Taxpayers don’t necessarily need to panic when they receive an IRS letter. Often, returns are chosen for examination randomly, or because the IRS needs additional information. This article provides tips on responding to audit letters and discusses when taxpayers might want to ask their tax advisor for help.
What to do if you’re audited by the IRS
The IRS audits only about 0.5% of individual tax returns, and more than 70% of those are correspondence (as opposed to field or in-person) audits. Such low odds of being audited hardly matter, however, if your return is selected.
If you receive a letter from the IRS, remain calm. Your return may have been chosen for examination randomly, or because the IRS needs additional information. And even if the IRS suspects mistakes or misstatements, understanding the process can make it smoother.
The IRS will generally contact you via U.S. mail or with a phone call and follow-up letter. (The IRS never uses email to notify taxpayers of pending audits; if you do receive an email or phone notification, it’s likely an attempt to defraud you.) The upper right corner of the envelope you receive should include a number specifying the reason for the correspondence. For example, Notice Number CP05A indicates that the IRS is examining your return and requires documentation.
Most IRS audit notices include a deadline by which you’re required to respond. With that and the focus of the audit in mind, begin gathering the information you’ll need to respond appropriately. This may include invoices, canceled checks and receipts, as well as your tax return for the year(s) in question. Make duplicates of any documents you’ll need to provide the IRS, so you don’t hand over your only copy of a record.
While it’s critical to provide the information requested, you don’t want to offer additional records, such as tax returns from years falling outside the audit’s scope. Doing so may prompt more questions.
If a tax preparer helped with your return, contact him or her. That professional will likely know what information should be provided and how to answer questions appropriately, without inviting further investigation.
The tax advisor also can review any documents you’re asked to sign — before you put pen to paper. This can be valuable whether you’re responding in person or via letter. Finally, having an expert on your side can limit the time and stress of the audit.
Most taxpayers being audited assume that the process will end with them owing money. In fact, audits often conclude with an individual’s tax liability remaining the same. And in some cases (34,000 in 2016), the IRS ends its examination concluding that it owes money to the taxpayer, plus interest. But if you do end up owing back taxes, how much should you expect to pay? The answer varies widely. Keep in mind that, in addition to the amount owed, you’ll be assessed interest and, potentially, penalties.
Although most audited taxpayers agree to any changes proposed by the IRS, you can appeal the decision through the IRS’s Appeals Office. Or you can take your case to court. IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree, explains your rights to appeal and the proper procedures to do so.
Resolve it quickly
Although an audit can take a little time to conclude, most are straightforward. With a correspondence audit, you don’t even have to meet with an IRS examiner. Simply mail requested documents back to the IRS and respond promptly to any follow-up questions. If you’re concerned about the IRS’s requests or disagree with its conclusions, contact your tax advisor.