IRS Form 4549: What It Is and How To Respond
After you complete an IRS tax audit, the auditor may send you Form 4549 (Income Tax Examination Changes) summarizing the audit’s findings and outlining changes made to your tax return. If you agree with the changes, you should pay any tax due or contact the IRS about payment arrangements. If you disagree, you can dispute the information on the form.
Read on to learn about this form, including how you should respond to it. If you need help responding to an audit report like Form 4549 or disagree with the IRS’s findings, learn more about our IRS Audit Representation services.
Key Takeaways
- IRS Form 4549: The IRS sends this form to propose adjustments to a tax return following an audit.
- What to do if you receive this form: Read it carefully so you understand where and how the IRS came up with the proposed changes.
- If you agree with Form 4549: Sign the form and make arrangements to pay the additional tax liability, if applicable.
- If you disagree with Form 4549: Consider requesting a meeting with the group manager, filing an appeal, or filing a petition with the U. S. Tax Court.
- Second Chance Opportunity: If you have new information that wasn’t presented at the original audit, it may be possible to request audit reconsideration.
- How a tax professional can help: If you don’t understand the information on the form or you want to dispute it, contact a tax professional for help.
What Is IRS Form 4549?
IRS Form 4549, Income Tax Examination Changes, is a document that summarizes the IRS’s proposed changes following the examination of a tax return. The proposed modifications often result in increased tax liability and may affect several aspects of your return, including:
- Reducing claimed tax credits;
- Limiting claimed deduction(s); and/or
- Identifying additional sources of income that weren’t previously reported.
These can result in not just more taxes owed, but also penalties and interest.
IRS Forms, Notices, and Letters Related to 4549
When the IRS sends out Form 4549, there will typically be a “cover letter” that explains how and why the IRS made the adjustments listed on Form 4549. The cover letter may take the form of Letter 525 (General 30-Day Letter) or Form 886-A (Explanation of Items).
In addition to or in place of Form 4549, you may receive one of the following:
- CP2000
- Form 5278 (Statement – Income Tax Changes)
- Form 4549-E (Income Tax Discrepancy Adjustment)
- Letter 692 (Request for Consideration of Additional Findings)
- Letter 915 (Examination Report Transmittal)
- Letter 950 (30-Day Letter-Straight Deficiency)
Remember that Form 4549 only reflects the IRS’s proposed changes, so you have the opportunity to challenge the adjustments. But before you do, you need to make sure you fully understand the information on Form 4549.
What to Do After Receiving a 4549 Form from the IRS
You should start by carefully reading the form and the attached cover letter explaining the proposed changes. Make sure you understand what the IRS has changed. Then, plan your response based on whether you agree or disagree. Reach out to a tax professional if you need help.
The form may note changes to any of the following elements of your tax return:
- Income
- Filing status
- Credits
- Deductions
- Taxes
For example, if the IRS proposes an increase to your income, confirm that you did indeed earn the income and that the amount is correct. Keep in mind that mistakes can happen. For example, if a third party, such as a bank or an employer, attributed income to you by mistake, this number may be incorrect.
Form 4549 typically shows penalties and interest due to the new tax liability on the second page.
Also, check if there’s additional information in the “Other Information” section towards the bottom of page two of Form 4549. This information can be very important if you disagree with one or more proposed changes from the IRS.
Responding to Form 4549
You can sign Form 4549 if you have nothing to dispute about the IRS’s proposed adjustments. Before signing the form, be aware that doing so waives your right to challenge the IRS’s findings contained on this form. Signing the form also makes you immediately responsible for paying any additional tax liability.
If there’s any reason to question the accuracy of the information on Form 4549, don’t sign it. The last thing you want to do is “agree” to a bigger tax bill than you are required to pay under the law.
Assuming you want to challenge the proposed adjustments from the IRS, your two primary options will be to request a meeting or telephone conference with the auditor’s manager or file an appeal. You typically have 30 days from the date of Form 4549 to request an appeal.
If you’re still unable to reach an acceptable agreement after going to Appeals, you can take your case to court.
Filing an Appeal
If your disagreement doesn’t involve arguments based on new information, then you may want to consider filing an appeal with the IRS Independent Office of Appeals. You can choose to represent yourself or hire a tax professional to represent you on appeal.
For disputes involving $25,000 or less, you can file an appeal by submitting IRS Form 12203 (Request for Appeals Review). Any additional instructions should be provided in the cover letter that the IRS sent you along with Form 4549. In addition to Form 12203, you’ll also want to attach a statement that outlines what and why you disagree with the proposed changes.
After you file your appeal, it gets forwarded to the IRS Independent Office of Appeals. An appeals conference gets scheduled, and these usually take place by telephone or by mail In-person appeals conferences are an option for complex tax cases.
