Legal Definitions - revenue agent's report

A Revenue Agent's Report (RAR) is an official document issued by the Internal Revenue Service (IRS) after it has completed an audit of a taxpayer's financial records and tax return. This report details any proposed changes or adjustments the IRS believes are necessary to the original tax return, based on their findings during the audit. It outlines the specific reasons for these adjustments, the revised tax calculations, and the resulting impact on the taxpayer's liability, which typically involves additional taxes owed.

Here are some examples illustrating the application of a Revenue Agent's Report:

• Example 1: Individual Taxpayer with Disallowed Business Expenses

  After an IRS audit of her personal income tax return, which included a Schedule C for her freelance photography business, Maria received a Revenue Agent's Report. The report detailed that several large business expenses she had claimed, such as home office deductions and travel costs, were disallowed because she lacked proper receipts and logs to substantiate them. The RAR clearly itemized each disallowed expense, recalculated her taxable income, and showed the additional tax amount she now owed as a result of these adjustments.

• Example 2: Small Corporation with Incorrect Depreciation

  A small manufacturing company, "Precision Parts Inc.," underwent an IRS audit. The auditor discovered that the company had incorrectly calculated depreciation for a new piece of machinery, leading to an overstatement of deductions in previous tax years. Following the audit, the firm received a Revenue Agent's Report that meticulously listed the corrected depreciation schedule, explained the proper accounting method, and presented the revised corporate tax liability for the affected years, including any interest on the underpayment.

• Example 3: Trust Audit with Misclassified Income

  The trustee of a family trust was audited by the IRS concerning the trust's income tax return. The IRS determined that certain investment income, which the trust had classified as tax-exempt, should have been reported as taxable income according to specific trust tax regulations. The subsequent Revenue Agent's Report explained the reclassification of this income, detailed the relevant tax code sections, and presented the updated tax obligation for the trust, reflecting the increased taxable income.