What Is IRS Form 4549 and How Should You Respond?

Receiving IRS Form 4549, “Income Tax Examination Changes,” means an audit of your tax return has concluded with proposed adjustments. This document is not a bill but a detailed report outlining the specific changes the IRS believes are necessary based on its review. It serves as the primary summary of the audit’s financial outcome, showing proposed changes to your income, deductions, or credits.

Form 4549 is typically accompanied by a “30-day letter,” which explains your rights and the timeframe for your response. Your next steps will depend on whether you agree or disagree with the examiner’s conclusions.

Understanding the Report of Income Tax Examination Changes

Adjustments to Income

The “Adjustments to Income” section on Form 4549 itemizes each change the IRS proposes. For example, it might list unreported income from a Form 1099 or disallow a business expense deduction due to a lack of substantiation. Each adjustment corresponds to a specific line on your tax return.

All subsequent calculations are based on these initial changes. The adjustments are totaled to arrive at a “Corrected Taxable Income” figure, which helps you pinpoint the sources of disagreement with the IRS.

Tax Computation

The “Tax Computation” section uses the new taxable income figure to calculate a corrected total tax liability. It shows your original tax, the corrected tax, and the resulting deficiency or overpayment. This part of the form translates the income adjustments into a specific dollar amount.

The computation also includes adjustments for any tax credits the IRS determined you were not eligible to claim. The value of a disallowed credit will be added to your total tax due, showing the financial impact of the changes before penalties or interest.

Penalties and Interest

Form 4549 also outlines any proposed penalties and the interest accrued on the tax underpayment. A common penalty is the accuracy-related penalty under Internal Revenue Code Section 6662, which is typically 20% of the underpayment. The form specifies the type of penalty and calculates its amount.

Interest is calculated on the tax deficiency from the original due date of the return until it is paid. The form shows an estimated interest amount calculated up to a specific date, noting that interest will continue to accrue until the balance is paid in full.

Responding to the Proposed Changes

Agreeing with the Findings

If you agree with all the proposed adjustments on Form 4549, you can sign and return it to the IRS. If you filed a joint return, your spouse must also sign. Signing the form is a formal acknowledgment that you accept the changes and waive your right to appeal the decision.

By signing, you consent to the assessment and collection of the additional tax, penalties, and interest. The IRS will then adjust your account and send a bill for the amount due, at which point you can pay or explore payment options.

Disagreeing with the Findings

If you disagree with the information on Form 4549, do not sign it. Your first step is to contact the examiner who conducted the audit to discuss the points of disagreement. This communication can sometimes resolve misunderstandings or allow you to present new information.

If discussions with the examiner do not lead to a resolution, you can request an informal conference with the examiner’s manager. This provides another opportunity to present your case and have the disputed items reviewed.

The Next Steps After Disagreement

The IRS Independent Office of Appeals

If you cannot reach an agreement with the examination team, you have the right to take your case to the IRS Independent Office of Appeals. This office is a separate function within the IRS designed to resolve tax disputes without litigation. To initiate this process, you typically file a formal protest outlining the disputed issues and your position.

The Appeals conference is an informal meeting where you present your arguments and evidence to an Appeals Officer. This officer has the authority to consider the “hazards of litigation,” meaning they can weigh the strengths and weaknesses of both positions to reach a settlement. Most tax disputes that enter the appeals process are resolved at this stage.

Receiving a Statutory Notice of Deficiency (90-Day Letter)

If you do not go to Appeals or cannot reach a settlement there, the IRS will issue a Statutory Notice of Deficiency, also known as a “90-day letter.” This notice is not a bill but a final administrative determination of the IRS’s intent to assess the tax deficiency.

The notice gives you 90 days from the date it is mailed to file a petition with the U.S. Tax Court, which allows you to challenge the proposed tax before paying it. If you do not file a petition within this 90-day window, you lose the right to go to Tax Court, and the IRS will assess the tax and begin collection.