Form 4549, officially known as the “Income Tax Examination Changes” form, is issued by the IRS following an audit. If you get one, it means the IRS is questioning your return. Let’s get into the form and what it means.
Table of Contents
ToggleDemystifying Form 4549: A Comprehensive Guide to Understanding Your IRS Audit Report
Overview of Form 4549
Upon completing an audit, the IRS issues an Income Tax Examination Changes to outline the adjustments they think should be made to your reported income, deductions, credits, and taxes owed. This form typically means there are some substantial changes being made: if there are only minor changes, you’re more likely to get just an adjusted return and a form CP22E, CP11, or CP210/220.
The 4549 form typically begins with a section identifying the taxpayer and the tax years under review, so the first thing to do is make sure that’s all correct. It should have your name, Social Security Number or Employer Identification Number, and the tax periods in question. Following the identification section, the form will list the changes that have been made to your return. These changes are categorized by type, such as adjustments to income, deductions, credits, or tax computations. Each adjustment should be accompanied by a brief explanation of the rationale behind the IRS’s modifications.
Then, you’ll get a number: your new balance owed or the amount they’re refunding you. You’ll also be told the penalties and interest you owe, if any, and the form should also include Form 12661, which explains how you can request a reconsideration of the audit.
Explanation of Adjustments
The explanation of adjustments details the specific changes with a line-by-line breakdown of the adjustments. For instance, if the IRS has decided to disallow you certain deductions, this section would explain why those deductions were not accepted. Similarly, if additional income was identified, the form would outline the sources and amounts of that income. In some cases, these changes might work in your favor, of course, and the explanation could be of why you are owed a refund.
Tax Computation Summary
This section summarizes the overall impact of the adjustments on your liability. It includes the initial amount of tax reported, the total adjustments made, and the revised tax liability. It will also list any penalties or interest that were assessed. Common penalties include the accuracy-related penalty, which can be imposed if the IRS determines that there was a substantial understatement of income or negligence in reporting. Other potential penalties include failure-to-file, failure-to-pay, and potentially even civil penalties, depending on the situation. Interest accrues on any additional tax due from the original filing date until the amount is paid in full.
Payment and Response Options
When you get this form, you have several options for responding. The form typically includes instructions for agreeing with the proposed changes and paying any additional tax, penalties, and interest. This can usually be done by just signing and returning the form along with payment. However, if you disagree with the findings, the form has some help there, too.
Variations on a Theme
The IRS sends Form 4549 if they think it’s likely you will agree with the proposed changes. It’s also common to get this form if the adjustments to your return aren’t going to change your tax liability for the audited tax year but will impact your tax liability for future years.
For instance, if the IRS decides they’re going to disallow a net operating loss (NOL) that you would otherwise have carried forward to the next tax year, they might send you the 4549 form. However, there are some alternative versions of this form that the IRS may use in different circumstances.
Form 4549-A
This is also known as the “Income Tax Examination Changes (Unagreed and Excepted Agreed) form,” and you get this one when the IRS thinks it’s likely you might disagree with the proposed changes to your return. It usually comes with Letter 3602 or Letter 3602-B. Just bear in mind that if this comes with a Form 870, and you sign it, that means you’ve just waived your right to contest the audit. Always talk with a tax lawyer before you sign anything.
Form 4549-B
This form, the “Income Tax Examination Changes,” is sent out when the IRS wants to display changes for more than three tax years. When the IRS makes adjustments to more than three years’ worth of your returns, they use Form 4549-B to list the additional years. Basically, this is just a secondary form continuing the main 4549 form.
Corrected Report
If you get a 4549 and it has “Corrected Report” stamped across it, this just means the IRS made adjustments to its initial audit findings. The corrected report is dated and will supersede any adjustments noted on any versions of the form with earlier dates.
Form 4549-E
The 4549-E, or “Income Tax Discrepancy Adjustments,” gets issued when proposed changes to your tax return result in a tax discrepancy adjustment. A discrepancy adjustment occurs when the IRS finds a difference between the information on your return and what was discovered during an examination process or compliance activity.
Consequences and Options
If you choose to sign the 4549, bear in mind that you’re accepting responsibility for the additional taxes and penalties. It’s always wise to talk to your tax lawyer before you sign anything unless the changes are extremely minor and you’re 100% sure you fully understand every implication of the change to your future tax liability. If you are unable to pay the full amount immediately, work with your lawyer to contact the IRS to explore payment and resolution options. There are a couple options available.
An installment agreement allows you to make monthly payments towards your tax debt, which spreads out the financial burden over time. If your financial situation warrants it, you might consider seeking an offer in compromise, which lets you settle your tax debt for less than the total amount owed. This can be a viable option if paying the full debt would cause you significant financial hardship, but it can be difficult to get an offer in compromise, so talk with a lawyer. If your tax issues are due to the actions of your spouse (or ex-spouse), innocent spouse relief may help. This relief applies if you can prove that the tax discrepancy was solely due to your spouse’s error and that you were unaware of it.
You may also request penalty abatement, which is asking the IRS to remove the penalties from your balance if you have a reasonable cause. For example, if you had a serious illness or there was a natural disaster, the IRS may be happy to remove penalties for failure to file. If you are experiencing severe financial difficulties, you can seek uncollectible status. This status pauses IRS collection actions, and they acknowledge that you cannot currently afford to pay your tax debt. Bear in mind that not-currently-collectable status is very difficult to qualify for, so it’s vitally important that you work with a tax lawyer.
Don’t Fail to Respond
It can’t be stressed too much: failure to respond to the 4549 form within the 30-day period the IRS usually gives is always a bad idea. If you don’t reply, you’ll get a statutory notice of deficiency (SNOD), and that escalates the situation.
Get Help Now
It’s never a good idea to try to go up against the IRS alone. If you’ve gotten a 4549 form, contact us at the Silver Tax Group Austin right away for help.