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. a
The purpose of the NOPA is to provide a taxpayer with a computation of proposed adjustments to
their tax return. a If the taxpayer agrees, they sign and return the agreement forms. a 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. a 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). a a a
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. a 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. a The taxpayer disagreed with the NOPA
because the 1099-R should have been issued to her deceased husband, who filed a separate return.
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%20agreement
%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%A7%20621
3%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/22winspr-
prp-lesser-liquidations/
