Running Head: NOPA 1
NOPA Response Paper
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Issue of NOPA by IRS
The Notice of Proposed Adjustment (NOPA) is issued by the Internal Revenue
Service (IRS) after conducting an examination which reveals that a taxpayer has an
outstanding tax liability. The IRS has the sole authority to issue a NOPA which comprises of
a delinquent tax account, the tax amount, the filing period, the interest as well as the penalty
that is due. In case a taxpayer does not agree with the NOPA he has a total of 30 days from the
very date of the NOPA to request an informal conference on the matter. In case no such
request is made by the taxpayer, on the 31st day, the NOPA is considered as the final
assessment (Internal Revenue Service, 2021).
An instance in which a NOPA was issued against a taxpayer involved a local business
entity. The taxpayer filed very low monthly sales tax for the period beginning January 2014
and ending December 2016. In January 2017, a notice of intent was issued for auditing all the
returns of the business for the past three years. A thorough examination was conducted by
involving interviews, tour of business sites and balance sheet analysis to gather evidence
indicating discrepancy in tax payments (Deloitte US). After the thorough examination
indicating that the taxpayer had outstanding tax liability, the IRS issued a NOPA. Prior to its
issue to the taxpayer, the NOPA was signed by the issue manager (Internal Revenue Service,
2021).
A Notice of Proposed Adjustment (NOPA) is a vital instrument that Internal Revenue
Service issues in order to resolve situations where tax liabilities are not met by taxpayers. The
Internal Revenue Service issues a NOPA so that outstanding tax liabilities of taxpayers that
have been determined after a thorough audit and examination can be cleared. 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 (Internal Revenue Service,
2021). The taxpayers must provide appropriate information that can be considered by the
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issue team for continuing, narrowing, expanding, or dropping the concern (Internal Revenue
Service, 2021). The amount that has been proposed in a Notice of Proposed Adjustment is
negotiable in nature. The taxpayer has to provide new information that could result in a
refund. However, it will require a valid informal claim in case there is a nexus with an issue
that has been identified in the examination process. Otherwise, the taxpayer has to make a
formal claim if the information relating to refund is provided after the initial phase for making
informal claim is over (Internal Revenue Service, 2021).
In the current situation involving the client, a number of issues exist as a result of
which the NOPA has been issued. Firstly, the business has failed to substantiate the amount
that has been incurred relating to the lodging, meals and incident expenses for its employee
who was travelling on work. In addition to this, the deduction for meals has been limited to 50
% as per section 274 (n). The company has even failed to differentiate between lodging and
meal expenses which is a key issue since lodging expenses are fully deductible in nature,
whereas in the case of meals, the deduction rules relating to the limitation are applicable.
Decision to Appeal a Tax Adjustment
While making the decision to appeal a proposed tax adjustment made by the Internal
Revenue Service (IRS), it is necessary to carry out a thorough cost-benefit analysis. A diverse
range of factors have to be taken into consideration so that the appeal can be justified.
Role of materiality and CPA/ legal fees
Before making an appeal, the client must consider fees that are charged by Certified
Professional Accountants or legal professionals and materiality aspect (Brackney, 2019). The
fee amount that is charged to the client will give rise to financial implications and hence must
be given importance. There are some professionals who charge contingent fees on the basis of
expected savings on tax deficiency that the professional can help the client to win. On the
other hand, there are some practitioners who charge flat-rate fees due to their use of
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knowledge to help the client solve the matter. In addition to the charged fee, materiality is a
vital consideration. In case the amount totals to a few hundred dollars in comparison to the
revenue that is generated by the firm, it may decide to pay the deficiency, and interest instead
of appealing the IRS decision. For example, if the amount is $ 15,000 and the firm’s revenue
is $ 50,000, it might be regarded as material, whereas if the amount is $ 15,000 and the firm’s
revenue is $ 500,000, it might be regarded as immaterial.
