Is Audit Reconsideration Available for a Payroll or Employment Tax Audit?

An IRS employee on one of my cases recently pondered whether the IRS permitted audit reconsideration in employment tax cases.

One United States Tax Court Opinion provided some support for the idea that employment tax audit reconsideration was within the IRS’s discretion. In Durda v. Commissioner, T.C. Memo. 2017-89 , the court recited these facts:

At the hearing the SO explained to petitioner that his account had already been placed in “currently not collectible” (CNC) status because of his financial difficulties. The SO rejected his request that the NFTL be withdrawn, concluding that it should remain in place to protect the Government’s interest. Petitioner requested audit reconsideration of the employment tax liabilities; he asserted that he had issued Forms 1099-MISC to some contractors and asked for additional time to retrieve copies of these documents. The SO set a deadline of November 20 for petitioner to supply any documents that he believed relevant to a request for audit reconsideration.

There, the IRS allowed the taxpayer the opportunity for audit reconsideration of employment tax liabilities. Notably, because this was a collection due process case (meaning, the tax had not been paid and the IRS was in collections mode), the taxpayer was not required to pre-pay the liabilities and use refund procedures.

It is also notable that IRM 4.13.1, covering audit reconsiderations, does not limit audit reconsideration income taxes (“income” is just mentioned once in the entire IRM section, in the context of the EITC).  Likewise, the criteria for audit reconsideration per the IRS’s internal guidelines (the Internal Revenue Manual or “IRM”) as stated in IRM do not limit the procedures, stating only that:

(1)       The taxpayer must have filed a tax return.

(2)       The assessment remains unpaid or the Service has reversed tax credits that the taxpayer is disputing.

(3)       The taxpayer must identify which adjustments he/she is disputing.

(4)       The taxpayer must provide new additional information for the audited issue(s) not considered during the original examination.

(5)       There was an IRS computational or processing error in assessing the tax.

IRS Pub. 3598 clarifies that the last requirement only requires that the taxpayer claims disagreement with the tax assessment.

The existence of refund procedures does not mean the lack of audit reconsideration procedures as a taxpayer may file a refund claim in income tax cases as well.  The IRM does not except employment tax returns or audits from the reconsideration procedures.  Accordingly, an audit reconsideration request for employment taxes appears to be within the discretion of the IRS.

Where there is still time to petition to Tax Court (90 days from the date of the Notice of Deficiency), those rights should usually be used. Audit reconsideration is not a statutory or regulatory right to taxpayers and is discretionary on the part of the IRS. If the IRS gets it wrong again, the taxpayer’s options become increasingly limited. Nonetheless, the IRS will usually try its best to follows its internal procedures. 

The IRS’s Internal Revenue Manual (IRM)would have been more explicit if it intended to limit audit reconsideration availability.  It is this author’s opinion that a taxpayer with new information following an employment tax audit assessment may utilize the audit reconsideration procedures, if the IRS followed the terms of the IRM.

The author of this post is Daniel Layton, a former IRS trial attorney and former federal prosecutor who founded DWL Tax & Bankruptcy Law in Pasadena, CA.

Posted 04/03/2020 by Daniel Layton.