TAX 700_ Discussion_ Week 2_ Post 1

A Form 5701 NOPA (Notice of Proposed Adjustment) or CP2000 is sent out when a third

party, such as an employer or bank, sends the IRS (Internal Revenue Service) information

different from the tax forms filed. The notice will have a designated period that you can

respond to the letter, but it is usually thirty days (Understanding your CP2000 notice, n.d.).

If you agree with the suggested changes, all you need to do is sign the response form and send

documents. Contact the reported company or person and ask for a corrected document or

statement if the information is inaccurate. If you do not respond by the deadline, you will

receive an SND (Statutory Notice of Deficiency) and be charged the suggested amount

opportunity to appeal, according to the Tax Court's decision in Clay (2019) 152 TC 223”

(Proposed penalty assessment is not "initial determination", 2020).

Internal Revenue Code section 7602 authorizes the examination of records "for the purpose of

ascertaining the correctness of any return, making a return where none has been made,

determining the liability of any person for any internal revenue tax or the liability at law or in

equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or

collecting any such liability." (IRC Sec. 7602).

The Internal Revenue Manual (IRM) Part 4 details the process for IRS agents to carry out

such examinations (commonly called audits). The IRM is not legal statute, rather a guide for

employees of the IRS, and helpful for taxpayers and their representatives to understand the

process, including response requirements and appeals options.

In my work, we are currently representing a C Corporation client for 2020 and 2021 tax

Amendment related to loans made by the corporation that did not report interest income as

might be expected.

changes.

Disagreed: an audit where the IRS has proposed changes and you understand but disagree

with the changes.

The process for IRS to propose changes is the NOPA, or Notice of Proposed Adjustment.

NOPA is provided to taxpayers on Form 5701. Form 5701 has space for each specific issue to

be addressed AND responded to by the taxpayer. As part of the taxpayer response, there is

space to provide additional information that may change the agent's proposed adjustment.

Essentially, the NOPA is the suggested changes to an audit inquiry, but not necessarily the

result. A taxpayer can provide additional information to "negotiate" the proposed adjustments

or move forward with an appeal to the NOPA results.

independent mediator with a resolution expected within 60 days (unlike the 6 months since I

provided records to the IRS agent and still have not received an update). The fast-track

application is Form 14017, but depending on what type of taxpayer is involved, there are

different Revenue Procedures applicable.

A Form 5701 NOPA (Notice of Proposed Adjustment) or CP2000 is sent out when a third

party, such as an employer or bank, sends the IRS (Internal Revenue Service) information

different from the tax forms filed. The notice will have a designated period that you can

respond to the letter, but it is usually thirty days (Understanding your CP2000 notice, n.d.).

higher-level official that the Secretary designates. Code Section 6751(b)(1) “mandates written

supervisory approval for the initial determination of a penalty no later than when a NOD or

formal communication notifies the taxpayer of the penalty determination and gives them the

opportunity to appeal, according to the Tax Court's decision in Clay (2019) 152 TC 223”

(Proposed penalty assessment is not "initial determination", 2020).

Internal Revenue Code section 7602 authorizes the examination of records "for the purpose of

ascertaining the correctness of any return, making a return where none has been made,

determining the liability of any person for any internal revenue tax or the liability at law or in

equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or

collecting any such liability." (IRC Sec. 7602).

The Internal Revenue Manual (IRM) Part 4 details the process for IRS agents to carry out

employees of the IRS, and helpful for taxpayers and their representatives to understand the

process, including response requirements and appeals options.

Regardless of the type of tax return, or the size of taxpayer (individual, small business,

partnership, public corporation), an audit concludes in one of three ways:

No change: an audit in which you have substantiated all of the items being reviewed and

results in no changes.

Agreed: an audit where the IRS proposed changes and you understand and agree with the

changes.

Disagreed: an audit where the IRS has proposed changes and you understand but disagree

with the changes.

The process for IRS to propose changes is the NOPA, or Notice of Proposed Adjustment.

NOPA is provided to taxpayers on Form 5701. Form 5701 has space for each specific issue to

result. A taxpayer can provide additional information to "negotiate" the proposed adjustments

or move forward with an appeal to the NOPA results.

