A Revenue Agent Report (RAR) is a key document that details the results of a tax audit
(Kagan, 2020). It will typically include a balance or refund due as a result of the findings.
The taxpayer should sign the RAR if they agree with it, but it is not final until it has been
accepted by the Area Director, Area Manager, Specialty Tax Program Chief, or Director of
Field Operations (IRS).
An RAR is not final if the taxpayer does not agree with the conclusions. Taxpayers can
request an appeal by filing a written protest and mailing it to the IRS address on the letter that
explains the appeal rights (IRS).
According to Jones (2013) “Almost everything is negotiable – even when dealing with the
IRS.” Negotiation with the IRS can be critical if there is lack of supporting documentation or
when the law is ambiguous (Jones, 2013). Negotiations can occur at many different levels,
including during examinations. Successful negotiations can directly impact the outcome of
an RAR when the IRS and the taxpayer work together to work out the items at issue. Some
critical factors in successful negotiations include being prepared, having a good attitude,
keeping your cool, and not giving up too quickly.
Much like our response memo to a revenue agent, the Revenue Agent Report (RAR) is issue
and fact based. Each item in question, and perhaps each code section referenced is addressed
separately, with conclusions based on the overall impact on the tax adjustment(s) proposed.
Much like the NOPA response on Form 5701, the RAR is not the final determination of audit
findings. There is still a path for negotiation and appeals.
Even before the examination fully commences, when the first notice and information
document request is received, it is important to communicate with our taxpayer clients in a
positive manner. Hopefully, we have anticipated this request as a "what if they ask about this
item after we file this tax return? Did we ask the client to provide support documents in case
we need to justify this?" Also, maintaining the positive attitude will install confidence in the
client and let the revenue agent that ultimately our goal is the same - for the correct tax to be
collected. Personally, I do not want my clients to pay more taxes than they must, but I want
them to pay what they owe. If I am friendly and helpful to the revenue agent, they will more
likely be friendly and helpful to me too. Ideally, the early communications can resolve the
issues in question without having to pursue appeals or litigation.
A RAR is prepared on Form 886-A, and it is detailed with facts of the taxpayer's case,
relevant tax law (including Revenue Code, Regulations, Revenue Rulings and Revenue
Procedures). In my work with tax clients, we have two clients currently in IRS examination,
and we received the RAR for one of them not too many days ago. Unlike the sample NOPA
that we worked with in this class, the Form 886-A we received in real life is 36 pages long!
Although, the tax issue is only related to one charitable contribution claimed by the taxpayer.
Internal Revenue Manual Part 4, Chapter 10, Section 8 details the process for revenue agents
to follow in preparing audit examination reports, including the RAR. Part of the duties of the
taxpayer representative is to understand the audit reports, but also to understand the revenue
agent's process in preparing the reports.
Tax audit examination is just one part of our tax system, and not every taxpayer has to
experience this part. When (and if) they do, as a preparer and representative, it is important
that I understand the process to guide them through successfully.
The Revenue Agent’s Report (RAR) is considered an essential document as it provides
information on the examiner's audit findings, states the amount of additional tax liability or a
refund, and illustrates how the tax liability was computed. It presents all the applied
procedures and performed tests based on which the conclusion was reached. In general, Form
4549 (Income Tax Examination Changes) shows changes to income, credits, and deductions
proposed by the examiner. If a taxpayer agrees with the audit findings included in the RAR,
he/ she needs to sign the report and “include a statement that the report is subject to the
acceptance of the Area Director, Area Manager, Specialty Tax Program Chief, or Director of
Field Operations” (IRS, 2022). In all unagreed cases, Form 4549 is accompanied by Form
886A that includes facts, laws that support the position, government’s position, taxpayer’s
position, and conclusion, which comments on the position taken by the taxpayer.
Initial interaction between a representative and/ or a client and the revenue agent is
extremely important as it “generally sets the scope and tone for the audit” (Jones, 2013). In
other words, the person who deals directly with the agent should expose a high level of
cooperation, competence, politeness, and confidentiality to gain agent’s trust, establish
credibility, and show due care. Regardless of the interactions, the representative and/ or the
client himself/ herself do not have to agree to all the adjustments proposed by the agent. They
should always use experience, proper communication, preparation, and presentation to win
the case. For example, memos issued to the IRS should be positive and tell why the facts
and/or law are in Favor of the client rather than arguing without proper references to tax
authorities.
