Your return may be examined for a variety of reasons, and the
examination may take place in any one of several ways. After the
examination, if any changes to your tax are proposed, you can either
agree with those changes and pay any additional tax, or you can
disagree with the changes and appeal the decision.
Examination selection criteria.
Your tax return can be selected for examination on the basis of
computer scoring. A computer program called the Discriminant Function
System (DiF) assigns a numeric score to each individual and some
corporate tax returns after they have been processed. If your tax
return is selected from DiF, it has received a high score. This means
that there is a high potential for an examination of your return to
result in change to your income tax liability.
Your return can also be selected for examination on the basis of
information received from third-party documentation, such as Forms
1099 and W-2, that does not match the information reported on
the tax return. Or, your return can be selected to address both the
questionable treatment of an item and to study the behavior of similar
taxpayers (a market segment) in handling a tax issue.
In addition, your return can be selected as a result of information
received from other sources on potential noncompliance with the tax
laws or inaccurate filing. This information can come from a number of
sources, including the media, public records, or possibly informants.
The information is evaluated for reliability and accuracy before it is
used as the basis of an examination or investigation.
Notice of IRS contact of third parties.
The IRS must give you reasonable notice before
contacting other persons, that in examining or collecting your tax
liability the IRS may contact third parties such as your neighbors,
banks, employers, or employees. The IRS must also give you notice of
specific contacts by providing you with a record of persons contacted
on both a periodic basis and upon your request.
This provision does not apply:
- To any pending criminal investigation,
- When providing notice would jeopardize collection of any tax
- Where providing notice may result in reprisal against any
- When you authorized the contact.
If Your Return Is Examined
Some examinations are handled entirely by mail. Examinations not
handled by mail can take place in your home, your place of business,
an Internal Revenue office, or the office of your attorney,
accountant, or enrolled agent. If the time, place, or method is not
convenient for you, the examiner will try to work out something more
suitable. However, the IRS makes the final determination of when,
where, and how the examination will take place.
Throughout the examination, you can act on your own behalf or have
someone represent you or accompany you. If you filed a joint return,
either you or your spouse, or both, can meet with the IRS. You can
have someone represent or accompany you. This person can be any
federally authorized practitioner, including an attorney, a certified
public accountant, an enrolled agent (a person enrolled to practice
before the IRS), an enrolled actuary, or the person who prepared the
return and signed it as the preparer.
If you want someone to represent you in your absence, you must
furnish that representative with written authorization. Make the
authorization on Form 2848 or any other properly written
authorization. If you want to consult an attorney, a certified public
accountant, an enrolled agent, or any other person permitted to
represent a taxpayer during an interview for examining a tax return or
collecting tax, IRS will suspend the interview and reschedule it. IRS
cannot suspend the interview if you are there because of an
Paid preparer authorization.
If you checked the box in the signature area of your Form 1040 to
authorize the IRS to discuss your tax return with your paid preparer,
this authorization does not replace Form 2848. The box you checked on
Form 1040 only authorizes the preparer to receive information about
the processing of your return and the status of your refund during the
period your return is being processed. For more information, see the
instructions for Form 1040.
Generally, the same confidentiality protection that you have with
an attorney also applies to certain communications that you have with
federally authorized practitioners.
This confidentiality protection cannot be used by you in any
administrative or court proceeding with an agency other than the IRS.
Confidential communications are those that:
- Advise you on tax matters within the scope of the
practitioner's authority to practice before the IRS,
- Would be confidential between an attorney and you,
- Relate to noncriminal tax matters before the IRS, or
- Relate to noncriminal tax proceedings brought in federal
court by or against the United States.
The confidentiality privilege does not apply to any
written communication that:
- Takes place between a federally authorized practitioner and
a corporate director, shareholder, officer, employee, agent, or
- Promotes the corporation's participation in a tax
A tax shelter is any entity, plan, arrangement, or transaction,
a significant purpose of which is the avoidance or evasion of income
You can make an audio recording of the examination interview. Your
request to record the interview should be made in writing. You must
notify the examiner 10 days in advance and bring your own recording
equipment. The IRS also can record an examination. If the IRS
initiates the recording, you must be notified 10 days in advance and
you can get a copy of the recording at your expense.
