form 4549 provides a detailed calculation of the proposed changes to your tax liability. It is typically a multi-page document that can cover up to three tax years.

The Legal Framework: IRC and Treasury Regulations 

The issuance of Form 4549 is grounded in the legal authority granted to the IRS by the Internal Revenue Code. Specifically, IRC § 6201 authorizes the Secretary of the Treasury to make inquiries, determinations, and assessments of all taxes. When an examination results in a proposed deficiency, the IRS is generally required to follow the deficiency procedures outlined in IRC § 6213. This section provides taxpayers with important rights, including the right to petition the US Tax Court within 90 days (or 150 days if the notice is addressed to a person outside the United States) of receiving a notice of deficiency 4. 

However, by signing Form 4549, you are agreeing to waive these rights. IRC § 6213(d) explicitly states that a taxpayer has the right to waive the restrictions on assessment and collection of a deficiency at any time by a signed notice in writing. Form 4549 serves as this written waiver. 

"Agreed" vs. "Unagreed" Cases: Your Response Options 

When you receive Form 4549, you have two primary choices: 

1. Agree with the findings: If you agree with the proposed changes, you can sign Form 4549. By signing, you waive your right to appeal the decision in US Tax Court and allow the IRS to assess the additional tax immediately. This will also stop the accrual of interest on the deficiency 30 days after the waiver is received by the IRS, provided the IRS does not issue a notice and demand for payment within that 30-day period. 

2. Disagree with the findings: If you do not agree with the proposed changes, you should not sign Form 4549. In this case, the IRS will issue a formal notice of deficiency, also known as a “90-day letter.” This letter officially notifies you of the deficiency and your right to petition the US Tax Court within 90 days. If you do not file a petition with the US Tax Court within the 90-day period, the IRS will assess the deficiency and send you a bill. 

The Power of Your Signature: A Waiver of Rights 

It is crucial to understand that signing Form 4549 is a significant legal act. By signing the form, the taxpayer is indicating they do not wish to exercise appeal rights with regard to the adjustments reflected in the report. While you retain the right to file a claim for a refund after paying the deficiency, you give up your right to challenge the deficiency in US Tax Court before payment. 

Form 4549 as an Informal Refund Claim 

Interestingly, Form 4549 can also work in the taxpayer’s favor. A Chief Counsel Advice memorandum from the IRS has clarified that a Form 4549 showing an overpayment can be considered a valid informal claim for a refund. This is because the form provides the IRS with timely notice of the basis for the overpayment. This can be particularly important if the statute of limitations for filing a formal refund claim is about to expire. 

Conclusion 

Form 4549 is a critical document in the IRS audit process. It summarizes the proposed changes to your tax liability and serves as a waiver of your right to appeal to the US Tax Court if you agree with the findings. Before signing Form 4549, it is essential to carefully review the proposed changes and understand the legal consequences of your signature. If you disagree with the findings or are unsure how to proceed, you should consider seeking advice from a qualified tax professional. 

To learn more about how to fix your IRS issues, click the link to watch the free video, The Ultimate Guide to Solving Your IRS Tax Problems: 

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