The Latest Reasons the IRS Sends Audit Letters
The IRS has been sending audit letters to many taxpayers — especially for underreported income — and you need to make sure you know what to do if you receive one.
With all the technology the government has in place, including a computerized matching system, anything that doesn’t match up with the income the government expects you should have reported can trigger an audit — and lead to an audit letter.
If you were completely honest when filling out your tax return, your audit can likely be handled with relative ease. But if you were intentionally dishonest, you could end up in big trouble. Regardless, if you receive an audit letter, the first thing you should do is open it immediately.
An IRS audit letter often makes people anxious or fearful. But in most cases, there is no need to panic. Typically, an audit letter means that the IRS flagged your tax return due to a common audit trigger.
For most mail audits, the IRS asks you to explain or verify something simple on your return, such as:
- Unreported/under-reported income
- Filing status
- Itemized deductions
- Eligibility for credits
Lately, there are more and more audit letters going out for various forms of underreported income in particular.
These discrepancies lead to a type of audit letter known as an IRS Letter CP2000 and often come in the following situations:
Let’s assume you have worked for Uber and Lyft and DoorDash and many other delivery services, all in the same year.
You will receive a 1099 for each one. If you fail to report one of your jobs to the IRS, your tax return will be flagged for an audit.
The same is true if you have multiple jobs for which you receive a W-2, if you don’t include them all with your tax return.
You might also receive an audit letter if you moved and your tax form from one of your jobs went to your old address.
Taxpayers who sell goods online are ripe for audit letters.
That is especially true because many online sellers use payment processing apps such as Venmo or PayPal to conduct their transactions.
Consider a situation where an online seller uses a PayPal account that isn’t their own, even one created under their spouse’s Social Security number, to receive income that they properly reported to the IRS under their business EIN number.
In such a case, the 1099-K for that income will be issued to the spouse — not the business that received the income — which will make it look like the spouse underreported their income.
Under a new federal law, starting in 2023, many more transactions through these payment processing apps will trigger a 1099-K.
In 2022, you had to have more than $20,000 worth of transactions for goods and services and more than 200 business transactions in a year to trigger a 1099-K.
In 2023, the 200-transaction limit is going away, and the dollar value is being reduced substantially to $600.
That is going to trigger a lot of audit letters.
For tax-reporting purposes, certain stock sales are “covered,” which means that your stock brokerage firm is required to report the cost basis to the IRS. The cost basis is the amount you originally paid for it.
For noncovered stock shares, only the taxpayer will receive the cost basis reporting, and then they must report it to the IRS.
If you fail to report the basis, an audit might be triggered because the government assumes that the amount you made after selling the stock is the total you earned — instead of the difference between the amount you sold it for and the original basis.
Real Estate Sales
If you sell your residence and fail to report the cost basis, that discrepancy will likely trigger an audit letter.
Many people have dabbled in cryptocurrency investing in recent years and don’t realize the tax implications.
If you sell your crypto and made money on your investment but fail to report the earnings, that will eventually trigger an audit letter.
If you win a significant payout at the casino, you will receive a Form W-2G.
That form will only show how much you won, but not how much you spent to win it. You need to pay income tax on the difference between what you spent and what you won.
However, if you fail to report what you spent, the IRS might think you earned more than you did and send you an audit letter.
As a taxpayer, you have the burden to prove that you didn’t underreport your income.
It can be quite difficult to do that if you have to prove you actually didn’t receive money that the IRS believes you received under your Social Security number, something that can happen in cases of identity theft.
An experienced tax attorney can help you make your way out of a scam like that.
Schedule C Correspondence Letters Continue to be Common
Correspondence audits of Schedule C continue to be a big issue for small business taxpayers and sole proprietors.
In these cases, the IRS flags your return if your income or expenses fall outside the expected standard for your industry.
If you report a small income like $10,000 along with $80,000 in business expenses, for example, you should expect an audit letter.
How to Identify an IRS Audit Letter
Simply receiving a letter from the IRS doesn’t mean you’re being audited.
In many situations, the IRS will send a letter asking for additional information or clarification of details listed on your tax return, which doesn’t make it an audit letter.
An IRS audit letter will come by certified mail. It will identify your name, taxpayer ID, form number, employee ID number, and contact information. The first line of the letter may say 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 explain the main focus of the audit and what documentation you need to share to resolve it.
In most mail audits, the IRS will request 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.
Real IRS Audit Letter Examples
Here are samples of actual IRS audit letters that our clients have received. Click to view each.
Determine How You’re Being Audited
There are a few types of IRS audits, each with their own rules and requirements. Understanding how you are being audited will help you figure out 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.
Have you received a letter from the IRS? Here’s what to do next.