Additionally, if the taxpayer disagrees in full or in part, there is an option to request a "fast

independent mediator with a resolution expected within 60 days (unlike the 6 months since I

provided records to the IRS agent and still have not received an update). The fast-track

application is Form 14017, but depending on what type of taxpayer is involved, there are

different Revenue Procedures applicable.

that involves a NOPA regarding transfer pricing. I thought it was a good case to discuss as it

combines the topics in the first two modules of this class.

In my research, I came across the audit case of Microsoft Corporation conducted by the

Internal Revenue Service in the late 90s and early 2000s. This is a high-profile case that

shifting and tax evasion as presented in section 482. The IRS concluded that Microsoft may

have underpriced these transactions, leading to lower U.S. taxable income.

In response, the IRS issued a NOPA, indicating that it proposed to adjust Microsoft's taxable

income upward. Essentially, in layman's terms, a NOPA is like the IRS saying, "We've taken a

look at your tax returns, and we think you might owe more tax than you've paid. Here's why

we think so, and here's how much more we think you owe." I found it interesting and it is

essential to highlight that the issues listed in a NOPA are not final verdicts. This means that

they are open to negotiation and discussion. Think of it as the IRS opening a dialogue about

the identified discrepancies and expressing its concerns.

In the Microsoft case, the company disagreed with the IRS' proposed adjustments, leading to

negotiations and eventually litigation (Microsoft Corp. v. Commissioner of Internal Revenue,

2002). The case highlighted the significant amounts of money at stake in these audits and the

complex nature of international business taxation. While the NOPA is a serious document that

can signify a significant tax liability, it is essential to remember that it also serves as the

on the form 5701. Note that the form 5701 is provided only for large business and

international businesses. Very often the IRS will also provide form 886-A along with the

form 5701. b Form 886-A will provide a full understanding of the audit trails and include laws

supporting, whereas form 5701 is a summary of form 886-A. The initial response time is

within 30 days; however, the CEP case manager may extend this time. The client must

respond in writing in detail and referencing their legal potion.

Internal Revenue Code section 7602 authorizes the examination of books and witnesses “for

the purpose of ascertaining the correctness of any return, making a return where none has

been made, determining the liability of any person for any internal revenue tax or the liability

at law or in equity of any transferee or fiduciary of any person in respect of any internal

revenue tax, or collecting any such liability”.

return after an audit. A NOPA can be issued to a taxpayer if the IRS has received a financial

document, such as a brokerage statement from an institution, that was not included in the

return. A NOPA can be issued for various reasons that do not always include a difference in

what a taxpayer reported and what was reported to the IRS by an employer, bank, or other

institution. For example, the IRS can issue a NOPA for topics such as charitable contributions

at. The IRS issued the NOPA on Form 5701. The client was given 30 days to respond if they

agree with the proposed adjustment or disagree with it. While in this case, our client agreed

with the NOPA, if they had not responded to it within the 30 days they would have received a

letter of deficiency. A letter of deficiency explains any adjustments that were made and how

the amount of deficiency was calculated. The taxpayer is given the option to agree and pay

the tax liability plus interest and penalties or challenge it in tax court. The taxpayer has 90

days to respond to this letter.

provide documentation they have as to why they disagree with the NOPA. I say it is not

negotiable per se as the taxpayer is not going to sit down with the revenue agent and negotiate

an amount to settle on. This type of negotiation would be seen when a tax attorney would sit

down and negotiate a Revenue Agent Report with the auditor. b

Internal Revenue Code, Section 7602 – Examination of books & witnesses

https://www.irs.gov/irm/part4

Internal Revenue Service - IRS Audits. https://www.irs.gov/businesses/small-businesses-self-

employed/irs-audits#conclude

Internal Revenue Service - Fast Track. https://www.irs.gov/appeals/fast-track

Proposed penalty assessment is not “initial determination.” Thomson Reuters Tax &

Accounting News. (2020, February 24). https://tax.thomsonreuters.com/news/proposed-

penalty-assessment-is-not-initial-determination/

Understanding your CP2000 notice. Internal Revenue Service. (n.d.).

https://www.irs.gov/individuals/understanding-your-cp2000-notice

Internal Revenue Code, Section 7602 - Examination of books & witnesses.

Internal Revenue Service - IRS Audits. https://www.irs.gov/businesses/small-businesses-self-

employed/irs-audits#conclude

Internal Revenue Service - Fast Track. https://www.irs.gov/appeals/fast-track