Audited Again? Repetitive Audit Rules and Reopening Closed Exams

I hear this regularly: "They audited my charitable deductions two years ago and found nothing. Now they want to audit them again." Sometimes the IRS is entitled to do that. Sometimes it is not supposed to. The difference depends on the rules below, and on whether you raise them.

Two different problems

People use "audited again" to mean two things:

• A new year, the same issue. You were examined for an earlier year, and now a later year is under exam for the same item. This is the repetitive audit question.
• The same year, a closed exam. Your audit for a year was closed, and now the IRS wants to revisit that same year. This is the reopening question.

Different rules apply to each. Let's take them in order.

Repetitive audit procedures

IRM 4.10.2.13 sets out when repetitive audit procedures apply. They cover individual returns without a Schedule C or Schedule F, when both of these are true:

1. An examination of one or both of the two preceding tax years resulted in a no change or a small tax change (a small deficiency or overassessment), and
2. The issues examined in either of those two years are the same as the issues selected for examination in the current year.

The IRM adds that prior-year surveys do not count. A survey is a return the IRS looked at and closed without examining. You need a real prior exam.

Note the limits. This protection is for individual returns without business or farm schedules. If you file a Schedule C, the repetitive audit procedures do not apply by their terms, though the separate scope-limiting rule below may still help.

Before the IRS contacts you

During initial screening of an individual return without a Schedule C or F, examiners must check for an audit in the preceding two years, using the return charge-out form or account research that shows prior audit years, disposal codes, deficiency or overassessment amounts and no-change issue codes (IRM 4.10.2.13.1). If the criteria are met, the examiner should survey the return, meaning close it without examination, and document why.

After the IRS contacts you

Sometimes the screening misses it. If you respond to the initial contact by stating that an exam of the same issues in either of the two preceding years ended in no change or a small change, and an appointment is scheduled, the IRM says the examiner should advise you that the appointment is postponed pending a review (IRM 4.10.2.13.2).

If the criteria apply, the case is closed. If your records were not examined, it is closed as a survey after assignment with Letter 1024. If records were examined, it is closed with regular no-change procedures. If the criteria do not apply, the examiner sends Letter 2685, Repetitive Exam Letter, explaining that the exam will continue and rescheduling the appointment.

A related rule that applies more broadly

Even when the full repetitive audit procedures do not apply, IRM 4.10.2.7.1.4 tells examiners to limit scope: if issues in the current exam were no-changed, or resulted in a small change, in either of the two preceding years, those issues should be eliminated from the audit plan unless other information shows they are worth examining. That rule is not limited to returns without a Schedule C or F. See audit scope expansion.

How to invoke repetitive audit protection

1. Find the prior closing letter. For a field or office exam that ended with no adjustments, that is usually Letter 590, the no-change final letter, which the IRM says notifies you the report has been reviewed and accepted (IRM 4.10.8.3.1). Keep the no-change report too.
2. Compare the issues. Line up the issues in the prior exam with the issues in the new letter. The rule turns on the same issues.
3. Respond in writing right away. State that the same issues were examined in a specific year within the two preceding years with a no-change or small change, cite IRM 4.10.2.13, and attach the prior letter and report.
4. Ask that the appointment be postponed pending review, as the IRM provides.

Do this before you start producing documents. Once records are examined, the closing changes from a survey to a no-change, which is fine, but you have spent the time you were trying to save.

A sample response

A short letter works best. Something like this:

We received your letter dated [date] regarding the [year] return. The issues identified, [list], were examined for tax year [prior year] and closed with no change, as shown in the enclosed Letter 590 and examination report. Because an examination of the same issues in one of the two preceding years resulted in no change, we request that this examination be reviewed under the repetitive audit procedures of IRM 4.10.2.13 and that the scheduled appointment be postponed pending that review.

Attach the prior closing letter and report. If the prior result was a small change rather than a no change, include the report showing the amount. Keep the tone factual. You are pointing the examiner to a procedure the examiner is supposed to follow, not accusing anyone of anything.

Reopening a closed exam: Policy Statement 4-3

Now the second problem. Your exam for a year is closed. Can the IRS come back to the same year?

Policy Statement 4-3, in IRM 1.2.1.5.1, says the IRS will not reopen any case closed after examination to make an adjustment unfavorable to the taxpayer unless:

• there is evidence of fraud, malfeasance, collusion, concealment or misrepresentation of a material fact;
• the prior closing involved a clearly defined substantial error based on an established IRS position existing at the time of the previous examination; or
• other circumstances exist which indicate failure to reopen would be a serious administrative omission.

The policy statement also requires prior approval for all reopenings at a senior management level. And the Code backs the principle: IRC 7605(b) provides that only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or the IRS, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

What does not count as an exam or a reopening

Policy Statement 4-3 also explains what is not an examination, which matters for both rules:

• Contacts to verify or adjust a discrepancy between your return and information returns, including late or amended returns, are not examinations or reopenings. That is the CP2000 process. See CP2000 vs. audit.
• Adjustments of unallowable items and other service center return correction programs are not examinations, so a later exam is not a reopening.

The practical lesson: a CP2000 for a year does not count as your "one inspection," and it does not count as a prior exam for repetitive audit purposes either.

When reopening works in your favor

Policy Statement 4-3 restricts reopening to make adjustments unfavorable to you. It does not stop you from seeking a correction in your favor. If a closed exam assessed tax you do not owe and the balance is unpaid, audit reconsideration is the route. If it is paid, a timely refund claim is the route. See when reconsideration is denied.

The bottom line

Keep your audit closing letters. Forever, practically. They are the evidence that triggers repetitive audit protection and the reopening limits. When a new audit letter arrives, compare it to your history before you do anything else. If the same issue came out clean in either of the last two years, say so, in writing, with the proof. The rules exist. Make the IRS apply them.