Transfers to another district.
Generally, your return is examined in the IRS district where you
live. But if your return can be examined more quickly and conveniently
in another district, such as where your books and records are located,
you can ask to have the case transferred to that district.
The IRS tries to avoid repeat examinations of the same items, but
sometimes this happens. If your tax return was examined for the same
items in either of the 2 previous years and no change was proposed to
your tax liability, please contact the IRS as soon as possible to see
if the examination should be discontinued.
An examination usually begins when you are notified that your
return has been selected. The IRS will tell you which records you will
need. If you gather your records before the examination, it can be
completed with the least effort.
Any proposed changes to your return will be explained to you or
your authorized representative. It is important that you understand
the reasons for any proposed changes. You should not hesitate to ask
about anything that is unclear to you.
The IRS must follow the tax laws set forth by Congress in the
Internal Revenue Code. The IRS also follows Treasury Regulations,
other rules, and procedures that were written to administer the tax
laws. The IRS also follows court decisions. However, the IRS can lose
cases that involve taxpayers with the same issue and still apply its
interpretation of the law to your situation.
Most taxpayers agree to changes proposed by examiners, and the
examinations are closed at this level. If you do not agree, you can
appeal any proposed change by following the procedures provided to you
by the IRS. A more complete discussion of appeal rights is found
If You Agree
If you agree with the proposed changes, you can sign an agreement
form and pay any additional tax you may owe. You must pay interest on
any additional tax. If you pay when you sign the agreement, the
interest is generally figured from the due date of your return to the
date of your payment.
If you do not pay the additional tax when you sign the agreement,
you will receive a bill that includes interest. If you pay the amount
due within 10 business days of the billing date, you will not have to
pay more interest or penalties. This period is extended to 21 calendar
days if the amount due is less than $100,000.
If you are due a refund, you will receive it sooner if you sign the
agreement form. You will be paid interest on the refund.
If the IRS accepts your tax return as filed, you will receive a
letter in a few weeks stating that the examiner proposed no changes to
your return. You should keep this letter with your tax records.
If You Do Not Agree
If you do not agree with the proposed changes, the examiner will
explain your appeal rights. If your examination takes place in an IRS
office, you can request an immediate meeting with the examiner's
supervisor to explain your position. If an agreement is reached, your
case will be closed.
If you cannot reach an agreement with the supervisor at this
meeting, or if the examination took place outside of an IRS office,
the examiner will write up your case explaining your position and the
IRS' position. The examiner will forward your case to the district
office for processing.
Within a few weeks after your closing conference with the examiner
and/or supervisor, you will receive a package with:
- A letter (known as a 30-day letter) notifying you
of your right to appeal the proposed changes within 30 days,
- A copy of the examination report explaining the examiner's
- An agreement or waiver form, and
- A copy of Publication 5.
You generally have 30 days from the date of the 30-day letter to
tell the IRS whether you will accept or appeal the proposed changes.
The letter will explain what steps you should take, depending on which
action you choose. Be sure to follow the instructions carefully.
Appeal Rights are explained later.
If you do not respond to the 30-day letter, or if you later do not
reach an agreement with an Appeals officer, the IRS will send you a
90-day letter, which is also known as a notice
You will have 90 days (150 days if it is addressed to you outside
the United States) from the date of this notice to file a petition
with the Tax Court. Filing a petition with the Tax Court is discussed
later under Appeals to the Courts and Tax Court.
The notice will show the 90th (and 150th) day by which you must
file your petition with the Tax Court.
Suspension of interest and penalties.
