Form 886-A Explanation of Items: How to Respond

Receiving an audit notice from the Internal Revenue Service can be an unfamiliar experience. A document labeled Form 886-A, “Explanation of Items,” will often be included. This form is not a bill or a final determination of tax owed. It is a communication tool used by an IRS examiner to provide a written explanation for proposed adjustments to your tax return. Form 886-A is the narrative that accompanies the numerical changes proposed in an examination report, like Form 4549, to create a clear record of the IRS’s position and reasoning.

Understanding the Contents of Form 886-A

Form 886-A is structured to present a logical argument for each adjustment, allowing you to analyze one issue at a time. The header contains administrative details such as the notice date, your Social Security Number, the tax year under review, and the IRS examiner’s contact information.

The Issue

Each disputed item from your tax return is addressed in its own section, starting with a concise statement of the matter. This section identifies the specific line item under examination, such as “Business Meal Expenses,” “Charitable Contributions,” or “Unreported Gross Receipts.”

Facts

This section outlines the information the examiner has gathered from documents you provided, bank statements, and third-party reports like Form W-2 or Form 1099. You should review these facts carefully for accuracy and address any inaccuracies in your response.

Law and Arguments

Here, the examiner cites the Internal Revenue Code sections, Treasury Regulations, or relevant court cases they believe support their position. This is the legal basis for the proposed adjustment.

Taxpayer’s Position

This part of the form summarizes your initial arguments or information you provided during the audit. It reflects the examiner’s understanding of your position on the issue.

Conclusion/Examiner’s Conclusion

This is the examiner’s final analysis, stating the proposed adjustment to your tax liability based on their interpretation of the facts and law. It specifies the change in income, deduction, or credit that the examiner is recommending.

Information and Documentation to Prepare Your Response

After analyzing Form 886-A, you must gather evidence to counter the examiner’s conclusions. The burden of proof rests on you to provide complete and credible documentation.

If the IRS questions business expenses, you will need to provide more than just proof of payment. Required documents include dated receipts, canceled checks, and bank statements. For travel or vehicle expenses, a contemporaneous mileage log is expected, along with appointment calendars to establish business purpose.

When a dispute involves unreported income, you need records to prove that certain deposits were not taxable, such as loan proceeds, gifts, or transfers between accounts. A bank deposit analysis can help present this information clearly. You should also obtain your Wage and Income Transcripts from the IRS to compare with your records.

For disallowed dependency claims, you will need to provide records proving you provided more than half of the individual’s support for the year. This can include school and medical records showing your address, birth certificates, and proof of your household expenses.

How to Formulate and Submit Your Response

Once you have gathered your documentation, you must decide whether you agree or disagree with the examiner’s findings. You must respond by the deadline mentioned in the cover letter, which is typically 30 days.

Responding in Agreement

If you conclude the examiner’s findings are correct, you will sign the accompanying examination report, Form 4549. The IRS will then assess the additional tax, interest, and any applicable penalties.

Responding in Disagreement

If you disagree with the findings, do not sign the agreement form. Instead, prepare a formal written rebuttal addressed to the examiner and send it via a trackable method, such as USPS Certified Mail with return receipt.

Your written response should address each point from the “Issue” and “Conclusion” sections of Form 886-A. For each disputed item, state your position clearly and reference the specific evidence you have gathered. Organize and label your supporting documents so the examiner can connect them to your arguments.

The Audit Process After Your Response

After you submit your response, the IRS examiner will review your explanations and supporting documents. This review can take several weeks to a few months.

If your response and documentation are satisfactory, the IRS may accept your return as filed. You will receive a “no-change” letter, which formally closes the audit.

The examiner may agree with some of your points but not others. This can result in a partial agreement, where the IRS proposes a revised adjustment that is lower than the one originally proposed. You would then have the option to agree to the revised findings or continue to dispute the remaining issues.

If the examiner rejects your arguments and no agreement is reached, the IRS will issue a Statutory Notice of Deficiency, or a 90-day letter. This notice gives you 90 days to petition the U.S. Tax Court to challenge the determination. The letter also explains your right to request a conference with the IRS Independent Office of Appeals to resolve the case without going to court.