The Revenue Agent's Report (RAR) stands as a fundamental component of the tax audit
process, providing a comprehensive overview of the IRS's examination findings in relation to
a taxpayer's reported amounts (Internal Revenue Service, n.d.). This document is paramount
in bridging communication between the IRS and the taxpayer, detailing any proposed
adjustments to tax liability.
Relevance of the RAR to the Audit Process:
The RAR offers insights into the audit's outcomes by the IRS agent. Through this report,
taxpayers gain a clearer perspective on potential discrepancies identified by the IRS, granting
an avenue for either addressing or challenging these findings (Internal Revenue Service, n.d.).
Influencing the RAR through Negotiation and Cooperation:
Engagement, transparency, and early cooperation with the IRS can significantly sway the
RAR's outcomes in favor of the taxpayer (Saltzman, 2018). Prompt provision of essential
documentation and early rectification of minor discrepancies can facilitate a more positive
RAR outcome. This proactive approach, paired with fostering an open dialogue, can reduce
potential adjustments and the chance of a prolonged dispute.
Finality of the RAR's Decision:
Though the RAR acts as a formal representation of the IRS's audit findings, its determinations
are not absolute. Taxpayers retain the right to either agree with or contest its conclusions
(Internal Revenue Service, n.d.).
Options for Taxpayers Based on the RAR:
Agree with the RAR: If the taxpayer aligns with the RAR's findings, this leads to the
subsequent process of addressing any owed taxes or securing potential refunds.
Disagree with the RAR: For those contesting the RAR's conclusions, several paths are
available:
Administrative Appeal: Prior to considering litigation, an appeal within the IRS can be
pursued. This involves deliberating disagreements with the IRS Office of Appeals (Internal
Revenue Service, n.d.).
Litigation: In the absence of a resolution through an administrative appeal, taxpayers have the
option of initiating litigation in either the U.S. Tax Court, Federal Court of Claims, or a
Federal District Court (Lederman, 2014).
A revenue agent’s report (RAR) is the IRS’s decision describing the results of an audit in
detail. It will outline any adjustments to income, corrected tax liabilities and any balance due,
which will include penalties and interest as applicable. It is not final, however, and can still be
open to negotiation by appeal. Cooperation and negotiation from the beginning of an audit
can absolutely influence the outcome; at the end of the day, the agents completing these
reports are only human and a positive discourse can give that person reason to provide an
interpretation of the tax law that is more favourable to the taxpayer. I liken this to the notion
that you should always treat those who handle your food kindly lest you find yourself with an
unsavoury consequence – you should always treat those who handle your taxes kindly as well
for the same reason. Kindness costs nothing and will advance any situation to a more positive
outcome. The Revenue Agent's Report (RAR) is very important when it comes to the
auditing process. It contains the findings and results of an audit that is put together by the
IRS. It will include if any taxes are owed back, and in these cases, taxpayers can disagree with
an RAR. If a taxpayer challenges an RAR, they must provide proof of why they are doing so.
All taxpayers must pay back what is owed on an RAR if they do not challenge it, and if they
fail to do so they could get fined or even in some cases face jail time. The decision is not final
in an RAR, that is why taxpayers are allowed to challenge it.
If a taxpayer cooperates with the IRS earlier in the audit process and therefore has nothing
that can backfire on them then they could avoid a bad RAR that may ask for back-taxes.
Being cooperative with the IRS makes the audit process smoother and can allow it to be done
quicker rather than trying to hide or avoid the IRS finding certain things within your financial
statements.
I mentioned in the first week that this class was especially relevant because I have been
working with a partner regarding a couple of clients under audit examination.
One client we feared would have some loans for other investments disallowed and treated as
Stockholder dividends instead. Thankfully, we worked diligently with and for the client, and
with the revenue agent.
The Revenue Agent’s Report (RAR) is a detailed document that describes the IRS examiner’s
audit findings. This detailed report includes how the adjustments made to the taxpayer’s
liabilities were calculated, procedures used, tests performed, and information obtained. Of
course, this also includes the conclusions from the examiner. b This report is called Form 4549:
Income Tax Examination Changes. The bottom line of the report will state whether the
taxpayer has overpaid, underpaid, or paid the correct amount of taxes. If the taxpayer
disagrees with the RAR, they have 30 days to appeal the changes with the IRS Office of
Appeals.
Cooperation early in the audit process can help set the “tone” of the audit as it will make for a
smoother process, making everything go by quicker and easier for all parties involved. By
providing all needed documents early and communicating often can result in more favourable
outcome. Communicating and negotiating often and early can allow for corrections to be
made prior to the RAR and for clarification on issues and provide additional supporting
documents, if needed.
The Revenue Agent Reports (RARs) inform the taxpayer of the adjustments and how the tax
liability was computed. These reports must be accurate and contain all the information
necessary to ensure a clear understanding of the situation. The information in the report
supports the audit results. The report for unresolved cases includes the facts of the case;
applicable laws- codes and regulations; the government’s position; the taxpayer’s position;
and the conclusion.