Generally, the IRS has 3 years from the date you filed your return
(or the date the return was due, if later) to assess any additional
tax. However, interest and certain penalties will be suspended if the
IRS does not mail a notice to you, stating your liability and the
basis for that liability, within an 18-month period beginning on the
- The date on which you timely filed your tax return, or
- The due date (without extensions) of your tax return.
If the IRS mails a notice stating your liability and the basis
for that liability after the 18-month period, interest and certain
penalties applicable to the suspension period will be suspended.
The suspension only applies to timely filers of individual income
tax returns for tax years ending after July 22, 1998. Also, for tax
years beginning after 2003, the suspension period will apply if the
IRS does not mail the notice stating your liability and the basis for
that liability within a 1-year period (rather than 18 months).
The suspension period begins the day after the close of the
18-month period and ends 21 days after the IRS mails a notice to you
stating your liability and the basis for that liability. Also, the
suspension period applies separately to each notice stating your
liability and the basis for that liability received by you.
The suspension does not apply to a:
- Failure-to-pay penalty,
- Penalty, interest, addition to tax, or additional amount
with respect to any tax liability shown on your return,
- Fraudulent tax return, or
- Criminal penalty.
If you later agree.
If you agree with the examiner's changes after receiving the
examination report or the 30-day letter, sign and return either the
examination report or the waiver. Keep a copy for your records. You
can pay any additional amount you owe without waiting for a bill.
Include interest on the additional tax at the applicable rate. This
interest rate is usually for the period from the due date of the
return to the date of payment. The examiner can tell you the interest
rate(s) or help you figure the amount.
You must pay interest on penalties and on additional tax for
failing to file returns, for overstating valuations, for understating
valuations on estate and gift tax returns, and for substantially
understating tax liability. Interest is generally figured from the
date (including extensions) the tax return is required to be filed to
the date you pay the penalty and/or additional tax.
If you pay the amount due within 10 business days after the date of
notice and demand for immediate payment, you will not have to pay any
additional penalties and interest. This period is extended to 21
calendar days if the amount due is less than $100,000.
How To Stop Interest From Accruing
If you think that you will owe additional tax at the end of the
examination, you can stop the further accrual of interest on the
amount you think you will owe. You can do this by sending money to the
IRS to cover all or part of the amount you think you will owe.
Interest will stop accruing on any part of the amount you cover when
the IRS receives your money.
You can send an amount either in the form of a deposit (cash bond)
or as a payment of tax. Both a deposit and a payment stop any further
accrual of interest. However, making a deposit or payment of tax will
stop the accrual of interest on only the amount you sent. Because of
compounding rules, interest will accrue on accrued interest, even if
you have paid the underlying tax.
To stop the accrual of interest on both tax and interest, you must
make a deposit or payment for both the tax and interest that has
accrued as of the date of deposit or payment.
Payment or Deposit
Deposits differ from payments in two ways:
- You can have all or part of your deposit returned to you
without filing for a refund. However, if you request and receive your
deposit and the IRS later assesses a deficiency for that period and
type of tax, interest will be figured as if the funds were never on
deposit. Also, your deposit will not be returned if one of the
following situations applies:
- The IRS assesses a tax liability.
- The IRS determines, that by returning the deposit, it may
not be able to collect a future deficiency.
- The IRS determines that the deposit should be applied
against another tax liability.
- Deposits do not earn interest. No interest will be included
when a deposit is returned to you.
Notice not mailed.
If you send money before the IRS mails you a notice of deficiency,
you can ask the IRS to treat it as a deposit. You must make your
request in writing.
If, after being notified of a proposed liability but before the IRS
mails you a notice of deficiency, you send an amount large enough to
cover the proposed liability, it will be considered a payment unless
you request in writing that it be treated as a deposit.
If the amount you send is at least as much as the proposed
liability and you do not request that it be treated as a deposit, the
IRS will not send you a notice of deficiency. If you do not receive a
notice of deficiency, you cannot take your case to the Tax Court. See
Tax Court, later.
