An issuance of a Notice of Proposed Adjustment is a part of the IRS audit process, which
consist of the following steps:
An initial contact letter that a taxpayer receives explains that his/her tax return was selected
for an audit and contains a list of the specific items reported on the tax return that are being
questioned by the IRS, with a request that the taxpayer provides documentation to support the
identified items. The primary method of obtaining information for the IRS is through issuing
Form 4564, Information Document Request (IDR). IDRs are required to be issue-focused and
contain a statement of the issue. However, IDRs issued at the beginning of an examination to
request basic books and records and general information about a taxpayer’s business are not
subject to the requirement to state an issue (Sec. 4.46.4.2(2)). As the case progresses, the IRS
may issue additional IDRs. As Sec. 4.46.4.7(1) states, IDRs encourage collaboration between
the taxpayer and the IRS to discuss and determine the necessary information for proper issue
development. In simple words, IDRs are used by the revenue agents to understand the
taxpayer’s position and develop factual record. For this discussion, I am going to assume the
taxpayer submitted the documentation and the revenue agent completed the field
examination. The next step in the audit is a Notice of Proposed Adjustments (Form 5701),
which represents the IRS’s view of the facts and its analysis of the issue (“we disagree with
your position because…”). The form includes the following: tax year at issue, adjustment
amount, account or tax return line, IRC section as a primary authority, and a summary of
proposed adjustment(s). Form 5471 also contains the taxpayer’s anticipated response date.
Consequently, the taxpayer has an opportunity to explain his/her position and present any
additional legal authorities to support the case. Per Sec. 4.46.4.13.3(1), the taxpayer’s
response should describe in detail the legal position on which the taxpayer relies.
Using an example of an audit from your work experience or your research, explain the
circumstances that led the IRS to issue a NOPA.
Bausch Health Companies Inc. (Bausch Health) disclosed in a security filing on September
30, 2021, that it had been issued an IRS notice of proposed adjustment (NOPA) which
contested the validity of a capital loss incurred in 2017.
The 10-Q report for the third quarter of 2021 by Bausch Health revealed that the NOPA is a
consequence of an internal restructuring undertaken by the company in 2017, specifically
through a Granite Trust transaction. This transaction led to a capital loss for Bausch Health,
referred to as the 2017 Transaction. At the time of the submission, Bausch Health had not
undergone an assessment, although it anticipated receiving a notice of proposed tax
deficiency. Bausch Health expressed its intention to vigorously uphold its stance and
expressed confidence in its ability to claim the deduction for the loss.
The disclosures pertaining to NOPA and the 2017 Transaction involve two separate categories
of nonrecognition events, specifically those that are not subject to taxation. The utilization of
the term "Granite Trust transaction" by Bausch Health indicates that the company approached
the transaction as the dissolution of a regulated corporation in accordance with section 332.
Furthermore, the interpretation of the IRS's stance by Bausch Health pertains to section
368(a)(1)(C), which states that the exchange of a significant portion of a target corporation's
assets exclusively for voting stock in the acquiring corporation (or its parent) qualifies as a
tax-exempt reorganization, specifically referred to as a C reorganization. If the transaction
that took place in 2017 were to be classified as either a section 332 liquidation or a C
reorganization, it would qualify as a non-recognition transaction, thereby disallowing the
recognition of the capital loss for Bausch Health.
Also, explain, in layman's terms, the purpose of a NOPA and whether issues listed in the
NOPA are negotiable.
Section 7602 grants the IRS the authority to conduct audits and examinations of taxpayers.
Section 6213 allows the IRS to make changes to a tax return.
The process for conducting audits is outlined in Part 4 of the Internal Revenue Manual (IRM).
The IRM is not a law but rather a thorough guide for IRS personnel. Additionally, it proves
beneficial for taxpayers and their representatives in gaining a thorough understanding of the
procedural aspects, such as response obligations and avenues for appeals.
A NOPA, also known as IRS form 5701, is to notify taxpayers about proposed adjustments
the IRS intends to make to their tax returns and provide instructions on how to dispute or
agree with the proposed changes. This notice is sent when the IRS identifies discrepancies or
errors in the taxpayer's reported income, deductions, credits, or tax liability during an
examination or audit. It allows the taxpayer to review the proposed adjustments and provide
any additional information or arguments to support their position. The purpose is to initiate a
dialogue between the taxpayer and the IRS to resolve disputes and reach a fair and accurate
resolution regarding the taxpayer's tax obligations.
The issues listed on a NOPA are negotiable. Taxpayers have the right to dispute the proposed
adjustments and provide additional information or arguments to support their position. This
can be done through various channels, such as responding to the notice, providing supporting
documentation, or requesting a meeting with the IRS. The taxpayer and the IRS can engage in
negotiations to resolve any disagreements and reach a mutually acceptable resolution.
A Notice of Proposed Adjustment, or NOPA, is part of the execution phase of IRS’s audit
process. The purpose of the NOPA is to provide a taxpayer with a computation of proposed
adjustments to their tax return. If the taxpayer agrees, they sign and return the agreement
forms. If they don’t agree, they can submit a request for appeal or protest by the due date
listed on the NOPA (IRS, 2022).
IRM 4.46.4.2(5) states that the IRS will solicit an acknowledgement of the facts from the
taxpayer to resolve differences or disputed facts. Under IRM 4.46.4.11(4), the issue team
should work with the taxpayer to develop all relevant facts and is expected to communicate
with the taxpayer throughout the process to resolve any disputes before issuing a NOPA.
