What Is IRS Form 886-A and How Should You Respond?
Understand the rationale behind an IRS audit adjustment with Form 886-A. This guide clarifies the form's purpose and outlines your procedural response options.
Receiving a notice from the IRS can be an unsettling experience, and a document labeled Form 886-A, “Explanation of Items,” appears during an audit. This form is not a bill or a request for payment, but a detailed communication from the IRS examiner assigned to your case. It outlines the issues the IRS has identified with your tax return and explains the reasoning behind any proposed changes. Understanding this document is the first step in navigating the audit.
Purpose of IRS Form 886-A
Form 886-A is not a form for a taxpayer to complete, but a report from the IRS examiner that provides a written justification for proposed adjustments to a tax return. It serves as the narrative behind the numbers in an audit, explaining why the IRS believes reported income, deductions, or credits are incorrect. This document frames the debate and gives you a clear understanding of the points you need to address.
This explanatory document is attached as a supporting schedule to an examination report, such as Form 4549, Income Tax Examination Changes. While Form 4549 presents a numerical summary of proposed changes, Form 886-A provides the detailed, issue-by-issue reasoning. It connects the raw numbers on the examination report to the legal and factual arguments the examiner is using.
Analyzing the Contents of Your Form 886-A
To understand the examiner’s position, you must analyze the contents of Form 886-A. The document is structured to present a logical argument for each adjustment, with each disputed item from your tax return addressed in its own section. This allows you to analyze one issue at a time.
For each contested item, the form contains several components:
- Issue: A concise statement of the matter in question, such as “Business Meal Expenses” or “Unreported Gross Receipts.”
- Facts: The information the examiner has gathered, including bank statements, documents you provided, and third-party information reports like Form 1099s.
- Law and Authority: The legal foundation for the proposed change, citing the Internal Revenue Code, Treasury Regulations, or court cases.
- Taxpayer’s Position and Government’s Position: A summary of your arguments and the examiner’s explanation for why your position was not accepted, leading to their conclusion.
Preparing Your Response to the Examiner’s Findings
After analyzing Form 886-A, you must gather and organize the evidence needed to counter the examiner’s conclusions. Your goal is to build a fact-based argument that directly addresses each point raised in the “Government’s Position” section of the form. For each issue, collect specific documentation that substantiates your original filing position.
If a dispute involves disallowed business expenses, evidence could include:
- Dated receipts
- Canceled checks
- Bank or credit card statements showing the payments
- A contemporaneous mileage log for travel or vehicle expenses
Align your evidence with each specific issue outlined in the Form 886-A. For example, if the form questions three different deductions, create three separate sets of supporting documents, labeling each to correspond with the issue. Beyond financial records, other relevant proof can include legal agreements, contracts, or sworn affidavits to corroborate your position.
Responding and Navigating the Audit Process
After gathering your documentation, you must decide on a course of action based on whether you agree or disagree with the examiner’s proposed adjustments. Your decision dictates the next steps in the audit.
If you conclude that the examiner’s findings are correct, the process is straightforward. You indicate your agreement by signing the accompanying examination report, Form 4549. This signifies that you accept the proposed changes, and the IRS will then assess the additional tax, interest, and any penalties and send a bill for the amount due.
If you disagree with the findings, do not sign the agreement form. Instead, prepare a written response addressing each disputed item in the Form 886-A, referencing your evidence. You can request a conference with the examiner’s direct manager to discuss your position, which may lead to a resolution.
Should the meeting with the manager not result in an agreement, the IRS will issue a formal “30-day letter.” This letter includes the examination report and explains your right to appeal. You will have 30 days from the date of the letter to submit a formal, written protest to the IRS Independent Office of Appeals.