If, after the IRS mails the notice of deficiency, you send money
without written instructions, it will be treated as a payment. You
will still be able to petition the Tax Court.
If you send money after receiving a notice of deficiency and you
have specified in writing that it is a "deposit in the nature of a
cash bond," the IRS will treat it as a deposit if you send it
- The close of the 90-day or 150-day period for filing a
petition with the Tax Court to appeal the deficiency, or
- The date the Tax Court decision is final, if you have filed
Using a Deposit To Pay the Tax
If you agree with the examiner's proposed changes after the
examination, your deposit will be applied against any amount you may
owe. The IRS will not mail you a notice of deficiency and you will not
have the right to take your case to the Tax Court.
If you do not agree to the full amount of the deficiency after the
examination, the IRS will mail you a notice of deficiency. Your
deposit will be applied against the proposed deficiency unless you
write to the IRS before the end of the 90-day or 150-day period
stating that you still want the money to be treated as a deposit. You
will still have the right to take your case to the Tax Court. See
If You Do Not Agree, discussed earlier.
Installment Agreement Request
You can request a monthly installment plan if you cannot pay the
full amount you owe. To be valid, your request must be approved by the
IRS. However, if you owe $10,000 or less in tax and you meet certain
other criteria, the IRS must accept your request.
Before you request an installment agreement, you should consider
other less costly alternatives, such as a bank loan. You will be
charged interest on the amount you owe and you may be charged a late
payment penalty on any installment not paid by its due date. There is
also a $43 fee if your installment agreement is approved.
For more information about installment agreements, visit the IRS
web site at www.irs.gov/ind_info/ coll_stds/collect.html or
see Form 9465, Installment Agreement Request.
If you owe interest to the IRS on an underpayment for the same
period the IRS owes you interest on an overpayment, you will be
charged interest on the amount of the underpayment (up to the amount
of the overpayment) at the overpayment interest rate. As a result, the
net rate is zero for that period.
Abatement of Interest
Due to Error or Delay by the IRS
The IRS may abate (reduce) the amount of interest you owe if the
interest is due to an unreasonable error or delay by an IRS officer or
employee performing a ministerial or managerial act (discussed later).
Only the amount of interest on income, estate, gift,
generation-skipping, and certain excise taxes can be reduced.
Interest due to an error or delay in performing a managerial act
can be reduced only if it accrued with respect to a deficiency or
payment for a tax year beginning after July 30, 1996.
The amount of interest will not be reduced if you or anyone related
to you contributed significantly to the error or delay. Also, the
interest will be reduced only if the error or delay happened after the
IRS contacted you in writing about the deficiency or payment on which
the interest is based. An audit notification letter is such a contact.
The IRS cannot reduce the amount of interest due to a general
administrative decision, such as a decision on how to organize the
processing of tax returns.
This is a procedural or mechanical act, not involving the exercise
of judgment or discretion, during the processing of a case after all
prerequisites (for example, conferences and review by supervisors)
have taken place. A decision concerning the proper application of
federal tax law (or other federal or state law) is not a ministerial
You move from one state to another before the IRS selects your tax
return for examination. A letter stating that your return has been
selected is sent to your old address and then forwarded to your new
address. When you get the letter, you respond with a request that the
examination be transferred to the district office closest to your new
address. The examination group manager approves your request. After
your request has been approved, the transfer is a ministerial act. The
IRS can reduce the interest because of any unreasonable delay in
transferring the case.
An examination of your return reveals tax due for which a notice
of deficiency (90-day letter) will be issued. After you and the IRS
discuss the issues, the notice is prepared and reviewed. After the
review process, issuing the notice of deficiency is a ministerial act.
If there is an unreasonable delay in sending the notice of deficiency
to you, the IRS can reduce the interest resulting from the delay.
This is an administrative act during the processing of a case that
involves the loss of records or the exercise of judgment or discretion
concerning the management of personnel. A decision concerning the
proper application of federal tax law (or other federal or state law)
is not a managerial act.