Revenue Procedure 2019-48 is applicable in the client’s scenario since it contains
rules to use a per diem rate for substantiating the amount of an employee’s expenses relating
to lodging, meal, and incidental expenses, or meals and incidents can be reimbursed by the
employer. In the scenario involving the client, IRS Section. 274 (e) (2), or (3) relating to
meals and entertainment expenses are applicable. Section. 274 (e) (2) is related to expenses
for goods, services and facilities to the extent that they are treated like compensation to the
recipient. Section. 274 (e) (3) is applicable for expenses that are incurred by a taxpayer
relating to the performance of services by an employer under reimbursement or other
arrangement for expense allowance. The employer is not offering meals to the employees on
site, and hence the amounts will not be treated as compensation to the employee who is
traveling on company business.
Impact of cost benefit analysis on decision to appeal
A rigorous cost-benefit analysis should be carried out while deciding whether an
appeal has to be filed or not. A taxpayer may decide to appeal without taking the assistance of
a tax professional as it would not give rise to any cost. However, a tax professional has a
thorough understanding of the Internal Revenue Service and how taxation rules work. Hence
by seeking professional help, there is a better chance to determine whether appealing the
decision of the IRS is a viable and feasible option or not. It is advisable for a taxpayer to have
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a representative. For instance, a professional can use his knowledge and expertise in the area
to restrict the scope of the appeal.
Most important factor
From the perspective of a tax practitioner, the most important factor while appealing
an issue is whether a genuine case exists or not. In case the client’s position cannot be
supported by any existing laws, regulations, etc, then a tax professional should not take the
case forward for appeal purpose. Similarly, from the perspective of a client or taxpayer, the
most important factor is performing a cost-benefit analysis. If the adjustment value, penalty,
and interest together are lower than the fee of the appeal, it is more financially feasible for the
taxpayer to make the payment instead of hiring a tax professional for making the appeal. It is
instrumental for a taxpayer to bear in mind that by pursuing the appeal, there is a possibility
that the final adjustment that he may have to pay could be increased. However, pursuing the
appeal is essential for the client so that it can present proof regarding the deductions that it has
made pertaining to the travel, meal and lodging expenses of its employees. By making the
appeal it will not have to make additional payment for which IRS has sent the NOPA.
Percentage of certainty
In order to advise a client to appeal the tax adjustment that has been proposed by IRS,
having the utmost certainty is crucial. In case the taxpayer and the Appeals Officer are unable
to reach an agreement, then the computation of the hazards of litigation is imperative
(Taxpayer Advocate Service – IRS, 2023). It implies that if the Appeals officer believes that
the hazards of litigation is more than 80 %, the issue should be concealed. The taxpayer has
the option to file a petition in the U.S. Tax Court is the Appeals officer is unable to reach a
settlement. However, the taxpayer has to show in the court of law the erroneous aspect of the
assessment. The Appeals officers are given training not to lose in legal matters. In case the
Appeals officer wishes to settle for a value that is lower than 50 %, then the case of the
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taxpayer is strong. If the client’s case is stronger than the IRS, the client can be advised to
proceed with the appeal.
Impact of changing circumstances
The circumstances may change, which may impact the factor which is considered to
be the most important. In case there is a mistake or fault from the side of the Internal Revenue
Service while making the adjustment assessment, then the legal fee may not be the most
critical factor for the taxpayer. In this case, the taxpayer should not make an appeal to make
unnecessary delay to make payment of the deficiency. The payment plan by IRS can be used
in order to make payments by the taxpayer to clear the deficiency. Form 9465, which is an
Instalment Agreement Request has to be filed by an individual taxpayer (Internal Revenue
Service, n.d.). If payment is over $ 50,000 then the taxpayer must complete Form 9465,
whereas if payment is below $ 50,000, it can be paid online. While making the appeal, the
first step involves the company filing a protest to the NOPA so that the case can be moved to
Appeals. The potential benefit of an appeal to the client outweighs the fees associated with
the CPA services since he will be able to justify the legality of the deductions that have been
made pertaining to per diem items.
