A notice of proposed adjustment (NOPA) is a notice issued by the IRS when there is a
material difference between the tax due that is calculated by the taxpayer and the tax
due generated by those issuing a W-2 or 1099 (whether it be a 1099-INT, MISC, DIV,
etc.). NOPAs can result in an additional tax payment from the tax payer, as well as a
refund being issued to the taxpayer. A NOPA is not necessarily negotiable. Once issued,
the taxpayer can agree or disagree with the notice. If they disagree, they will need to
respond to the IRS with support as to why they think the NOPA calculation is wrong. If
the IRS rejects the taxpayer’s response, the taxpayer can make an appeal.
I do not personally have any experience with a NOPA situation. In my research, I found
the following case.
In the case Sunfish Cove, LLC, Marlin Woods Capital LLC, Tax Matters Partner V.
Commissioner of Internal Revenue, Sunfish Cove was an LLC that was able to purchase a
large sum of land due to a contribution from its sole member. Sunfish Cove allowed the
Atlantic Coast Conservancy, Inc (ACC) an open space conservation easement, which
basically means that the ACC can have interests in the land while limiting future
development to preserve the area and its resources. Sunfish cove then donated “a fee
simple interest”, or absolute ownership, in the land to ACC. Sunfish Cove took a
charitable contribution deduction for the donation of the easement in the amount of
$12.5 million. In an IRS examination, it was determined that the $12.5 million
distribution was materially misstated as compared to other source documents received
by the IRS and a NOPA was issued for the adjustment. Due to the large difference in
amounts, the IRS issued a NOPA to alert the tax payer of the difference and reconcile.
If there is a difference between the information on the filed tax return and what
information is reported to the IRS, then a Notice of Proposed Adjustment (NOPA) is
generated and issued to the taxpayer under Section 4.46. A taxpayer can choose to
appeal the adjustments within 30 days of the notice by asking for the notice to be
withdrawn, presenting additional documents, amending the return, or making an offer in
compromise.
In the 2023 case Braen v. IRS, the plaintiff was issued a NOPA concerning a charitable
contribution or gift of property. The opinion states that the plaintiff must present proof
of the property’s fair market value and be compliant with charitable contribution
regulations. The IRS disallowed the claim of charitable contribution.
A Notice of Proposed Adjustment is sent by the IRS when there is a difference between
what you reported on your tax return and what was reported to the IRS by another
source, such as an employer or a bank. It may result in a refund or a balance due. The
taxpayer is required to respond to IRS within 30 days to request an IRS appeals officer.
A taxpayer may initiate an appeal indicating disagreed adjustments, briefly stating the
reasons for the appeal.
Failure to Pay will have the following implications: -
• Penalty computed after it remains unpaid after the stipulated 21 calendar days
after IRS sends the notice or ten business days if the tax amount you owe is
$100,000 or more.
• The Failure to Pay Penalty rate is 0.5% per month on the tax you did not pay.
• Even one day late counts as one month!
• If an approved payment plan, the penalty rate will be 0.25% per month during
the agreement period.
• If you receive an intent to levy notice and do not pay within ten days of receiving
it, the Failure to Pay Penalty rate is 1% per month till you pay fully.
I work in a small tax office; however, we get our fair share of NOPAs. One of the cases
from 2023 that comes to mind is a letter requesting additional information to process
tax payments. A Small business client filed 1120 electronically and remitted payment for
the amount owed, but the IRS only got the payment without form 1120. A few months
later IRS sent a letter requesting that the customer file a form 1120. The customer came
with a letter, and I submitted an IRS trace number to the IRS, which will research and
apply the unallocated payment to form 1120.
References:
Rupert, T. J., & Anderson, K. E. (2018). Pearson's federal taxation 2023. Pearson.
Braen v. IRS (2023). Retrieved on July 13, 2023 from 0d5fc0d9-ed8e-4c0b-8aee-
6e555b48f570 (ustaxcourt.gov)
4.46.4 Executing the Examination.
Sunfish Cove, LLC Marlin Woods Capital LLC, Tax Matters Partner Petitioner v.
Commissioner of Internal Revenue, Respondent. United States tax Court Washington
DC. March 2020.
