Form 4549 Instructions for an IRS Income Tax Audit
This guide provides clarity on IRS Form 4549, detailing how to interpret a proposed tax assessment and navigate the formal post-audit process.
Receiving Form 4549, titled “Income Tax Examination Changes,” from the Internal Revenue Service (IRS) signifies the conclusion of an audit of your tax return. This document is not a bill, but a formal report from the IRS examiner detailing proposed adjustments to your reported income, deductions, or credits.
The form is issued after the IRS has conducted a review, which could range from a correspondence audit focused on a few specific items to a more comprehensive field audit. The trigger for such a review can vary, from discrepancies between your return and third-party information like W-2s and 1099s, to claims of unusually high deductions. Form 4549 serves as the IRS’s opening position, presenting their findings and the resulting financial impact for your review.
Understanding the Proposed Changes on Form 4549
The primary purpose of Form 4549 is to provide a clear and itemized account of the adjustments the IRS proposes to make to your tax return. The form is structured to walk you through the examiner’s calculations, starting with the corrections to your income and ending with a new proposed balance due or overpayment.
The initial section of the form, “Adjustments to Income,” is where the examiner lists each specific change. This could include adding unreported income that the IRS identified or disallowing certain deductions you claimed. For example, if you deducted business meal expenses that the IRS determined were personal in nature, the amount of that deduction would appear here as a positive adjustment to your income. Each adjustment is accompanied by a brief explanation.
These individual adjustments are totaled to arrive at a “Corrected Taxable Income” figure. This new taxable income is then used to recalculate your total tax liability, a process detailed in the “Computation of Tax” portion of the form. It will also account for any changes to tax credits you may have claimed.
The form also includes the calculation of penalties and interest. If the IRS determines that you understated your tax liability, they may apply penalties. A common example is the accuracy-related penalty under Internal Revenue Code Section 6662, which is calculated as 20% of the portion of the underpayment attributable to the error.
Interest is also calculated on the amount of underpaid tax from the original due date of the return to the date the payment is made. The interest rate is determined quarterly and compounds daily, meaning interest accrues on the tax owed plus any accumulated interest. Form 4549 will show the total proposed tax, penalties, and interest, culminating in a final “Balance Due” or, in some cases, an overpayment.
Required Actions Based on Agreement
Should you review Form 4549 and agree with all the proposed adjustments, the primary action is to sign and date the consent section of the form. Your signature is a formal acknowledgment of agreement and serves as a waiver of your rights to further contest the specific issues with the IRS Appeals Office or the U.S. Tax Court.
Once signed, the form should be returned to the IRS examiner who conducted the audit. It is important to return the form by the response date indicated in the accompanying letter, which is 30 days. Promptly returning the signed form allows the IRS to officially close the audit and process the assessment of the additional tax, penalties, and interest.
Following the submission of the signed Form 4549, the IRS will formally assess the new tax liability and send a bill for the amount due. You will have the option to pay the full amount by the due date to stop further interest from accruing. If you are unable to pay the full balance at once, you can contact the IRS to explore payment options, such as an installment agreement to make monthly payments.
Required Actions Based on Disagreement
If you review Form 4549 and do not agree with the proposed changes, you should not sign the form. Your refusal to sign signals your disagreement with the examiner’s findings. This is the formal point at which the administrative process moves toward a potential dispute resolution path.
The immediate next step from the IRS, upon not receiving your signed agreement, is the issuance of a formal letter known as a Statutory Notice of Deficiency. This notice, often referred to as a “90-day letter,” formally states the IRS’s determination and asserts that you owe additional tax. It is the agency’s final proposed assessment before litigation.
Upon receipt of the Statutory Notice of Deficiency, you have a 90-day period to take action. During this window, you have two primary choices. One option is to concede and pay the assessed amount. The other option is to challenge the IRS’s determination by filing a petition with the U.S. Tax Court. Filing a petition allows you to have your case heard by the court without first having to pay the disputed tax. If you do not file a petition within the 90-day timeframe, the IRS will assess the tax and begin collection procedures.