Issuing a Letter 627 and accepting a return as filed is not an "examination," so the section 7605(b) one-inspection rule does not bar examining the return

Plain-English summary

Section 7605(b) generally limits the IRS to one inspection of a taxpayer's books for a given year unless it follows special reopening procedures. This short Chief Counsel email advises that issuing a Letter 627 (and previously accepting the estate's return as filed and paying a refund) does not prevent the IRS from later examining the return. There was no prior "examination" for section 7605(b) purposes: the IRS never inspected or even requested the taxpayer's books before the opening letter, and merely accepting a return as filed is not an examination under Rev. Proc. 2005-32. Because there was no closed examination, the reopening procedures in Rev. Proc. 2005-32 do not apply, and a Letter 627 is not a closing agreement. The email notes it is the IRS's business decision whether to examine a return it previously accepted.

Ruling snapshot

• Question: Does issuing a Letter 627 (after accepting the return as filed) bar the IRS from examining the return under the section 7605(b) one-inspection rule?
• Outcome: Advice given (no bar; the IRS may examine the return)
• Key authorities: IRC § 7605(b); Rev. Proc. 2005-32; Treas. Reg. § 601.105(j)

Full text (IRS public release)

ID: CCA_2021040115194343
UILC: 7605.01-00

Number: 202142010
Release Date: 10/22/2021
From: ---------------------
Sent: Thursday, April 1, 2021 3:19:43 PM
To: -------------------------------------------
Cc: ----------------
Bcc:
Subject: RE: -----------------------------

We agree with your conclusion that the issuance of a Letter 627 to --------------does not
preclude the IRS from examining the return.

There is no legal prohibition on the IRS’s examination of the return. There was no
examination of the return (either original or supplemental) for purposes of section
7605(b) and, by extension, Rev. Proc. 2005-32. Prior to the issuance of the opening
letter to the estate, the IRS never inspected ----------------books of account (nor did the
IRS even request such records); thus, the prohibition of “only one inspection” in section
7605(b) does not apply. Rather, the IRS accepted the return as filed, issued a refund,
and sent a Letter 627. Acceptance of a return as filed does not constitute an
examination. See Rev. Proc. 2005-32, § 4.03(1)(a) (looking at a return is not an
examination). The minimal contacts/communications between the IRS and ----------------
here easily fall into the category of “narrow, limited contacts between the Service and a
taxpayer that do not involve the Service inspecting the taxpayer’s books of account” that
do not constitute an examination or inspection. See Rev. Proc. 2005-32, §§ 4.03,
4.03(1).

In response to the opening letter, ----------------attorney contends that the IRS has not
followed the reopening procedures in Rev. Proc. 2005-32, § 5. However, these
procedures apply only to the reopening of a closed examination. See Rev. Proc. 2005-
32, § 5.01 (the IRS “will not reopen a case closed after examination to make an
adjustment to liability unfavorable to the taxpayer unless” at least one of three criteria is
met) (emphasis added); see also Treas. Reg. § 601.105(j) (same). Because there was
no examination in the first place, the opening letter is not a reopening of a closed
examination.

The prior advice from P&A that a Letter 627 is not a closing agreement supports our
conclusion here that the IRS is not legally prohibited from examining the return.

It is the IRS’s business decision to determine the factors that should or must be
considered when examining a return that was previously accepted as filed. That said,
2

there’s a consideration about IRM 4.25.14.8.1 and Letter 627 that we’d like to discuss
with you. Please let -------- know your availability for this and next week and we will
send a meeting invitation.

Thanks,