The RAR decision is not final. Taxpayers may still challenge the findings in tax court
proceedings. If the taxpayer does not reach an agreement with the revenue agent, there is an
option to request a conference with the manager of the agent conducting examination. If the
issue remains unresolved at the audit level, the taxpayer will receive a 30-day letter and may
request an appeals conference, which requires preparing a protest. In case of unsuccessful
determination, the taxpayer may file a petition in the United States Tax Court without paying
the tax or pay the tax, and file a claim for refund, and sue the United States for a refund in
either the United States District Court or United States Claims Court. Contrary, if the taxpayer
agrees to the audit findings, he/ she is required to sign both Form 870, Waiver of Restrictions
on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment and
Form 4549, Income Tax Examination Changes to give up the right to go to Appeals or the
United States Tax Court. If the taxpayer pays the tax upon signing the Form 870 waiver,
interest accrues on the tax deficiency from the due date of the return through the payment
date, ceases to accrue 30 days after the taxpayer signs the waiver, and begins to accrue again
when the IRS issues a notice and demand for payment. However, the IRS charges no
additional interest if the taxpayer pays the tax due within 21 days of the notice (ten days for
$100,000 or more) (Rupert, Anderson, Hulse, Franklin, 2023).
Relevance
Revenue Agent Reports (RARs) are critical documents that provide a thorough understanding
of adjustments and the calculation of tax liability. Workpapers are written records that
document the examination's procedures, tests, information obtained, and conclusions.
Examiners must ensure that these reports are accurate. Both documents are required for the
examination and to back up the audit findings.
Negotiation
Being prepared is crucial in negotiations, involving knowledge of the case's facts, Internal
Revenue Code, Regulations, Revenue Rulings and Procedures, Internal Revenue Manual,
Circular 230, and ethical requirements. A network of professionals can help discuss the case.
Preparation also involves educating clients on record types and organization, helping them set
up good procedures and systems, which can lead to new business and representation before
the IRS (Internal Revenue Service).
Having a tax representative present during negotiations with the IRS is crucial as they possess
knowledge of the case's facts and tax laws, as well as the appropriate information to provide
and what not to share based on relevance and materiality.
Final Decision
Although the RAR (Revenue Agent Report) is not the final decision of the revenue agent, the
taxpayer's response to the report will prompt the agent to decide whether to file an Agreed
Report or an Unagreed Report. When an agreement cannot be reached, the agent must
transmit the no-change with adjustments examination report using Letter 950-F and provide
the taxpayer with the option of appealing.
Options
Up to three tax years may be included in a regular agreed report (Form 4549). RARs must be
signed by the taxpayer and include a statement that the report is subject to approval by the
Area Director, Area Manager, Specialty Tax Program Chief, or Director of Field Operations.
In general, unagreed case report forms are identical to agreed case report forms. Examining
non-taxable returns is one of the exceptions. All unresolved cases necessitate written
comment on:
The involvement of the Team Manager in the examination of the validity of the issues
involved, as well as a statement about whether a closing conference was held with the
taxpayer.
Form 886-A is a written explanation of adjustments in unresolved cases that includes a
worksheet for detailed computations. It includes facts such as the activities of the organization
or plan, laws, the government's position, the taxpayer's position, and the conclusion.
Regardless of the number of years examined, the form covers three years. The taxpayer’s
position must be in writing, and the conclusion should include comments on it. After
considering all factors, the proper tax liability or service action should be maintained.
Regardless of the number of years examined, the form is designed to cover three years.
A revenue agent’s report (RAR) is a report that explains the outcome of an IRS audit,
including the calculations the IRS used when calculating back-taxes and penalties. It provides
a clear understanding of how the IRS came to their results.
When an RAR is issued, the IRS notifies state tax agencies. If the federal government changes
the taxpayer’s tax liability, the states require that an amendment be issued within 90 days of
the IRS audit. While cooperation with the IRS is always recommended, it likely will not alter
the outcome of the RAR unless further documentation and proof of accuracy is provided for
the tax return. Providing all relevant information relating to the return early on will assist the
IRS audit in moving quickly and accurately, and if the information provided was presented
accurately and legally within the tax return, will provide the taxpayer with less of a chance of
penalties and fees.
