An IRS audit letter is a communication from the IRS notices by mail only. The IRS sends these letters by U.S mail to inform customers that they are looking closely at some specific items from a customer’s tax return. IRS letters state the tax year being audited, the specific items from the return, and what the IRS expects the taxpayer to do.
Audit letters most often ask the taxpayer to submit some paperwork, including any receipts, bank statements, W-2s, 1099s, and any documentation they may have that pertains to the deductions and credits. Occasionally, the taxpayer is only asked to explain or verify the accuracy of some amounts, rather than submit a lot of documents.
An audit letter is certainly not a bill, nor is it a notice of penalty assessment. It is not an audit of a tax return, rather an IRS audit information letter. It is to help the IRS confirm what the taxpayer may have submitted in the tax return.
Why Does the IRS Send Audit Letters?
To conduct audits, the IRS combines human assessments and automated systems. The IRS might send an audit letter if the following occurs:
Discrepancies between the income report and the income reported to the IRS by employers or financial entities. For example, if there is a mismatch between a 1099 or W-2, the IRS may lift it from the tax return.
Significant and unusual tax deductions or tax credits may raise its flag if they are not proportionate to the earned income. For example, the IRS may want verification documentation if there are extreme tax deductions.
If there are arithmetic mistakes or missing forms, it could flag the return. It may also involve price-volatile transactions, such as stock trading or real estate sales. Some self-employed individuals may face audit scrutiny as the IRS regards their income and businesses as a higher risk.
Types of IRS Audit Letters
There are three main types of IRS audits, each corresponding to a different kind of audit letter.
Correspondence Audit
A correspondence audit mostly focuses on one issue, such as verifying a deduction or credit. This audit occurs entirely through the mail, and this is the most common audit type. The audit letters state the required documents and deadlines.
Office Audit
The second type is the office audit. This audit requires you to visit the local IRS office. You will need to bring specific documents and meet the IRS staff in order to complete the processes outlined in the audit letter. Office audits are more detailed than correspondence audits, but they are still limited in scope.
Field Audit
A field audit is when the IRS sends one or more agents to meet you in person to go over the audit. They will join you in your home or the office of your tax professional. Field audits are the most complex audits, and they are most common in businesses or more complicated tax situations. The audit letter will clarify the scope and which documents you need.
What Information Is Included in an IRS Audit Letter?
There are a few important things included in an IRS audit letter. It tells you which year's taxes are being audited and which lines and schedules are being looked at. The letter explains what documents or answers are needed and tells you how to send them in.
Most importantly, there are deadlines in the letter for when the documents need to be sent in. If you do not meet the response deadline, the IRS can make new changes to your return and the changes can lead to extra taxes, penalties, or interest.
There are also audit letter instructions, a reference number, and legal documents that mention your right to representation with a tax professional.
What to Do If You Receive an IRS Audit Letter
You will want to read the letter and identify any signs that the letter is authentic. The IRS will only send for audit audits by physical mail. They will include an IRS letter number as well as contact information for the IRS. If in doubt, you can confirm the authenticity of the letter by looking up the notice number on the IRS website. You can also call the IRS using the number on the letter and see if the appeal is on their system.
Collect the documents the IRS is requesting, and make a logical system of organization, and follow the instructions on the audit letter to the letter. You don’t want to send the IRS any unsolicited documents, as that may broaden the audit.
There will be a deadline on the audit letter, and you will want to make sure you respond to that by the deadline. You can request an extension if you need more time to prepare, but make sure you keep a complete record of everything you send.
If there is a large amount of money, significant complexity, or you don’t feel comfortable with the audit, that is a good time to hire a CPA, enrolled agent, or tax attorney. A professional will be able to handle the IRS communications, and make sure that your portion of the audit is completed accurately and thoroughly.
Possible Outcomes of an IRS Audit
An audit doesn't always mean you'll owe more tax. There are three possible results.
Your return may be accepted as filed. That just means no changes are necessary, usually because adequate documentation has been submitted to defend the data.
In other situations, the IRS proposes changes which result in paying more tax, plus any penalties and interest. If that is the case, you can agree to that and pay it, or look into other payment options.
Infrequently, an audit is done and the IRS determines that you actually paid too much tax, and you get something back.
If you don't agree with what the IRS decided, that is your right, and can appeal by submitting a different set of documentation.
How to Reduce the Risk of Future Audit Letters
Most people do not get audited because there are things you can do to lessen your chances of getting a letter saying you are being audited. These things are filing your tax returns completely and accurately, and making sure you check your income from your W-2s and 1099s.
The things you should definitely do to lessen your chances of getting audited are to keep good records from your tax deductions and credits, and to keep good records of your tax returns just in case the IRS asks for some records. You can also use a good professional tax service to help prevent filing your taxes with a lot of mistakes.
FAQ
An IRS audit letter shows an IRS audit on your tax return. IRS letters show which tax year you're being questioned, which audit items are being questioned, and explain which documents are needed. Letters also explain response deadlines and how the audit will take place (in person, by mail, etc.)
There are many audit triggers, including income that is reported as less than it actually is, tax write-offs and claims that are suspicious, loss declarations that are out of bounds, math mistakes on tax forms, and mismatched tax forms from different companies. They also audit high earning people, business loss declarations that don't add up, and people who invest in cryptocurrency or foreign accounts that are not disclosed to the IRS.
You should carefully read the letters and take note of the deadlines. You should get the documents that they need, and respond to them as fast as you can in the correct way. You shouldn't ignore it, and it is a good idea to get a CPA and tax lawyer to help you.
The IRS notifies you by sending a letter in the mail. They don't do phone or email audits, and they don't do text message audits either. They tell you what type of audit and which year taxes they are auditing by sending you a letter. There are also instructions for how to respond or what to send for evidence.