Public Disclosure for Uncertain Tax Positions
Recording Financial Statement Reserves
A public company may have to record its financial statement reserves under diverse
circumstances. The specific circumstances and conditions for recording financial statement
reserves pertaining to tax contingencies have been highlighted in Financial Accounting
Standards (FAS) No. 5. The two conditions that need to be taken into consideration when it
comes to loss contingency include the reasonable estimation of the loss which could be the
result of an adverse outcome and the information that is available before the financial
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statement issuance is indicative of probable impairment of an asset or incurrence of a liability
(FASB, n.d.). A suitable example is a firm that litigates an income tax issue.
In case, a business entity prepares for the court date on the basis of prior decisions relating to
only one side of the lawsuit, it may be determined that it has to pay $ 5 million as additional
tax. While observing the case from the opposite side, it may be open for interpretation. Based
on the interpretation, the entity may have to pay taxes amounting to $ 10 million in addition to
$ 5 million. In case such a situation arises, the firm will need an accrual of $ 5 million because
of the consideration of reasonable estimates pertaining to loss. The entity must disclose
losses, especially if there exist additional taxes that have to be paid. Proper disclosures are
instrumental in case of uncertain tax positions of entities and the entity has to report in its
financial statements that the disclosure was accrued.
Form 10-Q and Form 10-K
The impact of uncertain tax positions can be felt on the current Form 10-Q and Form
10-K of the business entity. Uncertain tax positions have the potential to influence the entity’s
position relating to deferred tax, assets as well as liabilities that are presented in the balance
sheet. According to ASC 740, the tax bases must be used for the purpose of computing the
deferred tax assets and liabilities, in addition to other amounts that are either receivable or due
from tax authorities for previous tax positions (FASB.ORG., n.d.). A business has to use
Forms 10-Q and 10-K, and the disclosure must state that the entity does not identify an asset
or a liability for deferred tax implications of temporary differentiation between the tax basis
relating to assets and liabilities amounts in the financial statements.
The temporary differences may ultimately give rise to taxable deductible amounts in
the upcoming years, i.e., when the amounts that have been reported are either settled or
recovered. The recognition of the tax impact on an uncertain tax position is most likely not
the tax position that is reported and sustained by the Internal Revenue Service (IRS) for
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examination purposes. The rules relating to ‘Accounting for Uncertainty in Income Tax’,
which is highlighted in FIN 48, have to be applied since it can provide as a guidance to the
business firm regarding its tax position (Deloitte, n.d.).
Recording reserves for the current tax year
When the public company has to finalize its appeal, it is essential for the business to
make a number of changes so that it can account for per diem reimbursements that relate to
travel expenses. In case of such an event, the reserve will have to be recorded in the financial
statements of the business so that it will be possible to account for any variance that may arise
between the new accounting method and the old accounting method. In addition to this, in
case the per diem payments are still the same, the only difference that is likely to arise is how
the business entity intends to substantiate its expense items. In this situation, there is no need
for the public company to record the reserve in its financial statements in the current tax year.
