Taxes

Tax Agent Report (RAR)

What is a tax agent’s report?

A Tax Agent’s Report (RAR) is a detailed document describing the results of an IRS examiner’s audit and specifying the amount owed or refunded, respectively, that the agent finds the taxpayer owes or owes.Taxpayers have the right to disagree with the tax agent’s report and have the option to file a formal protest with the IRS Office of Appeals by appealing to U.S. Tax Court, or pay a new assessment and then sue for a refund.

key takeaways

  • The Tax Agent’s Report (RAR) details the results and findings of the IRS audit, including calculations related to any tax owed and penalty amounts that may be owed.
  • Taxpayers can challenge findings in the RAR through tax court procedures.
  • If the RAR is not challenged or upheld, delinquent taxpayers could face higher fines or jail time if they fail to reconcile their tax positions.

Understanding Tax Agents’ Reports

The Tax Agent’s Report (RAR) shows how any adjustments made to the taxpayer’s liability are calculated, including the procedures applied, the tests performed, the information obtained and the conclusions reached during the inspection. The report (Form 4549: Changes in Income Tax Review) shows changes in income, credits, and deductions proposed by the examiner or agent on the taxpayer’s return, as well as proposed taxes, penalties, and interest, if any. Form 4549 is also accompanied by Form 886A, which explains why the IRS changed the taxpayer’s return.

The RAR’s bottom line says whether the taxpayer underpaid, overpaid or paid the right amount of tax. If the taxpayer overpays, s/he will receive a tax refund. If s/he pays less, s/he must pay additional taxes, usually with interest and penalties. If a change in the taxpayer’s federal taxable income is reported by an Internal Revenue Service (IRS) agent after an audit of the taxpayer’s tax return, the IRS will send the taxpayer a notice of final determination. After receiving the notice, the taxpayer has 30 days to file an appeal with the IRS Office of Appeals.

Consequences of RAR

The IRS notifies state tax authorities when it issues an RAR. State law requires that if the federal government changes a taxpayer’s responsibilities, the taxpayer must file an amended state return within 30 to 90 days after the IRS audit is finalized. States require taxpayers to re-determine their state tax liabilities, take into account the adjustments reflected in the RAR, and provide notification of any related impact to the applicable state tax authority.States have this requirement because any given state’s tax liability is based on federal tax liability.

Taxpayers may also owe more to the state if they are believed to owe more federal taxes than they have paid. This regulation applies whether the taxpayer is an individual or a business. If a taxpayer pays taxes in multiple states, the compliance process can be very cumbersome.

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