A revenue agent is examining your tax return. During the middle of
the examination, the agent is sent to an extended training course. The
agent's supervisor decides not to reassign your case, so the work is
unreasonably delayed until the agent returns. Interest from the
unreasonable delay can be abated since both the decision to send the
agent to the training class and not to reassign the case are
How to request abatement of interest.
You request an abatement (reduction) of interest on Form 843. You
should file the claim with the IRS service center where you filed the
tax return that was affected by the error or delay. If you do not
remember the service center where you filed that tax return, send your
claim to the service center where you filed your last tax return.
If you have already paid the interest and you would like a credit
or refund of interest paid, you must file Form 843 within 3 years from
the date you filed your original return or 2 years from the date you
paid the interest, whichever is later. If you have not paid any of the
interest, these time limitations for filing Form 843 do not apply.
Generally, you should file a separate Form 843 for each tax period
and each type of tax. However, complete only one Form 843 if the
interest is from an IRS error or delay that affected your tax for more
than one tax period or for more than one type of tax (for example,
where two or more tax years were being examined). You do not have to
figure the dollar amounts of interest that you want lowered.
If your request for abatement of interest is denied, you can appeal
the decision to the IRS Appeals Office.
Failure to abate interest may be reviewable by Tax Court.
The Tax Court can review the IRS' refusal to abate (reduce)
interest when all of the following requirements are met.
- You have filed a request for abatement of interest (Form
843) with the IRS.
- The IRS has not denied your request for abatement before
July 31, 1996.
- The IRS has mailed you a notice of final determination or a
notice of disallowance.
- You have filed a petition for review of failure to abate
interest under Code section 6404 with the Tax Court within 180 days of
the mailing of the notice of final determination or the notice of
You must also meet the following requirements.
- For individual and estate taxpayers -- your net worth
must not exceed $2 million as of the filing date of your petition for
review. For this purpose, individuals filing a joint return shall be
treated as separate individuals.
- For charities and certain cooperatives -- you must not
have more than 500 employees as of the filing date of your petition
- For all other taxpayers -- your net worth must not
exceed $7 million, and you must not have more than 500 employees as of
the filing date of your petition for review.
Abatement of Interest for
Individuals in Disaster Areas
If you live in an area declared a disaster area by the President
after 1996, the IRS will abate interest on income tax for the length
of any extension period granted for filing income tax returns and
paying income tax.
If you were granted an extension, but were charged interest on
income tax owed during the declared disaster period, the IRS can
retroactively abate your interest. To the extent possible the IRS can
do the following.
- Make appropriate adjustments to your account.
- Notify you when the adjustments are made.
- Refund any interest paid by you where appropriate.
For more information on disaster area losses, see Disaster
Area Losses in Publication 547,
Casualties, Disasters, and
Offer in Compromise
In certain circumstances, the IRS will allow you to pay less than
the full amount you owe. If you think you may qualify, you should
submit your offer by filing Form 656, Offer in Compromise.
The IRS may accept your offer for any of the following reasons.
- There is doubt about the amount you owe (or whether you owe
- There is doubt as to whether you can pay the amount you owe
based on your financial situation.
- An economic hardship would result if you had to pay the full
- Regardless of your financial circumstances, payment of the
full amount owed would harm voluntary compliance by you or other
If your offer is rejected, you have 30 days to ask the Appeals
Office of the IRS to reconsider your offer.
Generally, if you submit an Offer in Compromise, the IRS will delay
certain collection activities. The IRS usually will not levy (take)
your property to settle your tax bill during the following periods.
- While your Offer in Compromise is being evaluated by the
- For 30 days immediately after the offer is rejected.
- During any period that your timely-filed appeal is being
considered by Appeals.
Also, if the IRS rejects your original offer and you submit a
revised offer within 30 days of the rejection, the IRS generally will
not levy your property while it considers your revised offer.
For more information about submitting an offer in compromise, see