The client receives a contact letter scheduling conference. Before the conference, the IRS
requests documents, known as Information document requests, IDR. There are three things
that could be requested with IDR general records, transfer pricing documentation, and
answers regarding transactions in question.
After completion of the field exam, the Notice of Proposed Adjustment (NOPA) Form 5701,
which provides a summary of the proposed adjustment, is issued. Typically form 886-A can
accompany the NOPA. Upon receipt of the NOPA, the client can agree with the adjustment,
disagree with the adjustment, or provide additional information to resolve the issue. If it
cannot be resolved during the exam it is then escalated to the Office of Appeal. There will be
a 30-day letter issued stating the IRS’ stance on the matter and the client has 30 days to
protest this. If the client does not protest within the 30-day time frame, the IRS will
automatically issue a 90-day notice. The 90-day notice is known as a Statutory Notice of
Deficiency, which advises the client that since there was no response within the allotted 30
days, then the IRS assessment applies. b Once the 90-day notice is issued the client can pay the
proposed tax and sue for a refund or petition the tax court for redetermination of the
deficiency.
A notice of proposed adjustment is issued when there is a discrepancy between the IRS and
your tax returns, either from information being reported differently from other sources, such
as investment statements, than what the taxpayer reported, from an audit, or even from an
error on the IRS’s end. After the NOPA has been issued, the taxpayer either agrees or
disagrees with the adjustments; if they agree, they fill out the response form agreeing to the
changes and remit the payment (or accept the refund). If they disagree, they will fill out the
section stating they disagree and include a written response with supporting documentation
stating why they disagree. If resolution cannot be determined, the taxpayer can appeal the
adjustment with the court of appeals. b These should be done within 30-days of the date of the
NOPA.
I have not dealt with an audit, personally, but I have assisted the CPAs with responding to
CP2000 notices. We had a client receive a CP2000 stating they owed additional tax. We
requested a transcript of the tax return to determine what the discrepancy was between what
the IRS calculated and what we filed. The client received a Form K1 from their brother’s
estate with a section 1411 adjustment so the income would not be subjected to NIIT as it was
from his brother’s retirement plan. We drafted a response to the IRS disagreeing with their
adjustment and included a copy of their notice and the K1 with the section 1411 adjustment. b b
A NOPA is a notification that the IRS will issue if they and the taxpayer cannot agree on the
IRS’s proposed changes to the tax return in question. If the taxpayer agrees with IRS on the
changes, then no issue exists and no NOPA will be issued.
The IRS will conduct a Large Business and International Examination Process and attempt to
resolve issues with the audit prior to issuing a NOPA. As IRS (n.d.) explained, “There is a
greater likelihood that the taxpayer and LB&I will benefit in terms of resource utilization and
tax certainty when the parties have open and meaningful discussions of the issues throughout
the examination process” (IRS, n.d.) The IRS attempts to communicate back and forth during
each step of the examination process, which makes things easier all around, and would
hopefully lead to a peaceful resolution. (Karter, n.d.).
Prior to issuing a NOPA, the LB&I team explains the tax laws used to arrive at their
adjustment amounts, along with their reasoning. Once the IRS issues a NOPA, which is a
notice alerting the taxpayer that they will be making an adjustment to the taxpayer’s return,
the taxpayer has a reasonable amount of time to respond as agreed upon between the taxpayer
and LB&I team.
Noticed of Proposed Adjustment, NOPA, is issued when there is a discrepancy between
information provided by the taxpayer on tax return versus what data reported to the IRS by
employers, banks, and payers. Taxpayers’ responsibility is to read the letter carefully, review
all the presented evidence, and respond to the IRS within a timely matter (30 days/ extension
can be granted) by expressing an agreement or filing a protest/ requesting a hearing at IRS
Appeals. Nonetheless, before an official NOPA is issued, a draft Form 886-A is prepared,
which contains a written acknowledgment of the facts. The purpose of this document is to
ensure the issue team considers all important facts before a final tax determination is made.
This can be achieved by cooperating with the taxpayer, discussing disputes, as well as
presenting tax positions on the examined issues. A taxpayer’s disputes, if applicable, are then
reviewed by the issue team, and its position is listed on 886-A as an agreement or a
disagreement. The issue manager, on the other hand, reviews positions of both sides,
determines if the issue can be resolved at the examination level, and checks 886-A for
accuracy and completeness before signing Form 5701. A reasonable timeframe for responses
to NOPAs is also agreed upon unless a standard response date for all NOPAs is determined at
the opening conference. If the taxpayer does not reply by the agreed response date, the issue
manager has a right to inquire about the reasons for the delay. The case manager and issue
manager do also cooperate on penalty assessment. However, there is a penalty policy in place
to ensure its proper application and reversal of penalty assessment if sufficient information is
presented to prove it was used inadequately. If the taxpayer does not agree with the audit
results, the case can be brought to U.S. Tax Court (IRS, 2021).
One of the clients of the company I have worked for was a single member LLC who provided
services as a subcontractor and got multiple forms 1099-Misc. for the work. IRS incorrectly
scanned forms 1099-Misc. submitted by one of the payers without recognizing a comma
between the number reported and the remaining zeros for each of the recipients thinking the
amount made was 100 times more. In addition, the taxpayer did not include income from two
other payers as the forms 1099-Misc. we are not received. After careful review of the notice
sent by the IRS, the taxpayer replied in a timely manner and explained that there was an error
in reading the total reported to the IRS, for which the paper copy of the form 1099-Misc. was
attached. As far as the other two forms, the Taxpayer took full responsibility and paid the
amount due stated in NOPA including interest and penalty.
An example of a court case that involved NOPA followed by a Notice of Deficiency is
Thomas Spielbauer vs. Commissioner of Internal Revenue. The Notice of Deficiency was
issued for the 2011 tax period stating an income tax deficiency based on adjustments to self-
employment tax. The taxpayer filed a petition with the Court to dispute charges while his
bankruptcy case was still pending. The Court dismissed the petition as it was filed in violation
of the automatic stay provisions of 11 U.S.C. § 362(a)(8). Once the Internal Revenue Service
filed a proof of claim in petitioner’s bankruptcy case and listed 2011 federal tax liabilities as
an unsecured priority claim, the Bankruptcy Court converted petitioner’s bankruptcy case
from a Chapter 11 to a Chapter 7 bankruptcy and granted a discharge under 11 U.S.C. § 727.
A debtor’s discharge under 11 U.S.C. § 727 did not include debts for income tax which
became due within three years before the date the bankruptcy was filed, income tax assessed
within 240 days of the date the bankruptcy was filed, and income tax not assessed before the
bankruptcy was filed but still assessable thereafter. As a result, the taxpayer did not file a new
petition with the Court with respect to the Notice of Deficiency for tax year 2011 while the
respondent assessed the additional tax, penalty, and interest set forth in the Notice of
Deficiency (Dawson, 2023).
Resources:
DAWSON. (2023, April 5). THOMAS SPIELBAUER, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent. Docket No. 3422-22L.
IRS. (Updated 2021, September 23). 4.46.4.11.
Karter, LLM, P. (n.d.). How long does an IRS audit take? CPA now.
https://www.picpa.org/articles/cpa-now-blog/cpa-now/2020/11/16/irs-audit-process-what-
you-need-to-
know#:~:text=The%20IRS%20can%20propose%20an,of%20Proposed%20Adjustment%20(
NOPA).
IRS. Topic No. 652, Notice of underreported income – CP2000.
https://www.irs.gov/taxtopics/tc652 b
IRS Audit Survival Guide: Navigate the IRS examination process (hbepc.org)