IRM 4.46.4.8(7) states that NOPAs should be issued at the earlier of the preset milestone date,
or when a tax determination is made.
Taxpayers have an opportunity to respond to the NOPA if they have a legal position to
disagree with the proposed adjustments (IRM 4.46.4.13.3). b b b
A few years ago, I worked with a taxpayer that received notice from the IRS advising that her
federal income tax return was being audited. The notice contained a proposed change to the
taxpayer’s return resulting in tax due from income related to a 1099-R that was issued to the
taxpayer, but the income was not claimed on her return.
The notice provided the taxpayer with instructions on what to do if she either agreed or
disagreed with the proposed changes, and a deadline to respond. b The taxpayer disagreed with
the NOPA because the 1099-R should have been issued to her deceased husband, who filed a
separate return. b She attempted to get the payer to correct the 1099-R to no avail.
Documentation and an explanation were provided timely to the IRS in response to the NOPA.
The process took a long time, but eventually through written and verbal communication the
taxpayer was able to provide the proper support to the IRS, and they eventually agreed with
her position.
The Internal Revenue Service (IRS) can issue a Notice of Proposed Adjustment (NOPA) with
the intention to initiate a formal tax dispute. An example has been presented explaining the
specific circumstances that led the IRS to issue a NOPA. John is a sole trader who operates a
sole proprietorship business. The business receives numerous small-valued incomes from its
customers, which are generally below $ 50. As a result, the sole trader has not filed the
current amount of tax for the last two income years (Inland Revenue, 2022). Based on further
investigation, it is revealed that John’s business has generated substantial income, but he has
deposited a tiny number of deposits into the bank account of the business as income. In such a
scenario, the IRS may decide to issue a NOPA. Before its issue to the taxpayer, the NOPA
must be signed by the issue manager (Internal Revenue Service, 2021). After it has been
issued, the taxpayer, i.e., John, needs to respond to it within a period of two months.
A Notice of Proposed Adjustment refers to an instrument that can be used either by the IRS or
taxpayers to start a formal tax dispute. The Internal Revenue Service may issue a NOPA in
case the taxpayer has submitted different information than what is expected by the IRS. By
issuing a NOPA, the IRS basically starts a tax dispute process formally. The fundamental
purpose of the NOPA instrument is to give advice in order to make changes to the tax position
which the issuing party intends to make. It also captures the basis on which the changes need
to be made. In the NOPA, it is vital to include appropriate facts to support the change that the
issuing party wants to be made.
While the NOPA is issued to the taxpayer, it is necessary for the issue team to start early issue
resolution, i.e., as soon as the tax determination has been reached. The amount that has been
proposed in a Notice of Proposed Adjustment is negotiable in nature. Since there exist a few
ambiguous areas in the existing tax code of the U.S., there is a possibility for taxpayers to
negotiate about the amount of tax that they need to pay. The taxpayer as well as the issuing
officer from the Internal Revenue Service need to arrive at an amicable resolution or
agreement on the matter within thirty days.
Reference
4.46.4 executing the examination: Internal Revenue Service. 4.46.4 Executing the
Examination | Internal Revenue Service. (2021). https://www.irs.gov/irm/part4/irm_04-046-
004
Guide for completing NOPA for dispute about unreturned business income. Inland Revenue.
(2022). https://www.ird.govt.nz/managing-my-tax/disputes/when-you-start-the-disputes-
process/guide-for-completing-nopa-for-dispute-about-unreturned-business-income
IRS. (2022, September 19). Letters and notices offering an appeal opportunity. Retrieved
from IRS.gov: https://www.irs.gov/appeals/letters-and-notices-offering-an-appeal-
opportunity#:~:text=You%20receive%20this%20letter%20when,and%20return%20the%20ag
reement%20forms.
Internal Revenue Service. (n.d.). Www.irs.gov. https://www.irs.gov/irm/part4
4.46.4 Executing the Examination | Internal Revenue Service. (n.d.). Www.irs.gov.
https://www.irs.gov/irm/part4/irm_04-046-004
26 U.S. Code § 6213 - Restrictions applicable to deficiencies; petition to Tax Court. (n.d.). LII
/ Legal Information Institute.
https://www.law.cornell.edu/uscode/text/26/6213#:~:text=26%20U.S.%20Code%20%C2%A
7%206213%20-%20Restrictions%20applicable
26 U.S. Code § 7602 - Examination of books and witnesses. (n.d.). LII / Legal Information
Institute. https://www.law.cornell.edu/uscode/text/26/7602
Lesser, J. A. (2022, May 26). Liquidations and C Reorganizations Through the Prism of the
IRS 2021 Audit of Bausch Health’s 2017 Granite Trust Transaction. Www.americanbar.org.
https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/22winspr/22wi
nspr-prp-lesser-liquidations/
References
Sec. 4.46.4.2(2)
Sec. 4.46.4.7(1)
Sec. 4.46.4.13.3(1)
IRS Audit Survival Guide: Navigate the IRS examination process. (n.d.). RSM. Retrieved
from
https://www.hbepc.org/assets/Councils/HoustonBusiness-TX/library/nt-tax-all-
0817_tax-audit-survival-guide_e-book.pdf
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