The RAR is not final and gives the taxpayer a chance to work with the revenue agent to
resolve the issue. The RAR documents the audit process. The taxpayer can negotiate with the
revenue agent to obtain a favourable solution. The taxpayer can use the revenue agent as a
resource and a mediator. The taxpayer can ask the revenue agent questions for clarity and
submit additional documentation that supports their position. Any actions including
negotiations taken by the taxpayer will be included in the RAR. Negotiations could lead to a
lower tax liability. The original calculated determination could be corrected.
If the taxpayer disagrees with a RAR, then the taxpayer can protest formally to the IRS Office
of Appeals division by appealing to the U.S. Tax Court. Once an assessment is paid the
taxpayer may choose to sue for a refund. The taxpayer usually has 30 days to appeal the
changes with the IRS Office of Appeals.
This morning, my partner sent the client the following update:
Reference:
Revenue Agent Reports (RARs) | Internal Revenue Service. (n.d.). Www.irs.gov. Retrieved
September 8, 2023, from https://www.irs.gov/businesses/revenue-agent-reports-rars
The revenue agent’s report (RAR) is important in the audit process because it describes the
agent’s audit findings in details. RAR contains the following sections:
Adjustments to income – this section includes any additional income, a reduction of income,
adjustments to expenses, adjustments to net operating losses.
Corrected tax liability – that is the amount that the auditor believes the client owes based on
the audit findings.
Expenses – these are negative adjustments to the client’s income. If IRS disagrees as to an
item of an expense, it will be listed as a positive number to offset the negative number.
Balance due.
Penalties – this section includes the penalties that the IRS has assessed based on the audit
findings. One of them is negligence penalty.
Interest and total balance – interest is calculated from the date the tax payment was due.
Recommendations – this section includes non-binding recommendations from the agent on
how to resolve the findings.
Additionally, the examiner is required to keep written records (workpapers) that provide the
principal support for the RAR and document the procedures applied, tests performed,
information obtained, and the conclusions reached in the examination.
Negotiation and cooperation with the IRS early in the audit process can influence the outcome
in the RAR. For instance, if a taxpayer is cooperative, prompt, and respectful, the chances for
success increase.
The decision in the RAR is not final. If the taxpayer agrees with the RAR, he or she will be
asked to sign the examination report or similar form (870 or 4549). Once the taxpayer
completes one of these forms, he or she will forfeit the right to appeal or to contest the tax
deficiency at Tax Court. If the taxpayer does not agree with the examination report, he or she
can appeal the IRS decision. If the case is not settled in appeals, then the IRS will issue a
statutory notice of deficiency. At this point, however, the taxpayer can petition the Tax Court
for a redetermination of the deficiency. Alternatively, the taxpayer can pay the tax, then sue
for a refund in Federal District Court or the Court of Federal Claims.
Relevance
The RAR (Revenue Agent Report) is important to the audit process, as it contains pertinent
information such as how the tax liability adjustment was calculated. The revenue agent will
prepare work papers as part of the RAR, which are the notes kept in the audit process that are
used to document findings, information obtained, procedures performed, and it supports the
audit results.
This report is the revenue agent’s reasoning for the stance the IRS is taking on the tax issue
and everything that was used to make the determination should be included in the report,
including requests to the taxpayer for documentation and the results of those requests. This
will give A clear understanding of the facts in the appeal process.
Negotiation
In negotiations with the IRS, it is important to have your tax representative present, as they
know the facts of the case as well as the tax laws. Your tax representative will also know how
to deal with the IRS and what information to provide as well as what should not be shared,
depending on relevance and materiality. b b b b b
Decision
The RAR is not the final decision of the revenue agent, but the taxpayer’s response to the
report will prompt the agent to make the decision to file an Agreed Report or an Unagreed
Report. When an agreement is not secured, the agent must use Letter 950-F, to transmit the no-
change with adjustments examination report and offer the taxpayer the opportunity to go to
Appeals.
Options
IRC 7803 (a) (3) provides many rights for the taxpayer in the audit process, not limited to:
b b (C)the right to pay no more than the correct amount of tax
b b (D)the right to challenge the position of the Internal Revenue Service
b b and be heard
b b (E)the right to appeal a decision of the Internal Revenue Service in an
b b independent forum
References
How to analyse an IRS revenue agent report. (n.d.). Malikowski Tax Law. Retrieved from
https://www.caltaxadviser.com/how-to-analyze-an-irs-revenue-agent-report/
Revenue agent reports (RAR). (n.d.). IRS. Retrieved from
https://www.irs.gov/businesses/revenue-agent-reports-rars
Internal Revenue Service. (n.d.). The Examination (Audit) Process. Retrieved from
https://www.irs.gov/businesses/small-businesses-self-employed/the-examination-audit-
process
Saltzman, E. (2018). IRS Practice and Procedure. Thomson Reuters.
Lederman, L. (2014). Tax Litigation, Tax Controversy, and Tax Compliance. Pepperdine Law
Review, 41(4).