The taxpayer, however, does have the right to challenge the RAR if they do not agree with the
results. They can do this by submitting a formal appeal to the IUS Tax Court or by paying the
new tax amount and taking legal action for a refund. The deadline for appeal is 30 days. The
Revenue Agent’s Report (RAR) is of high relevance in the audit process. A Revenue Agent’s
Report fundamentally captures the outcome and findings pertaining to an Internal Revenue
Service (IRS) audit. It highlights the amount of refund or deficiency that is found that the
taxpayer must receive or is owed. The report adds value to the audit process since, based on
the information, the tax liability of a taxpayer is likely to get altered (Internal Revenue
Service, n.d.).
Effective negotiation and cooperation with the IRS at an early stage in the audit process can
influence the ultimate outcome of the Revenue Agent’s Report. By working in partnership
with the agent, a taxpayer can ensure that they can provide the necessary documentation and
explanation to justify their stance pertaining to the tax amount. In case any kind of
discrepancy in tax payment has been found by the agent, the active cooperation by the
taxpayer can ensure that they can provide additional details and information regarding the
matter or make appropriate corrections in a timely manner.
The decision that is expressed in the RAR is not final. In case the taxpayers do not agree with
the decision that has been arrived at in a Revenue Agent’s Report, they have the right to
disagree with it. The outcome that is captured in the report fundamentally highlights the
findings that have been arrived at by the revenue agent. Taxpayers have the option to agree or
disagree with RAR. The decision that has been made in an RAR can be final (Nessa et al.,
2020) only if the taxpayer agrees to the same and they do not challenge or express their
disagreement with the RAR decision within the suitable time.
Taxpayers have several options in case they agree or disagree with an RAR. In case they
agree with the RAR, they need to sign the report, which is indicative of the fact that the
decision in the RAR is final. Based on the findings and the final decision, they may have to
pay an additional tax amount. In case taxpayers disagree with the RAR decision, they have
the option to request for a conference with the IRS Appeals Officer so that the specific dispute
can be sorted in an amicable manner. Another option involves a mediation with the IRS. They
also can challenge the RAR decision by filing a formal protest.
Reference
Nessa, M., Schwab, C. M., Stomberg, B., & Towery, E. M. (2020). How do IRS resources
affect the corporate audit process? The Accounting Review, 95(2), 311-338.
Revenue agent reports (RARS). Internal Revenue Service. (n.d.-b).
https://www.irs.gov/businesses/revenue-agent-reports-rars
The Revenue Agent's Report (RAR) holds significant importance as a fundamental element
within the audit procedure for taxpayers undergoing an audit by the IRS. The RAR is a
written document produced by an IRS revenue agent who has conducted an audit. This report
provides the agent's findings and conclusions about the taxpayer's tax obligations during the
audited timeframe. The RAR is relevant to the audit process because it serves as the official
record of the IRS's examination and findings. It outlines any adjustments made to the
taxpayer's reported income, deductions, credits, or other tax-related items and determines the
amount of tax owed or refund due.
Engaging in negotiation and collaboration with the IRS at an early stage of the audit process
can impact the results of the RAR. Taxpayers are advised to exhibit a cooperative and
transparent attitude during the audit procedure, as their participation might effectively reduce
the magnitude of any subsequent modifications. Moreover, the RAR can undergo changes or
revisions if the taxpayer can furnish substantiating information that contradicts the initial
determinations made by the IRS agent.
It is important to note that the decision expressed in the RAR is not final. Taxpayers have
certain rights and options if they agree or disagree with an RAR.
Taxpayers can appeal a RAR determination if they disagree with the agent's findings. The
first option is to request an informal conference with the Revenue Agent's Group Manager to
discuss the audit and provide additional evidence.
Suppose the case is settled at the audit level. In that case, the client must sign Form 870
(Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance
of Overassessment) or Form 4549 (Income Tax Examination Changes). These documents
waive the client’s right to go to Appeals or the United States Tax Court.
If the taxpayer cannot reach a resolution with the Revenue Agent, they will get a
correspondence known as the 30-Day Letter. This letter provides the taxpayer with the
opportunity to request an Appeals conference. Completing this task necessitates formulating a
comprehensive protest to present the taxpayer's argument. If the case has been adequately
prepared during the examination phase, a significant portion of the tasks required to organize
the protest will have already been completed. Given the expansive jurisdiction of Appeals in
resolving issues, it is probable that the client may obtain certain concessions during the
Appeals process.
