I received an audit notice from the IRS. What do I do about it?

Assuming the notice says you must deal with the IRS by mail, you have been “invited” to a correspondence audit. The following excerpts from an article by the National Taxpayer Advocate give you a good idea of what this is all about and how to deal with it.

 

Correspondence audits are tax examinations conducted by mail for a single tax year involving no more than a few issues that the IRS anticipates it can resolve and close by reviewing relevant documents. Because these audits are limited in scope, the volume of these audits far exceeds any other type of audit conducted by the IRS.

 

Taxpayers receiving correspondence audit notifications should read the letters carefully and follow the instructions. All documentation requested should be submitted to the IRS by the due date in the letter, or the taxpayer should contact the IRS and request additional time. Ignoring the IRS is typically not a good strategy. If the IRS does not receive a response by the due date, it will not make a second contact. If the IRS does not receive a response, it will generally disallow the item(s) claimed and ultimately issue a Notice of Deficiency in accordance with IRC § 6212. A Notice of Deficiency is a legal notice that the IRS is proposing an additional deficiency (balance due). It provides taxpayers 90 days to petition the United States Tax Court for review (150 days if addressed to a person outside the United States). If no petition is filed, the IRS has the legal authority to assess and collect the proposed deficiency. After the assessment, a notice will be sent advising of the tax account adjustments, explaining any balance due, and requesting payment. If full payment or payment arrangements are not made within the timeframe on the notice, collection notices will be issued, and subsequent collection action may commence. The first collection notice is referred to as the CP 501, Individual (IMF) Balance Due – First Notice. It is wise to address any balance due as quickly as possible to avoid additional penalties, interest, or collection actions that could occur if the balance due remains unresolved.

 

Best Practices

 

When responding to the IRS, we recommend you do not send original documents – send copies. When submitting documents, you should include your name, taxpayer identification number (Social Security number or individual taxpayer identification number) and the tax year involved on each page. This helps the IRS associate all documents with your IRS’s file. You can contact the number provided on the IRS notice if clarification is needed, and always retain copies of any correspondence received from, or submitted to, the IRS. Along with your documentation consider providing written statements to support the items under examination. In many cases, statements or use of an affidavit similar to testimony during a trial can be used to corroborate a credit, deduction, or item of income. Also, there may be alternative documents that can support the item at issue that aren’t listed on the IRS’s original request. Taxpayers should consider reaching out to a tax professional, such as an LITC, for assistance in responding to IRS inquiries.  Usually, there is more than one way to approach supporting an item at issue to establish your entitlement to the deduction or credit. Taxpayers should not be constrained by only answering the IRS’s inquiries, as taxpayers may have additional information or documents that will support items on the return.

 

Communication is key during an examination. Do not disregard IRS notices or deadlines. If a taxpayer cannot timely respond, it is imperative that the taxpayer contact the IRS and request additional time. Disregarding the IRS is not a good practice.

 

Upon review of the documents submitted, the IRS can agree and close the matter or issue an examination report reflecting any proposed adjustments to the return under audit. A word of caution: Taxpayers should not sign an audit report if they do not agree with or understand the IRS’s proposed adjustments. Instead, they should respond by the due date sending additional documentation or further explanation, request an informal conference with the examiner’s manager, or request a conference with the IRS Independent Office of Appeals (Appeals). Requests for a conference with Appeals, referred to as a protest, must be made in writing and include the reasons for disagreeing with the IRS’s proposed adjustments. Information on the correspondence audit process and how to file a protest can be found in IRS Publication 3498-A, The Examination Process (Audits by Mail).

Communicating With the IRS Can Be Challenging

Unlike other IRS audits, correspondence audits are not assigned to a single examiner who oversees the entirety of the audit. These taxpayers are referred to Wage and Investment (W&I) and Small Business and Self Employed (SB/SE) correspondence audit toll-free phone numbers that operate with high hold times and provide limited levels of service.