An IRS Audit Letter

An IRS Audit Letter isn’t a Reason to Panic. Here is Why

 – An IRS Audit Letter – 

There are very few people who receive an IRS audit letter, but if you do, then, don’t panic. There is surely a good reason why. If you are totally honest when filling out your tax return, your audit can likely be handled with relative ease.

What is an IRS Audit?

An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.

How to Identify an IRS Audit Letter

Just because you receive a letter from the IRS doesn’t mean you’re being audited. In many cases, the IRS will send a letter simply asking for additional information or clarification of details listed on your tax return.

An IRS audit letter will come to you by certified mail. When you open it up, it will identify your name, taxpayer ID, form number, employee ID number, and contact information.

The first line of text within your letter from the IRS may state something along the lines of “Your (state or federal) income tax return for the year shown above has been selected for examination.”

Your letter will also reveal the primary focus of the audit and what documentation you need to provide to resolve it.

In most mail audits, the IRS requests receipts or documentation to prove the item in question on your return, as well as an explanation of your circumstances that led to the filing.

Determine How You’re Being Audited

There are a few types of IRS audits, each with unique requirements. Understanding how you are being audited can help you determine what documents you need to gather and where to send them.

Correspondence Audit: The IRS requests additional information regarding a part of your tax return, such as receipts or canceled checks.

Office Audit: The IRS requests that you bring specific documentation into your local IRS office, where your audit will be conducted.

Field Audit: An IRS agent shows up at your place of business to conduct a face-to-face audit.

Taxpayer Compliance Measurement Program Audit: The purpose of this audit is to update the data used to write the computer scoring program used by the IRS. In this case, an extensive examination of your tax return takes place, and every item must be substantiated by documentation, including birth and marriage certificates.

Why am I Being Selected for an Audit?

The selection for an audit does not always suggest there’s a problem. The IRS uses several different methods:

  • Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. IRS compares your tax return against “norms” for similar returns. They develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.
  • Related examinations – IRS may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.

Next, an experienced auditor reviews the return. They may accept it; or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.

How to Create an Audit Response Letter

Your actions before, during, and after your IRS audit will determine your compliance with the government.

Respond as soon as possible with either a phone call or an audit response letter—you will have 30 days to do so without a penalty. If you choose to write an audit response letter, here are some tips.

  • Include the following: Tax ID number, full name, contact information, employee ID, business ID (if applicable), and the name of the IRS officer who is in charge of your case.
  • Address each finding issue that the IRS stated in your audit letter.
  • Provide any and all related documentation attached to your letter.
  • Request a time and date to meet and resolve the finding issues.

The best thing to do when receiving an IRS audit letter (by certified mail) is to contact a tax professional.

A CPA or tax attorney will know exactly how to handle your unique circumstances and reasons for the audit. These response letters need to be flawless; if done correctly, they can resolve an audit quickly and stress-free.

How will the IRS Conduct my Audit?

The IRS manages audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit).

Note that, you will be contacted initially by mail. The IRS will provide all contact information and instructions in the letter you will receive.

Depending on the issues in your audit, IRS examiners may use one of these Audit Techniques Guides to assist them. These guides will give you an idea of what to expect.

What do I Need to Provide?

The IRS will provide you with a written request for the specific documents they want to see. Here’s a listing of records the IRS may request.

The IRS accepts some electronic records that are produced by tax software. The IRS may request those in lieu of or in addition to other types of records.

Contact your auditor to determine what we can accept. The law requires you to keep all records you used to prepare your tax return – for at least three years from the date the tax return was filed.

What are my Rights?

What are my rights?

Publication 1, Your Rights as a Taxpayer, explains your rights as a taxpayer as well as the examination, appeal, collection, and refund processes. These rights include:

  • A right to professional and courteous treatment by IRS employees.
  • A right to privacy and confidentiality about tax matters.
  • The right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
  • right to representation, by oneself or an authorized representative.
  • A right to appeal disagreements, both within the IRS and before the courts.

How does the IRS Conclude an Audit?

  • No change: an audit in which you have substantiated all of the items being reviewed and results in no changes.
  • Agreed: an audit where the IRS proposed changes and you understand and agree with the changes.
  • Disagreed: an audit where the IRS has proposed changes and you understand but disagree with the changes.

What Happens When you Agree with the Audit Findings?

If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted.

If you owe money, there are several payment options available. Publication 594, The IRS Collection Process, explains the collection process in detail.

What Happens When you Disagree with the Audit Findings?

You can request a conference with an IRS manager. The IRS also offers mediation or you can file an appeal if there is enough time remaining on the statute of limitations.

Protect Yourself in Case of an Audit. Simply keeping all of your paperwork can prepare you for a possible audit.

Here are some basic steps to keep your records in order:

  1. Keep tax returns and records for three years.
  2. Save your checkbook registers.
  3. Organize receipts by date for major purchases.
  4. File bills in folders.
  5. Journal and keep evidence of deductible information.
  6. Keep tax documents in one location.

If you enjoyed this article and found it helpful, do well to share it with friends and loved ones, and also, you can share your opinions in the comment section. 

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