Suppose the taxpayer's Appeals process yields an unfavourable outcome. In that case, the
taxpayer can initiate a petition in the United States Tax Court, exempt from the obligation to
pay the tax. Alternatively, the client can remit the tax payment, submit a claim for
reimbursement, and initiate legal proceedings against the United States for a refund in either
the United States District Court or the United States Court of Federal Claims. Effective
communication, meticulous preparation, and proficient presentation of facts significantly
contribute to the taxpayer's likelihood of success during the audit process.
A Revenue Agents Report is a document, completed by an IRS examiner, that accurately
details the findings of an audit. It includes a detailed explanation of any adjustments made,
including how the adjustments were computed. In addition to the RAR, IRS examiners also
keep workpapers which include procedures used, test performed, information received, and
the conclusions reached. RAR’s are considered extremely important because they are formal
forms of communication between IRS examiners and taxpayers.
Negotiations and cooperation with the IRS early in the audit process can greatly influence the
outcome in the RAR. To begin, it is important to always be polite during the audit process and
conduct yourself in a professional manner. Honesty with the IRS examiner is also an
important factor. Lastly, knowing the law applicable to your case or hiring a tax professional
can also greatly influence the outcome in the RAR.
Taxpayers have the option of agreeing or disagreeing with a RAR. If a taxpayer agrees with
the RAR, they can simply pay the taxes due. In addition, a taxpayer's signature is required, if
a taxpayer agrees with the RAR. If a taxpayer disagrees with the findings of a RAR, they may
file a formal protest with the IRS Office of Appeals by appealing to the United States Tax
Courts. Taxpayers may also decide to pay the additional tax accessed up front, but then sue
for a refund.
The Revenue Agent's Report (RAR) summarizes conclusions from thoroughly examining
taxpayers' financial records and tax compliance and is essential in IRS audits. The details of
proposed changes to reported income, deductions, credits, or other tax issues shape the IRS's
position on future tax liabilities or refunds. The IRS bases its decision on tax liabilities or
refunds based on the taxpayer's financial information and compliance with tax regulations in
this report, which is the central component of the audit process.
Indeed, early negotiation and collaboration with the IRS during the audit process might affect
the result noted in the RAR. Tax experts can efficiently handle differences, make
clarifications, and present supporting information to the revenue agent by communicating
openly and honestly with them. In addition to fostering a good working relationship, this
proactive strategy allows the taxpayer to explain their case and sway the agent's view before it
is completed in the RAR.
It is crucial to remember that the decision stated in the RAR may not be the final one. The
recommended modifications are open for taxpayers to accept or reject in their response to the
RAR. If the taxpayer is on board, they should quickly sign the report admitting the
adjustments, which will advance the audit process. In contrast, if the taxpayer disagrees, they
have other tools to contest the conclusions, including asking for an administrative appeal,
providing more proof, or participating in mediation.
The Revenue Agent's Report (RAR), which compiles the IRS auditor's conclusions and
suggested corrections, is crucial to the audit procedure. Early discussion and collaboration
during the audit can impact the decision provided in the RAR. Although the outcome of the
RAR is not final, it does represent a crucial turning point where taxpayers can decide whether
to accept or challenge the IRS's findings, using the appropriate avenues to settle problems and
guarantee a just tax assessment.
References:
Kagan, J. (2020). Revenue Agent’s Report. Revenue Agent's Report (RAR)
(investopedia.com)
IRS. Revenue Agent Reports (RARs). Revenue Agent Reports (RARs) | Internal Revenue
Service (irs.gov)
Jones, L. (April–May 2013). Negotiating with the IRS at the audit level. Journal of Tax
Practice & Procedure, 15(2), 5–8.
IRS.GOV (Updated on 2022, November 7). Revenue Agent Reports (RARs).
Rupert, T., Anderson, K., Hulse, D., & Franklin, M. (2023). Pearson’s federal taxation 2023
comprehensive. Pearson Education, Inc.
IRS. (n.d.). Requesting an appeal. Retrieved September 5, 2023, from irs.gov:
https://www.irs.gov/appeals/preparing-a-request-for-appeals
IRS. (n.d.). Revenue agent reports (RAR). Retrieved September 5, 2023, from Irs.gov:
https://www.irs.gov/businesses/revenue-agent-reports-rars
Jones, L. (April–May 2013). Negotiating with the IRS at the audit level. Journal of Tax
Practice & Procedure, 15(2), 5–8.
Kagan, J. (2020, October 31). Revenue agent's report. Retrieved from Investopdia.com:
https://www.investopedia.com/terms/r/rar.asp
