IRS Updates Procedures for Reopening Closed Cases

On May 20, 2005, the IRS issued Rev. Proc. 2005-32, which updates procedures for reopening closed examinations under §7605(b) and describes when a case is deemed closed after examination. It also provides a nonexclusive list of contacts and actions by the IRS that are not considered examinations, inspections, or reopenings of closed cases; explains when a closed case may be reopened to make an adjustment unfavorable to the taxpayer; and the approval process required to reopen a closed examination. This revenue procedure modifies and supersedes Rev. Proc. 94-68 and is effective May 20, 2005.

An agreed case is considered closed after examination when the IRS sends written notification to the taxpayer of adjustments to the taxpayer’s liability or acceptance of the taxpayer’s tax return or exempt status without change. In a fully agreed case where the IRS and taxpayer enter into a closing agreement, the case is not closed until the closing agreement is signed by an appropriate IRS official.

The revenue procedure provides four definitions for when an unagreed case is considered closed after examination. In the case of an unagreed income, estate, gift or chapters 41 through 44 excise tax case, or worker classification or plan qualification case subject to section 7436 or section 7476, it will be deemed closed when the period for filing a petition with the U.S. Tax Court expires with no petition filed. An unagreed TEFRA partnership case is considered closed when the time to bring an action in the U.S. Tax Court, a district court, or the U.S. Court of Federal Claims with respect to a Notice of Final Partnership Administrative Adjustment expires with no action filed.

Rev. Proc. 2005-32 defines the reopening of a closed case to involve the examination of a taxpayer’s liability which may result in an unfavorable adjustment to liability for the same taxable period as the closed case. It provides that the following four categories of contacts the IRS may make with a taxpayer are not considered examinations, inspections, or reopenings:

Communications between the IRS and a taxpayer that does not involve the IRS inspecting the taxpayer’s books of account, such as: (1) looking at a tax return; (2) matching information on a tax return with, or preparing a missing return from, other records that are already in the IRS’s possession; or (3) considering any records voluntarily provided by the taxpayer to explain an error on a tax return or discrepancy.
Voluntary participation by a taxpayer in an IRS-administered issue resolution program which invites the IRS’s involvement with respect to one or more taxable periods earlier than under the IRS’s normal audit procedures. Examples of these programs include the Industry Issue Resolution and Pre-Filing Agreement programs.
Review of a taxable period previously examined or adjusted when the review arises from or is affected by the treatment of tax return items or transactions by the same taxpayer in a different (usually later) taxable period or by a related taxpayer in any taxable period. Examples include adjustments for a correction under section 1311 (mitigation rules) or a change to an item that was carried back which affects the liability for the carryback year.
Examination of a taxpayer or a third party for one purpose, tax, or period which results in the IRS obtaining information relevant or useful for a different purpose, tax, or period that may later be matched with a return or lead the IRS to later open an examination for that different purpose, tax, or period. Under the revenue procedure, the IRS may contact any person to determine whether that person is required to maintain a list under §6112, or to inspect the list required to be maintained, or to verify the accuracy of or need for disclosure of a reportable transaction (or registration of a tax shelter) without that contact being considered an examination, inspection, or reopening with respect to any other party.

In general, the IRS will not reopen a closed case to make an unfavorable adjustment unless there was (1) fraud or misrepresentation of material facts, (2) a substantial error based on an established IRS position existing at the time of the examination, or (3) if the failure to reopen the case would be a serious administrative omission. However, Rev. Proc. 2005-32 also provides that if the IRS conducted and closed an examination that was limited to return items with a significant potential for abuse (which may include reportable transactions under §1.6011-4(b)) and later determines that other return items also merit examination, the IRS may reopen that examination.

If a reopening is sought, it must be approved in writing by the Territory Manager.

Rev. Proc. 2005-32 broadens the circumstances that permit the IRS to contact a taxpayer without that contact being considered an examination or case reopening. Furthermore, IRS warns taxpayers that the examples relating to contacts are not exhaustive or limitative and thereby reserves for itself a great deal of discretion in deciding when the reopening procedures must be followed.