For disputes involving more than $25,000, you’ll need to file a formal written protest. To do this, you’ll need to prepare a statement that includes the following information:
- Your name, address, and daytime phone number.
- A list of each issue you want to appeal, including the applicable tax years and why you disagree.
- The factual evidence you have in support of your arguments.
- The legal authority that supports your arguments.
- A signed statement where you swear under penalty of perjury that all of the information you’re submitting to the IRS is true, correct, and complete to the best of your knowledge.
Tax Court
If you receive a Notice of Deficiency, you have the right to go to Tax Court. You only have 90 days from the letter’s date (150 if sent out of the country) to file a petition. Due to the complexity of Tax Court cases, you should strongly consider working with a licensed tax attorney.
Audit Reconsideration
Audit reconsideration is for situations where you have additional information that you believe would change the IRS’s conclusions following the audit. This could arise if, for some reason, you weren’t able to participate in the original audit or if you have additional documentation to support your position. You can only request audit consideration if you haven’t paid the tax that was assessed on the original audit.
To request audit reconsideration, you’ll need to:
- Identify the areas of Form 4549 you disagree with;
- Send copies of documents supporting your position to the IRS, and keep the originals for your reference; and
- Complete IRS Form 12661, Disputed Issue Verification.
In place of completing Form 12661, you can write a letter identifying and explaining where you disagree with the IRS.
| Overview of Responses to IRS Form 4549 And What They Mean | ||
|---|---|---|
| If You Review Form 4549 and: | What You Need To Do In This Situation: | What Your Response Means: |
| Agree with the changes. | Sign Form 4549. If the proposed changes result in you owing money, make arrangements to pay this tax balance. | You admit that you agree with the IRS’s proposed changes and waive any rights you have to challenge them. |
| Disagree with some or all of the proposed IRS changes. | Don’t sign Form 4549. Depending on what you disagree with, you should file an appeal or file a Tax Court petition. | You want to challenge some or all of the IRS’s proposed changes. |
| Do nothing. | Prepare for the IRS to begin tax enforcement actions against you, including the filing of a tax lien and/or levying your property. | You may still have the right to request an audit reconsideration once the tax is assessed |
Tax Payment and Resolution Options
Should the IRS’s proposed adjustments result in you owing money that you can’t fully pay immediately, there are several options to consider, including:
- Installment agreement
- Offer in compromise
- Currently Not Collectible (CNC) status
- Penalty abatement
- Innocent spouse relief
East Coast Tax Consulting Can Help You Respond to Form 4549
Not all tax cases involving Form 4549 require the help of a tax pro. If you were heavily involved in your tax audit and nothing on Form 4549 surprises you, you might not need to hire someone to help you respond.
However, if you didn’t realize you were audited, don’t agree with the IRS’s proposed changes, or don’t understand the information provided on Form 4549, you should strongly consider professional tax assistance. A tax professional can also help if you owe taxes and want help making payment arrangements, applying for penalty waivers, or negotiating a settlement.
The CPAs from East Coast Tax Consulting Group are ready to assist you. To get help now, schedule a free consultation by calling (866) 550-7655 or using our online contact form.
IRS Form 4549 FAQs
What happens if I ignore Form 4549?
The IRS will likely send you a Notice of Deficiency. If you continue to ignore the tax liability, the IRS will begin taking steps to collect the back taxes. This could include filing a tax lien or pursuing a tax levy, which may include wage garnishment.
Why are there penalties on Form 4549?
When the IRS adds additional tax to your return, the agency typically applies a failure-to-pay penalty. It’s generally 0.5% of the tax liability per month, backdated to the return’s original filing deadline. The agency may assess higher penalties in some situations. The IRS also adds interest to the penalties and the tax liability.
Do I need to hire a tax professional if I get Form 4549 in the mail?
It depends on the complexity of your tax situation, how much the IRS claims you owe, and how familiar you are with the tax issues and facts of the audit. If the IRS’s proposed changes don’t make sense to you, you should strongly consider talking to a tax professional to get a complete understanding of what’s going on. Then, you can decide if you need professional tax help to respond to Form 4549.
Did I receive this IRS 4549 form because of the Automated Underreporter (AUR) function?
It’s unlikely. The AUR is an IRS system that compares tax information you’ve provided with information from third parties, such as banks and employers. If the IRS detects a discrepancy when comparing this information, the IRS will most often send you a CP2000 notice. This is similar to Form 4549 in that it lists proposed changes to your tax return, which you can then agree with or dispute.
Why did the IRS send me Form 4549?
Most likely, it’s due to the fact that you were just audited by the IRS. The IRS audit selection process is not public knowledge, but the IRS states that it uses random selection, statistical analysis, and referrals from related tax examinations to identify who to audit.