Receiving an audit notice from the Internal Revenue Service can make anyone feel anxious. However, being selected for an IRS examination does not necessarily mean that the IRS believes you have committed fraud or done something improper.
An audit may result from a discrepancy between your tax return and information reported to the IRS, or the IRS may simply need additional documentation concerning a particular item of income, deduction, or tax credit.
The most important things are to remain calm, not ignore the notice, and respond by the stated deadline.
Begin by identifying the following information in the IRS notice:
Not every IRS notice constitutes a formal audit. For example, a CP2000 Notice generally proposes changes based on discrepancies between the taxpayer’s return and information reported to the IRS by third parties, such as Forms W-2 and 1099. The process for responding to a CP2000 Notice differs from a traditional IRS audit.
Therefore, it is important to identify the exact notice or letter number before deciding how to respond.
An IRS audit generally begins with an official notice sent by mail. Be cautious of anyone who unexpectedly contacts you by telephone, email, text message, or social media, claims that an audit has begun, and demands immediate payment.
Scammers frequently impersonate the IRS and may use threats, urgent payment demands, or requests for unusual payment methods.
If you are uncertain whether a notice is legitimate, do not rely solely on the telephone number or contact information shown in the notice. You may confirm the notice through the official IRS website, your IRS Online Account, or a verified IRS telephone number.
The audit notice should identify the information the IRS wants to examine. Depending on the issues involved, the requested documents may include:
As a general rule, submit copies rather than original documents. You should retain a complete copy of everything provided to the IRS.
Do not send a disorganized collection of documents. Arrange the materials according to each tax return item being examined. When possible, include a cover letter or index explaining which documents support each item.
A well-organized response can help the IRS examiner understand your position and may reduce unnecessary follow-up requests.
You must respond by the deadline shown in the notice. If you cannot gather all required documents in time, contact the IRS before the deadline and request an extension.
For correspondence audits, the IRS may allow a one-time 30-day extension in certain circumstances. However, not every deadline can be extended.
In particular, the deadline for filing a petition with the United States Tax Court in response to a Statutory Notice of Deficiency generally cannot be extended. Missing that deadline can materially affect your ability to challenge the proposed tax liability without first paying it.
When submitting documents by mail, use a method that provides proof of mailing and delivery. If the notice permits electronic submission, you may be able to use an IRS system such as the Document Upload Tool. Follow the submission instructions stated in the notice.
IRS examinations generally fall into three categories.
A correspondence audit is conducted through the mail or an IRS electronic upload system. It usually concerns a relatively limited issue, such as a particular item of income, deduction, or tax credit.
Although correspondence audits may appear straightforward, an incomplete or poorly organized response can result in additional tax assessments or further inquiries.
An office audit involves an in-person meeting at an IRS office. The taxpayer or the taxpayer’s authorized representative may be asked to attend and provide documents.
An office audit may examine a broader range of issues than a typical correspondence audit.
During a field audit, an IRS Revenue Agent may conduct the examination at the taxpayer’s business, home, representative’s office, or another agreed-upon location.
Field audits may be more extensive, particularly when they involve a business, a high-income taxpayer, complicated transactions, or international tax issues.
Taxpayers have the right to be represented before the IRS by a qualified attorney, Certified Public Accountant, or Enrolled Agent.
By submitting Form 2848, Power of Attorney and Declaration of Representative, an eligible professional may be authorized to communicate and meet with the IRS on the taxpayer’s behalf.
You should consider seeking professional assistance as early as possible when:
Before retaining a professional, confirm that the person has relevant experience handling IRS examinations and disputes. General tax-return preparation experience does not necessarily mean that the professional has substantial experience representing taxpayers in audits.
You must respond to the IRS’s questions accurately, completely, and honestly. However, providing information that the IRS did not request may unnecessarily expand the scope of the examination.
Before submitting a response, consider whether:
You should never provide false information, alter documents, or create records that did not previously exist. Such conduct could create consequences far more serious than the issues raised in the original audit.
Keep a detailed record of every communication with the IRS, including:
Do not rely exclusively on oral explanations provided during telephone conversations. Important explanations and positions should generally be confirmed in writing.
Maintaining an organized audit file can become especially important if the matter is reassigned to another IRS employee or proceeds to an administrative appeal.
An IRS audit generally concludes in one of three ways:
Even if you intend to agree with the proposed adjustments, carefully review the calculations before signing an agreement. Confirm that the additional tax, interest, penalties, foreign tax credits, and other affected items have been calculated correctly.
If you disagree with the findings, you may be able to request review by the IRS Independent Office of Appeals.
If the IRS issues a Statutory Notice of Deficiency, you generally have 90 days from the date of the notice to file a petition with the United States Tax Court. In certain cases, the filing period may be 150 days when the notice is addressed to a person outside the United States.
Because these deadlines have significant legal consequences, you should consult a qualified professional promptly after receiving a Notice of Deficiency.
If you ignore an IRS audit notice, the IRS may complete the examination without the benefit of your records or explanation. It may then assess additional tax, interest, and penalties based on the information available to the agency.
Trying to correct or challenge the result afterward may require substantially more time and expense.
When you receive an IRS notice, your first priorities should be to identify the type of notice, the tax year involved, the items under examination, and the response deadline. You should then organize the necessary records and, when appropriate, consult a tax professional experienced in IRS examinations.
A timely, accurate, and carefully prepared response can make a significant difference in how efficiently the matter is resolved.
Disclaimer: This article is provided for general informational and educational purposes only and does not constitute tax, legal, accounting, or other professional advice. IRS procedures, deadlines, and the appropriate response depend on the taxpayer’s particular facts and circumstances. You should consult a qualified professional regarding your specific situation before taking action based on this article.