If you are one of the less than one percent of people who receive an IRS audit letter, don’t panic. More than likely, your tax return was flagged because of one of these common IRS audit triggers.
For most mail audits, the IRS asks you to explain or verify something simple on your return, including:
- Unreported income
- Filing status
- Itemized deductions
- Eligibility for credits
Assuming that you were totally honest when filling out your tax return, your audit can likely be handled with relative ease. However, if you were intentionally dishonest in your filings, you could end up in hot water. Either way, if you receive an audit letter, the first thing you should do is open it immediately.
If you had your taxes for the year in question done by a tax professional, contact him or her to ask for clarification about the problem. If he or she is unable to help or if you don’t have a regular tax professional, consult a qualified tax professional right away and ask for a review of your return.
Here are a few other things to keep in mind.
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.
IRS Audit Letter Examples
The following 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 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.
How to Properly Respond to an IRS Audit Letter
It’s imperative to respond to the IRS as soon as possible with either a phone call or an audit response letter within 30 days. Any longer, and you could be penalized.
Gather Your Documentation
After you’ve read your IRS audit letter and determined why the IRS chose to audit you, you should gather all of the documentation that supports the deductions in question. This may include receipts, appraisals, canceled checks, or mileage logs.
Generally speaking, the IRS has three years from the filing date to audit you, so it’s a good practice to save all of your tax documents for at least this long. However, in cases of fraud or failure to file, they could go back much further.
If you failed to save any documentation to prove that your claims are valid, try to garner support from third parties that may possess a reasonable way to verify the accuracy of your claims. For example, if you are being audited over donations made in 2017 and don’t have any evidence, reach out to the charities involved and ask them to send you documentation from their records.
How to Write an Audit Response Letter
A qualified tax attorney can help you to craft a compliant audit response letter. It will include:
- Tax ID number
- Full name
- Contact information
- Employee ID
- Business ID (if applicable),
- The name of the IRS officer who is in charge of your case
The letter will also carefully address each finding issue that the IRS stated in your audit letter, provide all documentation attached to your letter, and request a time and date to meet and resolve the finding issues.
While it may be tempting to write the letter yourself, there is some risk involved. An audit response letter must be flawless, dotting every I and crossing every T, precisely to the IRS’ specifications, one mistake could delay a resolution to your audit.
An experienced tax attorney will know exactly how to respond to the IRS based on your unique circumstances and the reasons for your audit. When done correctly, an audit response letter can quickly expedite a resolution to your examination.
After you or your tax attorney send in your documentation, along with a written explanation of why you disagree with the findings, the IRS will review your information and send a response.
What Happens if You Don’t Respond to an IRS Audit Letter?
If you fail to respond to your IRS audit letter within the allotted 30 days, respond late, don’t respond at all, or don’t respond correctly because you failed to contact a tax attorney, in most cases, the IRS will disallow the items in question on your tax return and send you a bill – plus penalties and interest accrued from the date of filing.
Just as it will hurt you to respond late, incorrectly, or not at all, it’s also important not to send multiple responses; this confuses the IRS. If their central processing center doesn’t associate all of your letters, it could appear as though you don’t have a complete response, preventing the IRS from understanding your position, and ultimately causing you to be penalized.
How Long Does it Take to Resolve an IRS Audit by Mail?
Mail audits can take anywhere from three months to more than a year to be resolved. However, by responding accurately and on time, with the help of a tax attorney, you have the best shot possible to get things wrapped up in just a few short months.
What Happens if the IRS Decides You Owe More?
If the IRS tax examiner determines you owe more taxes, and adds penalties, you can simply agree to pay or ask the IRS Appeals Office to review your case. They’ll look at your case and any new information you have and give you an independent analysis.
If you do end up owing more taxes and you don’t have the money readily available, you don’t have to pay immediately. You can set up a monthly payment plan with the IRS, or ask for an extension. If you are going through a financial hardship, the IRS offers other arrangements that may allow you to defer payment or settle.
Although ignorance is bliss, the absolute worst thing you can do when the IRS sends you an audit letter is to ignore it. The problem will not go away, and you have a finite amount of time to respond before the audit notice turns into a tax bill.
If you receive an audit letter from the IRS, contact a qualified tax attorney to help you face this situation head-on for the absolute best outcome.
- Why is Crypto So Popular and What Does it Mean for Your Taxes? - September 19, 2022
- Short- vs. Long-Term Capital Gains Taxes for Cryptocurrency - August 18, 2022
- The IRS, Cryptocurrency and Your Taxes: What You Need to Know - July 20, 2022