No issue will arise in case the reserve is not reflected in such a situation. b
Recording reserves for prior tax years
On the basis of the particular scenario involving the business entity and the Internal
Revenue Service (IRS) relating to the audit of previous tax returns, it has to be ascertained
whether the $ 5 million excess deduction of per diem expense was the result of inaccurate
substantiation of lodging, entertainment, and meal expenses or not. As per Financial
Accounting Standards Board (FASB), such a situation is probable, which is indicative of the
fact that it might be challenging to ascertain the loss. As the $ 5 million deduction that has
been determined by the IRS has been overstated, the amount which encompasses the
overstated deductions is not equivalent to $ 5 million. When there has to be a deduction, it
does not necessarily have to be the exact amount that has been identified for the repayment
purpose. On the basis of the available information, it is imperative to ascertain the exact
difference that exists between the tax returns and details in the financial statements. An
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accurate understanding of what will be owed by the company to the Internal Revenue Service
is essential, although it might be challenging to ascertain. b
In case the business entity makes the decision to make an appeal., it is fundamental to
bear in mind that the exact deduction value cannot be determined until the appeal process has
come to an end. In such a scenario, the business entity has to take into consideration the
elements such as interests and penalties. For instance, in case the final decision that has been
taken by the court is in favor of the Internal Revenue Service, it may lead to the accumulation
of the penalties as well as the interest amount that it will have to pay at the end of the appeal
(Internal Revenue Service., n.d.). The business firm needs to take into account these aspects
since they have the potential to influence the ultimate repayment amount that it has to pay
after the appeal process has come to an end and the final judgment has been passed by the
court of law.
Proactive Measures
Prior-year tax returns
The business must take appropriate measures to relating to its prior-year tax returns so
that it can be protected from an IRS audit in the future. It must ensure that necessary
documentation is in place for substantiating the expenses. In case it has to make certain
amendments, it has to obtain Form 1040-X which is specifically developed by the IRS and
used for amending tax returns. The form has to be filled with accurate and authentic
information, and it must also explain the reason for amendment by the entity. b
Amending Per Diem Issue
The per diem issue can be amended by the company by substantiating the expenses. In
case expenses cannot be substantiated and the difference between the lodging and food
expenses cannot be determined, it can follow the federal per diem schedule from Publication
1542. Maintaining expense reports is instrumental. However, if the firm chooses to combine
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the lodging and meal expenses for the reimbursement purpose, then 40 % can be treated as
meal payment, and the remaining 60 % can be treated as lodging expenses (Internal Revenue
Service, n.d.). Such an approach would help in handling the per diem situation in the business
context in a structured way.
Treatment of Per Diem Expenses
The business must adhere to IRS § 274 to treat the Per Diem Expenses. For
substantiating the expenses, it must ensure that expense-related records are maintained
regarding the date and place, business purpose of travel and lodging receipts. The firm has to
ensure that the meal expenses are separated from its lodging expenses since the latter are fully
deductible in nature. The employees must submit an expense report within a reasonable
duration i.e., 60 days to the employer so that per diem expenses can be treated.
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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
About form 9465, installment agreement request. Internal Revenue Service. (n.d.).
https://www.irs.gov/forms-pubs/about-form-9465
Appeals considers risk of going to court (hazards of litigation). Taxpayer Advocate Service.
(2023, May 19). https://www.taxpayeradvocate.irs.gov/notices/hazards-of-litigation/
Brackney, M. L. (2019). Recovering Fees from the IRS. The CPA Journal, June.
Fin 48: Accounting for uncertainty in income taxes. Deloitte. (n.d.).
https://dart.deloitte.com/USDART/pdf/ad511c06-3f31-11e6-95db-c562131e07c9
Expenses for business meals under § 274 of the Internal Revenue Code - Internal Revenue
Service. (n.d.). https://www.irs.gov/pub/irs-drop/n-18-76.pdf
Income taxes (topic 740) - fasb.org. (n.d.).
https://fasb.org/document/blob?fileName=Prop_ASU-Income_Taxes_(Topic_740)-
Disclosure_Framework-
Changes_to_the_Disclosure_Requirements_for_Income_Taxes.pdf
Overview - Deloitte US. (n.d.).
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-inflation-
reduction-act-reinstates-excise-tax-credits-and-superfund-excise-tax.pdf
Summary of statement no. 5. FASB. (n.d.).
https://www.fasb.org/page/PageContent?pageId=%2Freference-library%2Fsuperseded-
standards%2Fsummary-of-statement-no-5.html&bcpath=tff
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Your appeal rights and how to prepare a protest if you disagree. Internal Revenue Service.
(n.d.). https://www.irs.gov/pub/irs-pdf/p5.pdf
