EP Examination Process Guide - Section 7 - Appeals - Appeals Procedures - Discrepancy Adjustments
This section provides a general explanation of the appeals process for discrepancy adjustments.
A. Types of Issues That Generally Warrant a Discrepancy Adjustment
A discrepancy adjustment is an adjustment to an income tax return to correct a discrepancy between facts developed during an EP compliance activity (such as the examination of an employer’s pension plan) and line items on a related income tax return (such as a 1040 or 1120). Discrepancy adjustments are initiated by the IRS and generally are not resolved through the EPCRS. If the income tax return as filed accurately reflects the facts developed during the compliance activity, there is no discrepancy and no adjustment. If the income tax return does not accurately reflect these facts, a discrepancy exists and the adjustment will be proposed.
The following are examples of EP issues that can result in discrepancy adjustments:
- Unreported income due to unreported or incorrectly reported distributions from deferred compensation plans.
- Taxable allocations to participant accounts in defined contribution plans due to the revocation of the tax-exempt status of the plan trust.
- Taxable distributions to participants resulting from violations of IRC 72(p) loan limits.
- Adjustment to taxpayer deductions for contributions to a deferred compensation plan due to non-payment, late payment, excess contributions, plan disqualification, etc.
- Unreported income for reversion of excess plan assets after a plan termination.
- IRC 72(t) 10% additional tax on early plan distributions.
The EP Examination Process Guide contains more information about discrepancy adjustments.
B. How Is A Discrepancy Adjustment Proposed?
All discrepancy adjustments will be initially proposed on Form 4549-E - Income Tax Discrepancy Adjustments with Letter 3605-A. This letter is used by the office of Employee Plans to advise the taxpayer that a discrepancy adjustment is being proposed on the taxpayer's Form 1040 or 1120, and additional tax is due. The letter generally gives the taxpayer 30 days to respond and advises the taxpayer of their Appeal rights if they do not agree. During the 30-day response period the taxpayer is free to present any documentation supporting the accuracy of the income tax return as filed. Additional non-pension related adjustments to the return can also be included with the discrepancy adjustment for the revenue agent’s consideration. If no response is received within 30 days from the date of Letter 3605-A, the IRS will assume that the proposed adjustments to the taxpayer's return are correct.
If agreement can be reached on one or more issues, the taxpayer should be encouraged to enter into a partial agreement by executing a 4549-E covering the agreed issues. A typical situation might be where the taxpayer agrees to the discrepancy adjustment; however, he does not agree to the penalty associated with the adjustment to his tax liability.
C. Available Avenues If You Disagree with the Proposed Adjustment
Initial Request for Review with the Revenue Agent’s Manager:
If the taxpayer does not agree with the revenue agent’s finding, a meeting with the revenue agent's supervisor to discuss the findings may be requested. Although requesting a meeting with the manager is not required, it is a valuable option for the taxpayer and should be considered before moving forward with the remainder of the Appeals Process or Court.
If it is subsequently decided to have a meeting with the revenue agent’s manager, all the facts previously presented to the revenue agent should be presented again for reconsideration. If the manager concurs that the income tax return filed accurately reflects the correct income tax, there is no discrepancy and no adjustment. If there is further disagreement then the taxpayer is urged to appeal the case to an Appeals Office or directly to court.